Credit Unions Adapt to Pot Regulations
After reading federal guidelines on how financial institutions could offer banking services to marijuana businesses, Jennifer Roberts, COO of the $207 million Obee Credit Union, never expected her cooperative would be able to serve the pot industry.
“I read the Cole Memo and thought, there is no way our small credit union can do anything in this arena to comply, so we decided we were not going to get involved,” Roberts recalled.
Most financial institutions are wary about serving the marijuana industry because it could potentially create the compliance nightmare from hell, coupled with the possibility of federal crackdowns.
Despite initial serious doubts, the Tumwater, Wash.-based Obee learned how to manage serving its marijuana business clients, even with the added layers of regulatory costs and scrutiny.
The $1.5 billon Numerica Credit Union in Spokane Valley, Wash., decided to serve the pot industry to allow marijuana entrepreneurs to deposit their business revenues and help keep their communities safe at the same time.
Recreational pot sales have exceeded more than $405 million since June 2014 in Washington, where 192 retailers and 550 processors and producers make legal weed available to consumers, according to 502data.com, a site that sorts and aggregates data from the state's liquor and cannabis board.
Obee and Numerica are based in Thurston and Spokane counties, respectively. These counties accounted for $43.2 million, or about 10%, of the state's total marijuana sales since June 2014. What's more, some of Washington's top retailers, processors and producers operate in these two counties.
Thurston County, which has a population of 252,000, posted $9.4 million in pot sales since June 2014. Eleven marijuana retailers and 35 processors and producers operate in that county, according to 502data.com.
In Spokane County, which has a population of 471,000, marijuana sales have totaled $33.8 million since June 2014. Fifteen retailers and 100 producers and processors operate in Spokane County.
Soon after Washington became one of the first states in the nation to legalize recreational pot in 2012, Obee started getting inquiries from some of its members who wanted to get a piece of the marijuana industry action.
“When members ask credit unions for something, we do what we can to give them a good answer,” Roberts said.
Obee President/CEO James Collins, Roberts and other staff members began researching what it would take to serve marijuana retailers, processors and growers. After working with Washington's Liquor and Cannabis Board, which regulates the state's marijuana industry, and the Washington Department of Financial Institutions, Obee realized serving the marijuana industry could be a doable business proposition.
Numerica also determined marijuana businesses to be a viable opportunity after reviewing the federal guidelines, working with state regulators and conducting a risk analysis.
“The FinCEN guidance basically said that in order to do this, you have to establish all these procedures, which we did,” Lynn Ciani, executive vice president and general counsel for Numerica, said. “And the regulatory scheme by which the marijuana business is working under and is licensed under had to be extremely robust.”
Numerica performed a risk assessment to determine what regulations established by Washington's Liquor and Cannabis Board could mitigate the risks, as well as other issues that were described under the FinCEN guidance, the Cole Memo and other Department of Justice communications.
FinCEN clarified dozens of red flags for financial institutions that would trigger priority suspicious activity reports, such as a marijuana business receiving substantially more revenues than its competitors, excessive cash deposits and withdrawals relative to local competitors, or third parties with no connection to the account holder making deposits.
Because the recreational use of marijuana is a federal crime, the Cole Memo indicated the feds would only enforce federal laws if a marijuana business violated one of its eight priorities.
Some of those priorities include keeping marijuana away from minors, making sure pot sales revenue was not being funneled to criminal enterprises, gangs or cartels, and preventing state-authorized marijuana activity from being used as a cover for trafficking other illegal drugs or money laundering.
What apparently helped Washington credit unions meet the heavy compliance requirements was the fact that Washington's Liquor and Cannabis Control Board regulations were specifically written and adopted to address all of the Cole Memo priorities in the federal government's Controlled Substances Act, according to the Washington Department of Financial Institutions.
What's more, the Liquor and Cannabis Control Board's traceability software and strict application, monitoring and examination procedures for marijuana businesses were also designed to address the Cole Memo priorities, as well as the FinCEN guidance documents that detail red flags.
