Entrepreneurs are scrambling to enter Colombia’s rapidly growing cannabis market, but could financial and legal barriers be hindering their chances of success?
By: Luke Taylor
Over the last month, the entrance of two of Canada’s leading medicinal marijuana companies – Aphria and Canopy Growth Corp. – into the Colombian market has solidified international interest in the country’s potentially world class cannabis industry (see analysis). But if Canadian cash remains the only game in town, how will local firms ensure they get the best deals?
Over 100 cultivation licenses have been awarded in Colombia, the majority of them to local start-ups, but the reluctance of banks to open accounts and provide loans to cannabis firms is proving a major impediment to growth.
“As we educate the investor community and especially banks, we have an opportunity to articulate our unique business model, building trust and overcoming misconceptions about the emerging medicinal cannabis sector in Colombia and Latin America” says Alvaro Torres, CEO of Khiron Life Sciences, a Canadian company listed on the Toronto Stock Exchange with operations in Colombia.
BANKING BLUES: In the first few months of 2018, a number of Colombian cannabis entrepreneurs spent far more time with their bank managers than they would have liked to. Several firms told CCI they had their bank accounts frozen or closed and loan finance was near impossible to come by. Colombian banks are notoriously conservative and harsh penalties for money laundering have made them overly-cautious of the cannabis sector. One local entrepreneur approached a major bank in December to open account with a company registered under “activities relating to cannabis” and – despite having all his paperwork in line – the bank refused to open an account.
The banks expressed concern over possible fictitious exports of marijuana, the potential for fake license acquisition and for the entrance of criminal elements along the value chain.
For a while some firms got around the issue by registering as coffee producers with cannabis mentioned only as a secondary or tertiary activity. It was these firms that experienced problems with banks in the first months of the year. Colombia counts with a number of development banks, including Bancoldex and Finagro, with the resources to deploy towards cannabis projects as part of the wider goal of rural development, a vital cog of the peace- process. However, first-tier retail banks have so far remained wary of cannabis clients.
CCI approached Asobancaria – the Colombian banking association – for an interview but could only secure emailed responses to questions. According to Asobancaria, some of its members had presented “real worries” about the marijuana sector and reaffirmed that each financial firm forms its own internal policies based on its appetite for risk. The banks expressed concern over possible fictitious exports of marijuana, the potential for fake license acquisition and for the entrance of criminal elements along the value chain. The principle concern, however, was that company policies comply with Colombia’s LAFT risk management regime aimed at preventing money laundering and financing of terrorist groups.
The banks’ hesitancy is both misplaced and harmful, according to one company CEO. “You’d have to be mad to launder money in the cannabis sector, it’s one of the most regulated and highly observed sectors of the economy,” he told CCI. With little access to debt finance, local companies have little option but to access foreign financing either in the form of joint-ventures or selling equity, a frustrating reality for firms trying to get ahead of the curve.
ITS THE FEDS: Colombia is far from the only country to experience such problems financing a nascent cannabis industry. Despite being legal in several states, the US federal government’s tough drug stance presents major challenges to companies, with many Colorado firms forced to stump up large security bills for the transport and storage of the cash they receive.
The impact of US policy directly affects Colombian operations. “Even if Colombia completely legalized cannabis, most financial institutions are also based in the U.S.,” said Carol Ortega of Muisca Capital Group, an investment management firm looking to support Latino initiatives in legal cannabis industries. She told CCI, “So when you try to use their services outside the U.S., where it’s considered legal, they try to avoid any related financial activity in order to avoid being seen as a money- laundering related activity”.
This means that direct investment is currently limited to that coming from Canada or Europe. “It’s a matter of time before this changes, but if you compare the cannabis industry with any other legal industry in the world, you’ll see that entrepreneurs in cannabis have to face harsher circumstances”, she says.
EDUCATION: By July, however, a shift in the mood had been observed. Davivienda, one of the country’s leading banking organizations, was reportedly opening accounts for cannabis firms. But progress remains slow mostly due to a lack of education and poor awareness of the industry. “Education should be the most important priority for the industry,” says Ortega. “After 50 years of civil war, there is still a lot of misinformation, stigmatization and fear related to drugs. Recently, the government has made significant efforts, but we need more initiatives to change people’s perception of cannabis.”
In Uruguay, Canada and Germany, early adopters of legalized medicinal marijuana, industry wide dedicated guidelines and protocols for financing have been established.
Rodrigo Arcila, Executive President of Asocolcanna, (the Colombian Association of Cannabis Industries), assured CCI that such complementary regulation is underway, and advised that entrepreneurs and investors should remain patient, since necessary adjustments are being negotiated with the government. “This is a long term process”, Arcila said.
“Investors should trust that the association is working hard with the support of the cannabis industry. We are trying to ensure the banking sector understands that we are at a completely medicinal and scientific level, and we have to overcome this”.
In the near future entrepreneurs should also follow developments with smaller and regional banks, such as Bancoldex, Finagro and Banco Agrario, where progress is likely to be made first, Arcila advised. On July 21st Banco Agrario, the state-owned bank aimed at rural development, agreed to open their portfolio of services to the cannabis industry.
Today investors can gain exposure to the Colombian cannabis sector through Canopy Growth Corp (TSX:WEED), Aphria (TSX:APH) and Khiron Life Sciences (TSXV:KHRN) on the Canadian capital markets. Many more acquisitions of local, licensed companies are expected in the coming months. “You have to move very quickly and use capital markets to access resources that ensure we deliver our business model, which is why participating in the TSX has been important for us, we are the first cannabis company with core operations in Colombia to list in any exchange globally”, says Torres.
Many of Colombia’s local firms have the drive and desire to develop an integrated and diversified local cannabis industry. If an empty treasury forces them to take the first offer from Canada, it will be up to Toronto CEOs to decide how much value-added they wish to develop in Colombia. The government and financial sector must, therefore, act soon.
It’s quite possible that the success of the first wave of Colombian companies will shift the financial sector’s view of them from dubious start-up to high– value corporate client. The opening of Davivienda, the first house-name bank to embrace the industry, is seen as a particularly positive sign. “The banking system in Colombia has taken the first step,” says a local CEO