Puff or Pass? Cannabis Business Banking Remains Risky
The road to federal marijuana legalization remains a long, treacherous and perhaps even impossible one, yet some credit unions are continuing to fight for the industry’s business owners by offering them banking services. But is it worth the risk?
Last week, I sat in on Safe Harbor Private Banking’s first-ever Cannabis Banking Q&A webinar. Led by Sundie Seefried, president/CEO of Partner Colorado Credit Union in Arcada, Colo., the webinar offered attendees a rundown of how cannabis banking could benefit a credit union as well as a wake-up call as to what it actually entails.
Seefried has established herself as a leader in cannabis banking, and has been vocal about her motivation behind banking the industry (creating safer communities by getting cash off the streets, realizing exponential business growth and living up to the credit union philosophy of serving the underserved) while remaining totally transparent about the headaches involved (an overwhelming amount of compliance work and the potential for hefty fines). Her credit union has been serving marijuana businesses for more than two years, and she’s now helping other credit unions break into the market through her cannabis banking program, Safe Harbor Private Banking.
Businesses in the cannabis industry still have limited access to banking services – due to marijuana’s federally illegal status, most traditional financial institutions have steered clear of the industry, leaving alternative financial services providers to step in. As a recent example, Bloomberg reported in June that cannabis businesses are turning to Bitcoin for their banking needs. This process allows customers to purchase cannabis products with a credit card after using the card to purchase digital currency through a third party (and paying a transaction fee).
Credit unions that are considering banking the cannabis industry may want to strike while the iron is hot, as in, before alternative banking solutions completely take hold of the market. And the decision should not be based on credit union executives’ personal feelings toward marijuana – the fact is, cannabis business owners are an emerging, underserved market, and therefore right in line with the mission of credit unions.
However, banking this industry does come with its fair share of risks. Here are five realities I learned about banking the cannabis industry during the Cannabis Banking Q&A webinar:
Be ready for some major compliance work. The first hurdle to remaining compliant is the fact that no specific compliance guidelines have been released for credit unions that want to bank the industry. Seefried pointed out that FinCEN’s guidelines are vague, and the Cole Memo – designed to outline how financial institutions can permissibly bank marijuana businesses in states where the drug is legal – isn’t written specifically to FIs. So a credit union won’t know if they’ve been fully compliant until it’s time for their exam.
That said, to increase the chances (there’s never a guarantee) that their cannabis business members won’t be engaging in any illegal activities, like taking product over state lines, credit unions must thoroughly vet and continuously monitor the businesses they take on as members. At Partner Colorado, staff pays extra attention to BSA/AML guidelines, ensures business owners fully understand the Cole Memo, and most importantly, maintains relationships with the owners through a private banking model (more on that later).
If you screw up, the stakes are high. Banking cannabis businesses opens the door to potential prosecution for money laundering if you’re not extra careful, and the consequences can be severe – two months ago, the Federal Reserve fined Deutsche Bank $41 million for failing to maintain adequate protections against money laundering. During the webinar, Seefried said, “A fine like that would take our credit union down.” Yikes.
You’ll take time to nurture personal relationships. Many credit union tellers know their members by name, but for Partner Colorado’s cannabis business members, it goes way beyond that. Before opening an account at the credit union, a cannabis business owner must explain why they’re the right fit for membership during an in-person interview, and to gain an ongoing understanding of their business processes, a credit union representative makes onsite visits. Partner Colorado also collects and analyzes about 50 documents from each potential business member, and vets any investments the business has made.
You’ll need a special cash-collecting system, and loans are a no-go. Since handling cannabis business’ high volume of cash through their branches would be too risky, Partner Colorado works with individuals from private, third-party services who pick up the cash at the businesses, deliver it to a facility and then have it deposited in the credit union’s Federal Reserve accounts. And don’t plan on growing loans through your cannabis business members – Seefried noted her credit union doesn’t lend to the industry because the loans would be considered uncollectable, as the businesses don’t have legitimate property to seize.
An exit strategy is a must. Preparing for the worst is always smart, and in Partner Colorado’s case, it determined that should the credit union need to one day exit the market, it would liquidate all of its cannabis business accounts. So ensuring it is in a position to liquidate is a key part of its strategy.
In my opinion, credit unions that choose to bank cannabis businesses despite the risks and intensive labor shows courage and a real commitment to supporting an industry that is growing rapidly yet largely unbanked. However, choosing not to get involved should be seen not as a sign of weakness but of common sense. As Seefried pointed out in the webinar, many credit union CEOs are approaching retirement age and not willing to risk their status and potentially their retirement benefits should they serve the industry and be fined. Others still operate under a post-recession mentality and choose to avoid high-risk business practices in general.
The good news is, for credit unions brave enough to serve an industry with an uncertain future, a cannabis banking community is forming – accompanied by a growing number of resources and support – which allows them to not feel so alone.
Natasha Chilingerian is managing editor for CU Times. She can be reached at firstname.lastname@example.org.