Back in 2013, the United States Department of Justice (DOJ) decided they would investigate banks and the businesses they work with, including businesses believed to be at higher risk for fraud and money laundering, which was the cause for the investigation. A 2014Â report from the U.S. House of Representatives said these businesses included guns and ammunition sales, payday loans, online gambling, and other businesses, and I believe this may have put cannabidiol (CBD) sites and medical and retail marijuana (MMJ) under further scrutiny as well.Â This effortÂ â€” originally announced in 2013, according to American BankerÂ â€” was named Operation Choke Point.
How did Operation Choke Point affect these business types?
By my observation, Operation Choke Point allowed the government to pressure the financial industry to cut off banking and financial services to these businesses, which they needed to have in order for their companies to survive. Essentially, the initiative made it so companies deemed high-risk by the DOJ couldnâ€™t even have a business bank account in some cases.
Four years later, Politico reported that the U.S. DOJ officially put an end to Operation Choke Point, stating it was hurting legitimate businesses instead of preventing fraud. But has it completely gone away? Yes, Operation Choke Point itself has gone away, but some speculate Congress has more work to do, including one contributor onÂ The Hill. In 2018, the chief executive of the Electronic Transactions Association reportedly stated that “there is nothing to stop the DOJ, CFPB, FTC, and the state attorney general from bringing a case which looks very much like those that arose under Operation Choke Point.”
What exactly is cannabidiol?
According to the Huffington Post, CBD is one of the non-psychoactive components found in the cannabis or hemp plant. Researchers have seen the potential for CBD oil to help withÂ anxiety, drug addiction, pain relief, and many other issues.
In the U.S., cannabisÂ â€” where CBD comes fromÂ â€” has not lost its classification as a Schedule 1 drug, according to the DEA. In my personal experience as the CEO of a company that provides financial solutions to CBD companies, marijuana industries (both recreational and medical) have struggled to access banking and credit facilities. These businesses may struggle just to get a business bank account, and if theyâ€™re able to, the bank may charge hefty percentages and fees on their deposits.
Where do these businesses turn for financial services?
As I’ve observed by working with this industry, for the most part, CBD and medical marijuana companies have trouble finding banks to even deposit their money. When they do find a resource, the bank account often comes with extra fees to offset risk. After all, the fact that itâ€™s 2019 doesnâ€™t mean banks that serve marijuana retailers and producers arenâ€™t potentially at risk of seeing money-laundering charges. Small credit unions, in my experience, have provided the bulk of the current banking solutions for both marijuana and CBD entrepreneurs.
Sources of financing these entrepreneurs can turn to include:
â€˘ Family members
â€˘ Cannabis-specific funds
â€˘ Hedge funds
â€˘ Angel investors
â€˘ High-net-worth individuals
â€˘ Business incubators and accelerators
During my time working with a number of companies in this space, the most successful method of financing I have seen is partnering with funds that specifically focus on investing in the CBD and MMJ businesses. These funds understand the industry well and could offer great resources and connections these businesses would likely not otherwise have access to.
I believe finding banks for CBD companies will eventually get easier, especially if more research comes out on the potential health benefits of using the products. If you are in the CBD industry currently and decide to venture into the financing world, make sure you do your research on finding the best providers. Thereâ€™s a lot more involved since you will likely be considered a high-risk merchant. Make sure you look at any contract terms in depth. Specifically, examine rates, deposit time frames, risk reserve requirements and if the bank is located within the U.S.