One decision by a major bank could mean trouble in the not-too-distant future for marijuana stocks.
PNC Financial Services (PNC -0.87%) is shutting down the bank accounts for a major advocacy group for marijuana legalization, the Marijuana Policy Project (MPP). According to The Washington Post, Nick Field, MPP's chief operating officer, was informed by a PNC Bank representative that MPP's accounts were being shut down because the bank felt it was "too risky" to do business with the organization.
Could the impact of this move by PNC ripple across the marijuana industry? Yes -- and it could deflate marijuana stocks in the process.
Rationale behind PNC's move
A PNC representative confirmed that MPP's account was being closed but wouldn't comment on details. However, PNC did state that "as a federally regulated financial institution, PNC complies with all applicable federal laws and regulations."
The PNC representative's reference to federal laws likely had the Bank Secrecy Act in mind. This legislation, which was enacted in 1970, requires financial institutions to monitor customers' accounts for potential criminal activity. If a customer could be engaged in criminal activity, banks are prohibited from doing business with the customer.
MPP doesn't grow or sell marijuana. However, an audit of the organization's accounts by PNC reportedly revealed that MPP received some funding from businesses in the marijuana industry. Although these businesses operate in states where marijuana has been legalized, because use and sale of marijuana remains illegal under federal law, PNC apparently decided it could no longer do business with MPP. The organization had been a customer with PNC Bank since it was founded in 1995.
A domino effect?
PNC is just one bank. MPP is just one organization. It's possible that this recent development doesn't lead to anything further. However, it's also possible that PNC's decision is just the first domino to fall in a series of many others.
Although many major banks deny that they conduct business with companies in the marijuana industry, research by financial services publication American Banker found otherwise. An analysis revealed that in Massachusetts alone, four major national banks did business with numerous marijuana-related customers.
In 2014, the U.S. Department of Justice and the U.S. Department of the Treasury provided guidance that outlined ways that financial institutions could serve marijuana-related businesses in states that had legalized the drug. These guidance memos didn't change the federal laws, but they did help make some banks and credit unions be more willing to work with marijuana businesses.
It's possible that the situation has changed with Trump administration officials in place, especially Attorney General Jeff Sessions, who has been vocal in his opposition to legalized marijuana. If that's the case, other big banks could follow PNC's lead.
Should Sessions be given leeway to go after marijuana businesses, starting with banks and credit unions would be a smart place to start. It probably would take only a handful of Justice Department targets in the financial industry to effectively shut down banking services for most marijuana-related companies.
What could be next
Small marijuana businesses would likely attempt to shift to a cash-only model to survive if there is a crackdown on banks. Many already operate strictly on a cash basis.
However, for larger companies, including those that are publicly traded, access to banking is a must. Marijuana growers and distributors with sizable operations could be placed in a financial limbo.
For now, the Justice Department is specifically prohibited from using federal funds to do anything to interfere with states that have legalized medical marijuana. However, this restriction is part of the temporary federal spending bill that expires in September. The bill also doesn't keep the Justice Department from targeting marijuana businesses in states that have legalized recreational marijuana.
There are also legislative efforts underway to change federal banking laws to allow financial institutions to do business with companies in the marijuana industry. Don't count on these efforts passing anytime soon, if ever, though.
If more news breaks about other banks or credit unions backing away from doing business with marijuana-related businesses, that will probably be a sign that the Trump administration is letting financial institutions know that enforcement of federal laws is about to tighten. And it could be a sign that the marijuana stock boom in the U.S. has gone up in smoke.