Are you ready to bank marijuana?
Even as marijuana remains illegal under federal law, several states have legalized it for recreational use and many more states have legalized for medicinal use. Does that create a conflict? Absolutely.
But marijuana and cannabidiol (CBD) businesses are thriving. The conundrum remains that marijuana-related businesses (MRBs) are very cash-intensive due to their inability to get banking services. Many financial institutions (FIs) simply won’t do business with MRBs until the laws are changed, leaving an estimated $10 billion in industry revenue without a way into the legitimate financial stream.
There are lots of shifts currently going on, however. For instance, rules around banking hemp are certainly changing. There have been some reports indicating that regulators are unlikely to punish credit unions for working with MRBs if those businesses are operating in compliance with state laws.
Still, nothing has changed on the books. The US Department of Justice continues to hold the authority to potentially prosecute FIs that allegedly violate anti-money laundering laws by servicing marijuana-related businesses. So, the challenge remains that MRBs have large amounts of cash on hand — and with all those hundred-dollar bills flying around — it inevitably creates incredible safety risks at all touchpoints. While many large financial institutions shy away from being involved in the marijuana business, some bold financial institutions are doing it anyway, subject to a strict, risk-based approach and following limited FinCEN guidance.
I spoke with one such financial institution who asked to remain anonymous for this article. Why? Again, marijuana is illegal under the Controlled Substance Act (CSA) and the Racketeer Influenced and Corrupt Organizations Act (RICO), just to name a few federal laws.
However, if your FI is thinking of getting into the cannabis business, here are six tips to consider, straight from “Jane,” the Bank Secrecy Act (BSA) analyst for the anonymous FI.
1. Get board approval
Jane told me the first thing to consider when starting the MRB conversation is getting your board’s approval. That starts with your BSA officer and ultimately the president of the bank. You need all hands-on deck in this endeavor. “You must have your board of directors’ support,” Jane said. “So, start with a presentation outlining where this could go and the benefits of banking cannabis.”
It is also crucial to discuss the concerns, including regulatory scrutiny, FDIC insurance, and the possibility of getting cut off from the Federal Reserve Bank for their cash orders, Jane explained, emphasizing the need for taking things very slow and not jumping right in.
2. Talk to regulators
Once you have educated the board and received their buy-in, you’ll want to engage the “R” word — the regulators. While this may seem counterintuitive (why draw attention to yourself?), it is imperative you have this conversation. “You aren’t asking permission from the regulators,” Jane said. “They will not and cannot tell you what you can and cannot bank, but you need to have a significant discussion and be as transparent as possible.”
Also, make sure you are in a good place from a compliance standpoint. If you had a recent bank audit, for instance, that uncovered violations of laws or regulations and failures to follow the bank’s own policies, you may reconsider moving forward with banking MRBs until that situation is remedied. Jane cautioned that you don’t want to bring unnecessary scrutiny to your program.
3. Talk to the lawyers
Next, always talk to knowledgeable outside counsel to get their opinion — they also can provide your FI with recommendations for the program. Outside legal counsel can help highlight common pitfalls and assist your decision-making process when going through your risk-based approach to banking MRBs. This can be particularly important if you decide to offer products related to the cannabis business or dispensary loans.
4. Make a comprehensive risk assessment
Next, your FI will want to conduct a truly comprehensive risk assessment that includes identifying the risks associated with MRBs, pinpointing activities that are lower-risk compared with higher risk, discussing transaction monitoring, and, perhaps most importantly, not violating the rescinded Cole Memo, Jane said, adding that this means not banking to businesses that sell to minors, or not bankrolling funds diverted to criminal enterprises.
5. Examine staffing and resources
Alright, so you’ve talked to the board, you’ve made nice with the regulators, and your lawyers are giving you the green light. Good to go now? Can you hang a shingle with a pot leaf outside your local bank branch? Not quite. You can’t do any of this without a properly trained staff.
Some questions Jane suggested include:
- Do you have the resources necessary to fund this?
- Can you add a dedicated person to handle these accounts? Will that person be responsible for filing marijuana-related Suspicious Activity Reports (SARs)?
- Conversely, do you want to split the time of another employee who is already doing a panoply of other things?
- Will you be able to properly train all staff on how to handle this new business line? Who will do it?
6. Know your customers
Do you know who your customers are? In this line of work, you need to. Jane told me her bank does background checks on all MRB clients, including beneficial owners. She also ensures consistent monitoring of clients to learn of any MRBs the FI wasn’t aware of — that means having proper transaction monitoring software in place.
Be choosy about your MRB clients. Do you want to service MRBs who are in the news? Maybe not. Jane advised creating policies addressing how you work with MRB customers, including transparency in the on-boarding process. “We are meeting with clients in person and keeping an open dialogue,” Jane said. “We remind them this has to be a very transparent industry because we are on the hook for this and you are on the hook with us.” Jane also performs site visits to make sure the MRB is legitimate and not violating those Cole Memo principles, she added.
At the end of the day, if you want to provide banking services to companies in the cannabis business, you can find a way. Jane warns, however, this is a slow process. “You just have to be willing to put in the resources and time, and then wait to get a payback once you on-board more clients to make your efforts lucrative.”
Gina Jurva recently recorded a webinar: “Cannabis Banking: A Financial Institutions’ Perspective.” Hear what Jane Doe from the anonymous bank has to say about actively banking marijuana-related business under federal prohibition.
Hear Gina Jurva's on-demand webinar with anonymous marijuana banker, "Jane Doe"