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Fitch: Canadian banks hesitant to serve cannabis industry over legal uncertainty

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Fitch: Canadian banks hesitant to serve cannabis industry over legal uncertainty

Fitch Ratings said Canadian banks remain hesitant to provide services to the cannabis industry, despite the Canadian government legalizing the use of recreational cannabis in 2018.

The rating agency said risks such as increased compliance considerations and cross-border anti-money laundering regulations will continue to limit opportunities for Canadian and U.S. banks to lend and provide advisory services to cannabis companies over the medium term. Fitch noted in its report that there is a "persistently high proportion" of cannabis companies without licenses and that cannabis companies in general have limited track records, which will raise due diligence and onboarding concerns for banks for the foreseeable future.

Fitch said Canadian banks' cautious approach is a credit positive and that they mainly provide advisory and capital services. These activities do not subject the banks to compliance risks, according to the report.

Fitch also noted that large Canadian banks such as Bank of Montreal and Toronto-Dominion Bank have said they will not provide services to the U.S. cannabis industry unless there are changes in federal laws. The rating agency noted that as cannabis is classified as a Schedule 1 drug under the U.S. Controlled Substance Act, Canadian companies may be liable under U.S. anti-money laundering laws if they provide services unless they place "stringent controls on cannabis activities."

Even if the U.S. Congress passes a law exempting Controlled Substance Act application for states where cannabis is legal, there is still legal uncertainty around interstate commerce in jurisdictions where the Controlled Substance Act still applies, according to Fitch. This in turn will limit the opportunities for U.S. and Canadian banks to provide services.

There is a growing bipartisan effort to remove barriers for companies to provide services to cannabis companies. The Secure And Fair Enforcement Banking Act filed in the U.S. House of Representatives aims to provide safe harbor for banks and insurance companies providing services, as state laws that legalize some forms of cannabis use would be reconciled with federal laws.