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 arenot willing to take a risk on an industryin which the problemsmay outweigh the rewards.

And that could be a sign thatbanksin the near futurewill bejust as leery ofaccepting lawful recreationalpot-sellers as clients.

KhurramMalik,an analystwithJacob Capital Management Inc., whichadvises on thethe global cannabis sector, said banksare 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 verydiligently," he said.

Reports say Scotiabank and the Royal Bank of Canada will no longer giveaccounts tocompanies associated with the marijuana industry. Those includestores that sell pipes andbongs (but not cannabis), as well as medical marijuana producers.

"Banks are for-profit organizations, their competitive advantage is managing risk," saidWalid 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."

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

Malikestimates that the current legal pot-related businessin Canada is worth$250millionayear, which, spreadamongthe Canadian banks, would generaterelatively 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 ofthemare important financial clients.

'Dust has settled'

The Liberal government has said thatmarijuana legislation won'tbe introduced until the spring of 2017. Banks will eventually get involved in accepting recreational pot-sellers as clients, Maliksaid, but not until "the dust has settled" as the government seeks to shut downthe black market.

"So what that's going to mean is you'regoing to see a lot of arrests, a lot ofbusinessesbeing shut down," he said."And the banks do notwant to havetheir names anywherenear that."

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But Janet Ecker, president and CEO ofToronto Financial Services Alliance, said banks will still be cautious when dealing withlegal pot-sellers, concerned about whether theywill meet all the governmentstandards.

"You as a seller might have a whole listof 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 corporatelawyer who representedTweed Marijuana Inc. in its merger negotiations, said she is not sure whether Canadian banks will want to take on such clients, as long asU.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 1drug, meaning it's still illegal on a federal level. Banks in the U.S. have as result beenlargely inaccessible to marijuana-relatedbusinesses, saidJessicaRabe, 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-sellerscould prove instructive for their soon-to-beCanadian counterparts.

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

Many marijuana businesseshave to deal with cash andcannot 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 retailershaveto spend a significant amountof money on guards andsafes where they store their money.

Two years ago, the U.S. Treasury Departmentand the DepartmentofJustice set downguidelinesthat would allow banks to work with thepot businesses if they couldassure that thesedispensarieswerein compliance with statemarijuanaregulationsand not part of money launderingschemesandcriminalnetworks.

Since those guidelines were established, federal figuresshow that the number of banks and credit unions across the country willing to handle pot money subject tothose 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-relatedbusinesses as customers," Rabe said."The problem is those relationshipsusually don't last long."