In neighboring Oregon, however, financial institutions are staying away from serving the pot business.
Oregon was one of the first states in the nation to approve the use of medical marijuana in 1998, and retailers began selling recreational pot on Oct. 1, 2015. State officials there are concerned these all-cash businesses will spark an increase in robberies and other crimes.
Chip Lazenby, a Portland, Ore.-based lawyer serving marijuana business clients, said financial institutions are not comfortable providing banking services for marijuana entrepreneurs because a state regulatory system like Washington's that helps credit unions comply with federal regulations does not exist in Oregon.
At the Northwest Credit Union Association's conference last month, Lazenby said he got the impression from Oregon CEOs that they are staying out of the marijuana business until the feds give them the green light.
“My impression is that, by and large, bankers have just thrown up their hands and said, ‘We don't need the hassle,’” Lazenby said.
In April 2015, the $177 million MBank in Gresham, Ore., announced it would close its 75 cannabis business accounts because the cost and time spent on compliance was too much for the community bank to manage, according to a report in Marijuana Business Daily.
“My personal opinion is that it will have a negative effect on other banks’ appetites,” Jef Baker, president/CEO for MBank, told the publication. “Anytime one of us exits a business it's a red flag of sorts. I don't think this is going to be a positive.”
This problem prompted Oregon State Treasurer Ted Wheeler to write a letter to U.S. Treasury Secretary Jacob L. Lew asking the Treasury Department to issue new guidance that will result in banking access for Oregon's marijuana businesses.
“Banks need assurances that accepting legal marijuana customers will not put their charters in jeopardy, diminish access to federal deposit insurance or otherwise imperil relationships with federal banking regulators,” Wheeler wrote the June 2015 letter. “The more certainty you can give banks and credit unions, the less states and communities will experience the high costs of an all-cash business.”
For Washington's regulators, it was also a public safety matter to make basic banking services available to licensed marijuana business owners. It helps prevent robberies of large amounts of cash and money laundering that supports criminal racketeering and other illegal activities, they said.
Managing and monitoring suspicious activity among marijuana business accounts requires financial institutions to hire more employees.
Obee and Numerica said they had to hire a few more people – one and a half at Numerica and two at Obee – to manage the extensive application process, monitor marijuana business accounts, and handle the substantial increases in SAR and CTR filings.
“There is a lot of initial and ongoing due diligence,” Ciani said. “I call it knowing your members on steroids.”
For example, in addition to the state conducting a criminal background check of the marijuana business owners and all of their investors, the credit unions also do their own criminal background checks. Other due diligence requirements include visits to the marijuana business owners’ work sites.
To monitor for money laundering, the credit unions check the business owners’ sales against their deposits and constantly look for other unusual account activity. They also check regularly with state regulators to see if the business owners have made any violations.
Depending on the nature of the violations, credit unions can immediately close a marijuana business account.
Both credit unions have increased their fee structure for marijuana business members to cover the costs to manage their accounts – something they have not received complaints on because the pot entrepreneurs are grateful to have banking services. Obee noted its fees are lower than those charged by competing banks.
While Obee and Numerica offer marijuana business clients basic checking account services, they do not provide traditional business loans because the risk is too high. If a marijuana business member were to be convicted by federal authorities, the credit union's loan would default and any collateral would be lost.
In addition to a checking account, Obee also offers marijuana business members savings and money market accounts, share certificates and credit cards.
Numerica serves 50 to 100 marijuana business members that hold an aggregate balance of about $5 million. Obee serves between 80 and 100 marijuana business clients, and the average member balance is slightly north of $35,000.
At Obee, some of the small business owners who opened marijuana businesses are doctors, dentists, bakers and anglers.
“That's been one of the myths,” Roberts said. “People assumed that you would have what I like to call marijuana enthusiasts who really don't know how to run a business. That has absolutely been the opposite case for us. In our experience, we’ve had very professional business owners.”