| Why Most Financial Institutions Fear Banking For Cannabis
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Why Most Financial Institutions Fear Banking For Cannabis

13 Jul Why Most Financial Institutions Fear Banking For Cannabis

By Nicholas King and Suzanne Harank

For the past seven months, we have been working behind the scenes to understand the financial industry’s reluctance to openly bank the Cannabis Industry, employee, or vendor accounts, and provide solutions for both industries.

Although we are neither bankers nor lawyers, we have learned a lot about the challenges banks and credit unions face and we are working to identify and develop solutions to address the problem.

We are not alone in this process. From the federal to local levels, many people, companies, financial institutions and government authorities are quietly working to find solutions to the problem.  Our first task was to understand the significant obstacles the financial services industry faces regarding the Cannabis Industry.

What we have learned leads us to believe the banking issue boils down to three primary issues:

  1. Risk;
  2. Work;
  3. Profitability.

Because cannabis is still federally illegal, banking for the Cannabis Industry is automatically risky for a financial institution and its governing board; it requires a lot of work to understand and meet federal regulations; and may not yield high enough profits to justify the work and risk.

Why is this so?

Many regional and community banks would like to service the Cannabis Industry. Federal law does not prohibit them from doing so. But the current federal regulatory system imposes a host of onerous requirements which must be met to accept cannabis accounts.

The fundamental problem — as most of us in or servicing the Cannabis Industry know — cannabis remains a Schedule I drug according to the Controlled Substances Act of 1970, which classified cannabis as having high potential for abuse, no medical use, and not safe to use without medical supervision.

Anyone engaged in the production, distribution or sale of cannabis may face federal felony charges regardless of state law. When combined with the Bank Secrecy Act (BSA) of 1970 and USA Patriot Act of 2001, the financial industry is confronted with a daunting task requiring a lot of work to mitigate the risks for uncertain rewards.

The Risks

Until cannabis is removed from the Controlled Substances Act (and maybe even afterwards), financial institutions must determine how to address 10 key risks to the institution before accepting cannabis business accounts.

Risk 1: Potential criminal liability

The U.S. Department of Justice clearly stated in the 2009 Ogden and 2014 Cole Memorandums that marijuana prosecutions are at the bottom of the DOJ’s priority list. However, federal illegality of cannabis subjects anyone in or connected with the industry to criminal prosecution.

Both the BSA and the Patriot Act require financial institutions to report on financial transactions having the potential for money laundering. Thus, because a financial institution is accepting money from a “criminal enterprise” into the mainstream financial system, the institution may be viewed as facilitating money laundering. This exposes the financial institution to sanctions and its officers to criminal prosecution.

The Financial Crimes Enforcement Network (FinCEN) is responsible for monitoring financial institutions for Anti-Money Laundering (AML) activities. FinCEN can recommend sanctions and criminal prosecutions of banks and credit unions with cannabis business accounts if they are not complying with AML regulations and guidance.

Risk 2: Withdrawal of Insurance

The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) provide the bulk of deposit insurance required for the nation’s banks and credit unions.

Financial institutions are potentially subject to having their deposit insurance withdrawn when they serve the cannabis industry. FinCEN can recommend withdrawal of deposit insurance if a financial institution accepts a cannabis account.

Risk 3: Asset seizure

While recent Justice Department guidance has sharply limited the conditions required for asset seizure in state-legal cannabis businesses, federal law enforcement can seize any and all cannabis industry assets, such as equipment, buildings, certificates of deposit, etc. at any time — including bank accounts.

If a financial institution has a substantial concentration of assets in the Cannabis Industry and there is a change in federal policy, the sudden seizure of those assets can negatively effect the financial institution’s balance sheet.

Risk 4: Loan collateral vulnerability

IF a financial institution makes a loan to a cannabis business, the collateral — both business and personal — can be seized by federal authorities, leaving the institution without a source of repayment for the loan. Because the business is illegal at the federal level, there is the potential the loan agreement will not be enforceable in federal courts and possibly state courts.

Risk 5: Civil lawsuits

Financial institutions may be exposed to civil lawsuits by other account holders, shareholders, or businesses and others hostile to the Cannabis Industry for banking federally illegal businesses.

