June 04, 2020 Articles

The Haze Surrounding Compliance for Cannabis Businesses

Running a cash-only business comes mostly with headaches.

By David Benkert
Dispensaries find numerous challenges in running a cash-only business.

Dispensaries find numerous challenges in running a cash-only business.

During the hippie countercultural movement, it involved simply handing a street dealer a five-dollar bill in exchange for a nickel bag.

Today, there are several legal marijuana dispensaries in or near the Haight-Ashbury District, but the transaction is a bit more complicated. Customers at California’s recreational cannabis dispensaries need to be 21 and show a valid government ID. Purchases are limited to one ounce of loose flower, or eight grams of concentrates found in edibles such as gummies and brownies. And for today’s legal state dealer—the cannabis dispensary operator—running such a business involves numerous compliance issues.

All sales are cash in dispensaries because while individual states have legalized marijuana sales, the federal government still classifies cannabis as an illegal drug; this prohibits banks and credit card companies from doing business with dispensaries. Dispensaries find numerous challenges in running a cash-only business, including the need to keep copious records, establish sound control and tracking policies, and employ strong security measures.

Furthermore, there are complications related to taxes. Because of marijuana’s “illegal” classification, a cannabis dispensary does not enjoy the same federal income tax write-offs as other businesses. And the Internal Revenue Service (IRS) is more likely to scrutinize the filings of a cash-only business.

Then there are the legal and insurance issues. Conflicting state and federal regulations make cannabis businesses vulnerable to legal challenges that include issues related to directors and officers’ coverage and employment-related matters. Also, without proper record keeping and tracking of cash, dispensaries are susceptible to theft, fraud, and other crimes, potentially resulting in lawsuits from shareholders, partners, suppliers, and landlords. In addition, cannabis businesses or their landlords may have trouble obtaining insurance coverage. Traditional policies may exclude coverage for criminal activities or public policy violations.

Complicating matters, some of the laws and regulations apply to unsuspecting businesses that are not directly in cannabis distribution but are in the cannabis supply chain. When dealing in cash, the same federal banking laws apply to the growers, manufacturers who cut the buds and extract the oils, distributors, shippers, marketing firms, and even landlords.

It is critical for attorneys representing dispensaries and cannabis-related businesses to understand the intricacies of the industry so that they can best advise their clients on how to comply with the rules and regulations and avoid costly litigation.

A Growing Demand for Cannabis

Demand for cannabis and related goods continues to rise as consumers purchase products for medicinal and recreational use.

Because cannabis contains tetrahydrocannabinol, or THC, the chemical that gives it the “high,” it is heavily regulated by the Food and Drug Administration. Cannabis containing THC was first approved for medicinal sale in 1996 in California. Today, 22 states allow the legal sale of medical marijuana, and it is prescribed for a variety of uses, such as to treat chronic pain and anxiety, to ease nausea related to chemotherapy, and to reduce the number of epileptic seizures. In 2012, Colorado and Washington became the first states to license the legal sale of recreational marijuana. Today, 11 states allow the sale of recreational marijuana, and products range from plant buds and oils to edibles such as gummies, chocolates, and snacks.

By contrast, the FDA is less stringent in its oversight of the manufacture and sale of hemp-related products that contain a small amount of THC and the chemical cannabidiol, or CBD, which doesn’t cause a “high.” The 2018 U.S. Farm Bill removed hemp from the list of controlled substances. Since then, sales of CBD products have exploded, and the extract is now found in creams and sprays, squirted into lattes and smoothies, and even used as a topping on ice cream and pizza.

The combined sale of cannabis products containing THC and CBD is expected to reach $59 billion by 2025, according to a report by Global Market Insights, a market research firm.

Banking Challenges

While more states are licensing the legal sale of marijuana, the federal government still considers cannabis a Schedule 1 drug, in the same category as heroin, LSD, and ecstasy. As a result, federally regulated banks and credit card companies are hesitant to open accounts for cannabis businesses.

The Treasury Department requires banks to file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCen) for all marijuana-related businesses. These regulations require banks that have marijuana-related businesses as customers to complete SARs every 90 days to update any changes in potential risks. Additionally, FinCen requires banks to report any cash transaction of $10,000 or more. This requirement extends to all banks and businesses that are depositing $10,000 or more in cash into a financial institution. These requirements exist to prevent money laundering and other financial crimes. Because the federal government views the product as illegal and looks askance at the large cash transactions, banks are reluctant to provide services to the cannabis industry.

Any entity along the legal cannabis supply chain faces the same hurdles. Growers, manufacturers, distributors, and shippers all deal in cash and have the same banking troubles. And when one of these cannabis businesses pays the landlord, cleaning service, and other contractors in cash, they, too, encounter similar issues.

