Can Constellation Brands’ Entry into the Market Lead to Banking Reform?
By Beau Whitney, Senior Economist of New Frontier Data
An intriguing possibility arose within the U.S. cannabis industry last month: Did an American alcohol company’s investment in Canada inadvertently open a door for U.S. cannabis banking reform?
Constellation Brands’ investment in Canopy Growth Corporation, acquiring 9.9% of the Canadian-based company, offers a test of large commercial banks’ resistance to providing normalized banking services to cannabis-related companies.
So far, Canopy Growth Corp. has only invested or partnered with ancillary U.S.-based operations in the cannabis space; but, given that Constellation is a U.S.-based company, the implication seems to establish Constellation as a U.S. cannabis company. It would seem that should banks apply the strict policies applied to small cannabis companies and ancillary businesses (like security providers and consultants) equally across the spectrum, those banks may now be obligated to conduct extensive due diligence on Constellation, and file regular suspicious activities reports while requiring enhanced reporting from Constellation to ensure that they are not supporting cartels, laundering monies, or illegally providing cannabis to youths.
Currently, cannabis businesses are subject to such requirements because of the federal Schedule I status of cannabis. Many commercial banks (such as U.S. Bank, Wells Fargo, or Chase, etc.) are unwilling even to provide basic banking services to cannabis-related businesses. If such banks discover that a person or business is so associated, the reflexive tendency is not only to shut down the company’s account, but also the accounts of its workers, owners, and owners’ relatives. While operating legally since 2014, one Oregon dispensary has had its associated bank accounts shut down more than 30 times; in another instance, a bank not only closed the account of a large shareholder in a Canadian public cannabis company with operations in Oregon, but also the accounts of his wife, his mother, and his child’s college savings fund.
As other established, mainstream corporate investors and operations follow Constellation’s lead, large commercial banks will face some key decisions to make:
- Will the banks now decide to shut down the existing bank accounts of, say, Corona and Molson breweries and distributors, as well as their executives and employees? That would seem unlikely.
- Will they provide banking to the large corporation, but not to smaller cannabis businesses, thereby setting themselves up for potential lawsuits?
- Will they find a way to provide normalized banking services to other cannabis-related businesses, pushing open some doors for banking reform?
Curiosity is what proverbially opened Pandora's box. But as more big businesses enter the cannabis space to invest in ancillary businesses and meanwhile leverage their existing banking relationships, can banks keep any lid on it? Decisions by banks to limit or deny services will become increasingly problematic for them.
For now, only time (and possible litigation) will tell. While astronomers say that the annual Geminid meteor shower will provide the best stargazing this December, investors and operators will want to keep their eyes instead focused on the fallout from Constellation.
Beau Whitney, Senior Economist of New Frontier Data
Beau Whitney is the Senior Economist for New Frontier Data. Whitney has a unique blend of high tech business operations skills, economics and pollical analysis, as well as cannabis industry experiences.
While at Intel and TriQuint Semiconductor, Whitney honed his business operations skills associated with quickly ramping products from low volume to high volume. This is a skill he has since transferred to the cannabis industry. He is the former chief operations officer and compliance officer of one of the largest vertically integrated, publicly traded cannabis company in North America. His experiences incorporated growing, extraction, edible manufacturing and wholesale and retail distribution operations.
As an economic and policy analyst, his Whitney Economics white papers analyzing the cannabis market have been referenced in Forbes Magazine, USA Today, as well as in cannabis industry publications and across the Associated Press wire. Whitney has provided policy recommendations at the state and national levels and is considered an authority on cannabis economics.