Risk 6: Verifying and monitoring operational legality

FinCEN’s February 2014 guidance to financial institutions indicated a state’s regulatory system could be used as a basis for serving the Cannabis Industry. However, relying on state inspectors that may not have audited a business for a couple of years may not be enough to satisfy FinCEN, the FDIC, NCUA or DOJ.

A key component of Anti-Money Laundering activities is a “Know Your Customer” and more recently, “Know Your Customer’s Customer” currently advocated by federal authorities. Additionally, financial institutions are ill equipped to verify a cannabis business’s level of compliance with a state’s rules and regulations.

In Colorado, for example, cannabis enterprises are being audited by the Marijuana Enforcement Division about once every three years. Those audits primarily address compliance with state operational and licensing rules and payment of taxes — not transfers of money.

Financial institutions must take on the costly burden of identifying and reporting potential money laundering to federal authorities. Given the time between state inspections, a lot can go wrong and a financial institution could be subject to federal penalties for inadequate monitoring of the account, which is why Know Your Customer and Know Your Customer’s Customer is so important

An extreme, though not inconceivable, example is a lighting distributor in one state that provides grow lights to another state’s cannabis cultivators. This places the distributor into the category of an indirect marijuana-related business (Know Your Customer’s Customer). The distributor’s account might require enhanced monitoring by the financial institution.

As a result, rather than dealing with the enhanced monitoring of “cannabis related” accounts, some financial institutions are extending the ban on cannabis accounts to employees and vendors providing goods and services to the industry — especially if payments for services are made in cash.

Only by requiring cannabis business accounts to undergo periodic field assessments for compliance with state rules can a financial institution be relatively assured of an establishment’s ongoing compliance with the state’s rules. Few, if any, financial institutions presently have the knowledge or ability to perform this task and must rely on third party cannabis compliance companies like ours to ensure the applicant or account is in compliance with state regulations.

As for satisfying the Anti-Money Laundering activities requirements for enhanced monitoring, several companies have developed or are developing software and cash management programs and systems for financial institutions to enhance their monitoring and reporting of cash transactions. So far, none of the systems have been accepted by federal regulators — even informally. These systems will require training and implementation procedures, the costs of which will ultimately be passed on to the cannabis businesses in the form of higher fees.

A final note on operational legality: Two states (Colorado and Washington) allow adult consumption of cannabis and permit out-of-state citizens to purchase marijuana. A cannabis retailer that does not monitor frequent and repeated out-of-state customer purchases within short time frames for potential smuggling into another state may be violating point three of the Cole Memorandum to prevent diversion to other states. This not only puts the retailer at risk, but, by extension, a financial institution (think Know Your Customer’s Customer) as well as other ancillary businesses.

From a banker’s perspective, this is a nightmare scenario, not unlike monitoring the connecting nodes of a spider’s web.

Risk 7: Concentration

As I heard one regulator put it, “too much of any one thing is a problem.” They do not like financial institutions to have high concentrations of any one kind of account. If a financial institution accepts cannabis accounts, they have to be careful about the percentages of those accounts and money they allow in the account in relation to the rest of their accounts.

I have heard, but cannot verify, a standard that if the cannabis accounts do not exceed 5 percent of an institution’s business AND adequate systems and controls are in place, such as field compliance assessments, money tracking, etc., the regulators are more accepting of the institution servicing cannabis accounts. It may be financial institutions will have to set aside a larger, or perhaps separate, contingency or reserve funds to guard against a sudden collapse of the industry as a result of a change in Justice Department priorities relative to cannabis, which leads us to the next risk.

Risk 8: Regime Change

At best, the Cannabis Industry is in a toddler stage of development. It is volatile, and dependent on dispensation by the federal executive branch of government. A change in policy by a new attorney general or president could result in a shutdown of the entire industry.

Given the relatively quick expansion of medically cannabis legal states and emerging adult consumption legal states, a wholesale shutdown does not appear likely, but no one knows for sure. Financial institutions must assess that risk as well.

Risk 9: Legacy Cash

This is a term financial institutions, regulators and the Cannabis Industry use to describe the large sums of cash that has accumulated in safes across the Cannabis Industry because of a lack of accessibility to the financial system.