The American Bankers Association supports an easing of federal restrictions, and the U.S. House of Representatives recently passed the SAFE Banking Act, which would enable banks to accept deposits from cannabis businesses with fewer restrictions. The Senate has yet to consider the bill. Some state-chartered banks, savings and loans, and credit unions are willing to open accounts, but the legal cannabis industry largely remains a cash-only business.

Cash: Need for Careful Controls

The reality is that because the legal marijuana business deals largely with cash, stringent procedures and controls must be put in place to ensure proper security and compliance with laws and tax regulations.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is an organization that provides thought leadership and guidance on risk management, internal controls, and fraud deterrence for business enterprises. COSO encourages management, when developing policies and procedures, to identify the organization’s risks; its business processes, internal controls, and technology; and where control activities may be necessary.

Dispensaries must be careful that there is a detailed record of each cash transaction. The National Association of Cannabis Businesses (NACB) prepared national standards on best practices, with suggested procedures that include point-of-sale systems to track the price and inventory of items sold, the day and time of each sale, and the employee who made the sale. The cash drawer should be balanced for each employee at the end of each shift and at the close of business.

The NACB also provides guidance to management regarding cash controls, suggesting the removal of cash from the register and placing it in the safe. Two people should review and sign off on the deposit slip. Two people should be present to place money into and remove money from the safe. Detailed records must be kept when using cash to pay suppliers, services, and landlords.

The NACB suggests that dispensary operators also should have strong security, including highly fortified doors and windows, surveillance cameras, and computer systems with strong firewalls to prevent hacking. There should be armed security personnel to protect the store and to escort anyone removing cash from the building. Secure transportation should include vehicles with bullet-proof glass, video cameras, and GPS tracking.

The Troubles with Taxes

The federal classification of marijuana as an illegal drug also causes tax complications for cannabis-related businesses. While the IRS requires you to claim any earnings from the sale of illegal drugs, it offers very few tax write-offs. If business owners fail to file income taxes on illicit sales, they could go to jail. Remember Al Capone?

Under section 280E of the federal Tax Code, a business engaged in trafficking of a controlled substance is prohibited from taking most tax deductions. The only exception is a write-off for “costs of goods sold,” meaning the expenses related to purchasing inventory, the cost for shipping, and any other directly related expenses. Cannabis dispensaries and other marijuana-related businesses are unable to write off other routine business expenses, such as salaries and benefits, depreciation, professional services, real estate taxes, mortgage interest, advertising and promotion, office supplies, transportation, travel, and business entertainment.

Cannabis businesses don’t get too many tax breaks on the state side, either, as most states adopt the federal tax rules when shaping their income tax forms. California did recently pass legislation allowing licensed medical and recreational marijuana dispensaries to write off typical business expenses.

Dispensaries and other marijuana-related businesses also are subject to an array of state taxes, mostly in the form of excise and sales taxes. Among the 11 states allowing the recreational sale of marijuana, excise and sales taxes range from 43.5 percent in Washington and 31 percent in Illinois to 22.5 percent in California, 17 percent in Massachusetts and Oregon, and 0 percent in Alaska.

Legal and Insurance Risks

There are any number of legal and insurance-related risks and challenges for marijuana-related businesses:

  • There is regulatory uncertainty. The myriad federal and state laws regulating cannabis businesses present legal risks in insurance disputes, including issues related to directors and officers’ coverage and employment-related matters.
  • There are risks inherent with the business. Dispensaries, which deal in cash only, are vulnerable to fraud and theft. Growers and manufacturers may use equipment that increase the risk for power outages, fires, or chemical explosions.
  • Insurance companies are reluctant to cover property owners who lease to cannabis businesses. Most traditional policies prohibit coverage for violating criminal statutes or engaging in conduct that violates public policy.
  • Legal issues include regulatory challenges, especially involving banking; potential criminal issues, such as theft of products or money, employee fraud, or embezzlement; and potential products liability issues.
  • Further, if a cannabis business doesn’t utilize the proper policies, procedures, and controls, it could be subject to lawsuits from partners, shareholders, or landlords.


While recreational cannabis dispensaries and related businesses are growing in number and have a huge potential for profit, they also carry many business, regulatory, and legal risks. Common elements of each of these risks are basic compliance and governance components that would benefit from an informed legal perspective. Attorneys need to be equipped to provide sound advice to clients about the regulatory, banking, tax, insurance, and legal challenges associated with a marijuana-related business.

David Benkert is a senior managing director at Ankura in California, focusing on financial accounting and compliance oversight.


Ankura is the Litigation Advisory Services Sponsor of the ABA Section of Litigation. This article should be not construed as an endorsement by the ABA or ABA Entities.


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