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Canadian banks likely to be leery of legal marijuana sellers 'until the dust has settled'

Even as Canada heads toward the legalization of selling recreational marijuana, pot-related businesses are being shunned by some banks that are not willing to take a risk on an industry in which the problems may outweigh the rewards.

Scotiabank, RBC will no longer provide accounts to companies associated with the marijuana trade

A man smokes a marijuana joint during the '420 Toronto' rally in Toronto on April 20, 2016. While the majority of Canadians may support legalization of marijuana, there are still many who don't, and many of them are important bank clients. (Canadian Press)

Even as Canada heads toward the legalization of selling recreational marijuana, pot-related businesses are being shunned by some banks that are not willing to take a risk on an industry in which the problems may outweigh the rewards.

And that could be a sign that banks in the near future will be just as leery of accepting lawful recreational pot-sellers as clients.

Khurram Malik, an analyst with Jacob Capital Management Inc., which advises on the the global cannabis sector, said banks are likely thinking "until it's a big enough market where we can generate some decent fees, why take on the headache?"

'Protect their brand'

"You have to understand the DNA of these banks. They're the most conservative organizations in the world and they protect their brand very diligently," he said.

Companies associated with the marijuana industry are already finding that some banks don't want to have them as clients. (CBC)

Reports say Scotiabank and the Royal Bank of Canada will no longer give accounts to companies associated with the marijuana industry. Those include stores that sell pipes and bongs (but not cannabis), as well as medical marijuana producers.

"Banks are for-profit organizations, their competitive advantage is managing risk," said Walid Hejazi, associate professor of international business at the University of Toronto's Rotman School of Management.

"So these two banks did their due diligence and came up with the conclusion that in their position, there is some risk and that risk can be reputational."

Once the industry matures, marijuana will be a very important market for the banks and other financial institutions, Hejazi said. "But we're just not there yet." 

Malik estimates that the current legal pot-related business in Canada is worth $250 million a year, which, spread among the Canadian banks, would generate relatively tiny fees.

Yet it's still a controversial industry that receives a lot of press coverage, he said. While the majority of Canadians may support legalization, there are still many who don't, and many of them are important financial clients.

'Dust has settled'

The Liberal government has said that marijuana legislation won't be introduced until the spring of 2017. Banks will eventually get involved in accepting recreational pot-sellers as clients, Malik said, but not until "the dust has settled" as the government seeks to shut down the black market.

"So what that's going to mean is you're going to see a lot of arrests, a lot of businesses being shut down," he said. "And the banks do not want to have their names anywhere near that."

But Janet Ecker, president and CEO of Toronto Financial Services Alliance, said banks will still be cautious when dealing with legal pot-sellers, concerned about whether they will meet all the government standards. 

Scotiabank and the Royal Bank of Canada will no longer provide accounts to companies that do any kind of business related to the marijuana industry. (Eduardo Lima/Canadian Press)

"You as a seller might have a whole list of conditions you have to meet," she said. "You may or may not meet them. And [the banks] don't know. And they can't guess."

Debbie Weinstein, an Ottawa-based corporate lawyer who represented Tweed Marijuana Inc. in its merger negotiations, said she is not sure whether Canadian banks will want to take on such clients, as long as U.S. federal laws make it illegal to hold funds derived from the sale of marijuana.

"The U.S. laws relating to banking are borderless," she said.

Although the sale of marijuana is legal in some states, marijuana, like heroin, is still classified as a Schedule 1 drug, meaning it's still illegal on a federal level. Banks in the U.S. have as result been largely inaccessible to marijuana-related businesses, said Jessica Rabe, a research analyst with Convergex, a global brokerage firm.

Many U.S. banks find it too risky

The challenges faced by U.S. recreational pot-sellers could prove instructive for their soon-to-be Canadian counterparts.

For many U.S. banks, "it's basically too risky for them to accept marijuana-related businesses as customers," said Rabe, who studies the legal marijuana industry in the U.S.

Many marijuana businesses have to deal with cash and cannot accept debit or credit cards. Many legal pot shops in Washington, Colorado and Oregon — the only states with legal recreational sales so far — and dispensaries in medical marijuana states keep banking machines on site to facilitate cash transactions.

Since many banks won't take them on as clients, pot retailers have to spend a significant amount of money on guards and safes where they store their money. 

Although the sale of marijuana is legal in some U.S. states, marijuana — like heroin — remains classified as a Schedule 1 drug, meaning it's still illegal on a federal level. (Brenna Linsley/Associated Press)

Two years ago, the U.S. Treasury Department and the Department of Justice set down guidelines that would allow banks to work with the pot businesses if they could assure that these dispensaries were in compliance with state marijuana regulations and not part of money laundering schemes and criminal networks.

Since those guidelines were established, federal figures show that the number of banks and credit unions across the country willing to handle pot money subject to those rules has jumped from 51 in March 2014 to 301 this year..

"Some banks and some credit unions will take the risk and accept marijuana-related businesses as customers," Rabe said. "The problem is those relationships usually don't last long."

With files from The Canadian Press and The Associated Press

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