Say a Canadian entrepreneur is hoping to get in to the country’s about-to-take-off cannabis industry, projected to be worth more than $4 billion by next year. They think of a clever name, gather some capital, and head to their local Canadian bank to open a business account.



But the bank declines the request. Why? A nearly twenty-year-old American law aimed at terrorist activity.



That law is the PATRIOT Act, and one clause—Section 319(b)—in the Bush-era legislation could cause Canadian banks to think twice about taking on cannabis clients, despite Canadian and regional U.S. legalization.



The PATRIOT Act was passed in 2001 to deter foreign operations from funding terrorist activity in the U.S., but this particular section authorizes the U.S. government to seize “illicit funds”—by issuing subpoenas “to any foreign bank that maintains a correspondent account in the U.S.” Because cannabis remains illegal under federal law in the U.S., any cannabis revenue is seen as illicit.



In other words, the American cannabis industry’s biggest hurdle, cannabis banking, is a potentially global one, thanks to the PATRIOT Act.



Most Canadian banks maintain correspondent banking relationships with American banks. Those relationships are how banks can make transactions across borders. If someone uses an American debit card in Italy, the foreign bank involved has a correspondent relationship with a bank in the United States. JP Morgan Chase, for example, is affiliated with Bank One Canada in Toronto.



When it comes to the PATRIOT Act, what this means is: If a foreign bank has a correspondent relationship with a U.S. bank, the foreign bank could be subpoenaed for banking cannabis money that the U.S. government considers illegal. According to a Brookings Institution report, foreign banks taking such deposits could be considered money laundering by the U.S.



John Hudak, a co-author of the Brookings report, says this law impacts most banks in countries all over the world. “Essentially any legitimate bank in a foreign country has interbank relationships,” Hudak told Cannabis Wire. “I’m sure North Korea doesn’t, but they’re not reforming their marijuana laws anytime soon.”



In Canada, where medical cannabis has been legal since 2001 and will be legal for recreational use starting on October 17, banks have been reticent to take on Canadian cannabis accounts. Rob Patridge, who shaped Oregon’s cannabis regulations as the former chair of the state’s liquor control commission, says concerns around the PATRIOT Act’s anti-money laundering provision might be the reason.



Even once cannabis is fully legal in Canada, Patridge told Cannabis Wire, “That [correspondent] U.S. bank is subject to all the U.S. regulation.”



Uruguay, Patridge points out, “had to re-do their whole system because of the correspondent banking relationship.”



Uruguay was the first country to legalize recreational cannabis, in 2017. But there was a problem: Banks that wanted to protect their U.S. correspondent relationships closed the accounts of local pharmacies that were legally distributing cannabis. The Uruguayan banks had received letters from their U.S. counterparts, warning they would terminate their Uruguayan relationships, citing the PATRIOT Act.



Uruguayan banks acquiesced. Now, some pharmacies have stopped selling cannabis, and others have become entirely cash businesses.



Not all Canadian banks are shying away from cannabis money, however. The relatively small Alterna Savings and Credit Union became Canada’s leading cannabis banker when it took on Canopy Growth Corp, now one of the largest cannabis companies in the globe. And in anticipation of the legalization bill, the Bank of Montreal, one of Canada’s big six, worked on financing deals with Canopy Growth and Aurora Cannabis.



Representatives for Alterna and BMO did not respond to requests for comment. Cannabis is still a taboo subject in the banking industry overall, according to André Herrera, executive Vice President of Hypur, a tech company that helps banks in the U.S. with the rigorous compliance process of taking on cannabis clients.



Herrera says smaller foreign banks might opt out of correspondent relationships with the U.S. if they determine that they don’t need to provide international transaction services to their customers.



But Canada’s six biggest banks, including Bank of Montreal, have correspondent relationships with U.S. banks, and Herrera stresses that banks like those, and others with those relationships, could ultimately be impacted by Section 319(b).



“At the end of the day, U.S. institutions, they’re going to try to comply with U.S. law,” Herrera said. “Just because it’s legal in Canada doesn’t make it legal here. … There’s this federal risk.”



A representative for a major U.S. bank that does business in Canada told Cannabis Wire the bank was looking into the impact of Section 319(b) on their Canadian affiliates post-legalization. A representative of Canada’s Scotiabank, which has stayed away from cannabis business so far because of the risk factor, declined to comment.



Canada’s government hasn’t issued any cannabis guidance for banks, says Annik Faucher of the Office of the Superintendent of Financial Institutions, which regulates the country’s banks and oversees its anti-money laundering measures.



Faucher said in a written statement to Cannabis Wire that “financial institutions are ultimately responsible for ensuring compliance with the rules and regulations of the jurisdictions in which they do business (Canada, U.S. or elsewhere).”



So, whether a Canadian bank wants to take on cannabis clients will be up to each bank. It’s a matter of how much each institution considers cannabis business owners to be risky clients.



The U.S. government hasn’t so far gone after any American banks with correspondent relationships to foreign banks that work with cannabis businesses. In Uruguay, the cease and desist letters came from American banks themselves, as they were protecting themselves from legal repercussions.



Hudak’s Brookings Institution report focused on cannabis legalization in Uruguay. He says American banks going after Uruguayan banks due to the PATRIOT Act was a show of force.



“American banks played a game of chicken with Uruguay, knowing that the U.S. would win,” he told Cannabis Wire.



He notes that medical cannabis is already legal in Canada, “but the banks are not sending cease and desist letters” to that country. Hudak wonders: “Why is it that a predominantly white country gets treated differently than a Latin American country over the same law?”



Hudak thinks it’s possible American banks could simply look the other way if Canada’s big banks start taking clients in the cannabis industry, due to Canada’s larger economy and stronger financial relationship with the U.S.



A new bill introduced in Congress, the STATES Act co-sponsored by Sen. Elizabeth Warren, might offer some hope on the cannabis front for Uruguay, Canada, and the U.S. banking industry, too. The bill allows for states to regulate cannabis on their own, and according to a Warren spokesperson, “ensures that banks can lawfully provide services to cannabis businesses operating in compliance with state law, so to the extent the PATRIOT Act provision authorizes subpoenas of foreign banks based on a suspicion that the bank is moving funds for an illegal business, the STATES Act would eliminate the basis for a subpoena if the bank was acting in accordance with state law.” The hope is that exemption for banks working with businesses legal in their own jurisdictions could extend beyond U.S. borders.



With his country’s cannabis pharmacies stripped of their banking access, Uruguayan National Drug Council secretary Diego Olivera told Cannabis Wire the agency is keeping a close eye on the STATES Act’s trajectory through Congress.