How does a financial institution receive and account for the source of that cash in compliance with the BSA? So far, no one I have spoken with has an answer to this question. I have heard of only two possible solutions:

  1. Perform a very costly forensic examination of the cannabis business’s records to ensure the cash is “clean;” and,
  2. Have financial institutions receive cash from sales only from the point of acceptance of the account. Thus a cannabis business would have to slowly pay out cash out to vendors willing to accept it — which creates another set of potential money laundering monitoring problems for financial institutions and regulators ability to Know Your Customer’s Customer.

Risk 10: Training

Financial institutions will have to spend time and money to train personnel from the Board of Directors, executive officers to the teller on the line to develop and understand new policies and procedures when handling cannabis industry accounts. This investment may or may not yield sufficient rewards to justify the cost.

The Work

In addition to the research and training described above, financial institutions must comply with the Bank Secrecy Act requirement that a Suspicious Activities Report (SAR) is filed on substantial ($10,000 and above) or frequent cash transactions. There are three levels of SARs:

  1. “Marijuana Limited” which simply provides identifying information and addresses to FinCEN because the business is involved in or related to the production, distribution or sale of cannabis but are not violating state law or the Cole Memorandum;
  2. Marijuana Priority” SARs would be filed if a financial institution suspects one of the Cole Memorandum’s priorities are violated.
  3. Marijuana Termination” SARs are required whenever a financial institution terminates a marijuana related account.

The cost to the financial institution for filing each Suspicious Activities Report can range from $50 to $200. The institution has only 30 days to verify that the transaction is legitimate and therefore not file the SAR. This means that, theoretically an institution could have to file a Suspicious Activity Report on each and every transaction (conceivably both deposits and payments) made by a cannabis business. This places a financial and personnel burden on the institution that they may be unwilling to assume even when the costs are passed on to the account holder in the form of higher fees.

FinCEN’s Feb.14, 2014 guidance identified 23 “red flags” for financial institutions to use to identify potential bad actors in the Cannabis Industry. Applying these signals to cannabis accounts will require a financial institution to develop policies and procedures as well as staff training programs to meet FinCEN’s expectations.

Lastly, banks are required to make Currency Transaction Reports (CTRs) for any cash transaction of $10,000 and above, imposing yet another cost to the financial institution. If a marijuana business tries to keep it’s cash deposits under that amount by making more frequent deposits under $10,000, it can run afoul of another red flag called “structuring” to avoid filing a CTR.


The rewards for a financial institution MAY be substantial but are difficult to ascertain at this point in time. Certainly cannabis businesses will have to pay higher fees to cover the added real and potential costs of serving and providing enhanced monitoring of their accounts.

Even with higher loan fees and interest rates for cannabis accounts, the cost/benefit may not justify the risk. But servicing fees is not where banks make most of their money. Banks make most of their money through loans. As long as cannabis is illegal at the federal level, banks will have a hard time making loans when collateral is subject to seizure by federal authorities.

The bottom line is this: Can a financial institution servicing a state-legal cannabis industry meet Financial Crimes Enforcement Network, Federal Deposit Insurance Corporation or National Credit Union Administration, Federal Reserve, and Justice Department requirements, and still make money?

As usual with regulatory agencies, the answer is a definite MAYBE, IF… cannabis is removed from the Controlled Substances Act as a schedule 1 drug, IF money tracking systems satisfy the regulators, IF state regulatory programs meet federal guidelines, and IF the Cannabis Industry clearly demonstrates compliance with state (and eventual federal) regulations.

Suzanne Harank, Co-Founder and CEO of MRM Systems, is a Cannabis Industry expert and pioneer in the field of regulatory compliance. Suzanne and Nicholas King, Co-Founder and CCO, were the first consultants to perform on-site field compliance assessments in 2011 within the regulated Cannabis Industry. Suzanne has testified as a compliance consultant at Marijuana Enforcement Division court hearings. As one of the pioneer owner/operators of a premier Colorado dispensary in 2009, Alpine Herbal Wellness, Suzanne understands the critical importance and complexities of ensuring full and maintained compliance, at all times, to protect a business’s investment.

Nicholas King was a key member of the 23 person Colorado state work group that developed the first regulatory system for commercializing medical marijuana in the world. He has an intimate knowledge and perspective of the rules governing retail and medical marijuana programs. In 2010, he founded the trade association ACT4CO to include owner/operators in the developing the regulations. Nicholas was the first in the industry to provide training classes and field assessments for pioneer owner/operators to understand the rules and regulations and how to properly apply them in their facilities.

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