By Alan Hanson
With the possible passage of the SAFE Banking Act, many credit unions are considering what it takes to serve the cannabis industry. It is essential that credit unions examine these five key areas as part of strategic and business planning.
Purpose
The most important question is, “Why would you serve the cannabis industry?” The decision to serve the cannabis industry will require a significant investment in time and money; therefore you will want to possess a clear purpose. The purpose should also be something that can be shared with your stakeholders, members, staff, and the general public. Common purposes can be financially based, such as fee income or deposit growth, or community based, such as reducing criminal violence by reducing cash transaction or providing industry oversight.
Market Research
As with any new product, you should conduct sufficient market research. Cannabis is unique because the first consideration is understanding your state laws and present legal status; currently there are 10 states that allow adult/recreational use, 23 that allow medical use, and 14 that allow CBD. There are only three states where cannabis is completely illegal. You will also need to understand the rules and restrictions surrounding each type of license that is issued in your state.
You may be in a position to be the first one to serve the cannabis industry in a particular market. This can provide a great advantage, but is also a major responsibility. Along with the first mover advantage, you will also have the privilege of establishing the standards in your market, including the fee structure. While it may feel like the sky is the limit, cannabis businesses are aware of the fees charged in other states. It will behoove one to research the fees other financial institutions charge for similar accounts. The industry can be very loyal to the first institution to offer services, provided they don’t feel taken advantage of.
Reputation
Even if the SAFE Banking Act should pass, significant risk will still exist. Risk to the credit union’s reputation is one primary concern. In every community there will be a group who will not support cannabis for any reason. You will hear from this group when they voice their dissatisfaction with your decision, which is why a clear statement of purpose explaining why you’ve chosen to serve the industry is key. You should anticipate these complaints and have a well-thought-out message prepared for front line staff. My experience has been that most people understand that financial services are important, and while they may not approve of your decision, very few will terminate their relationship with you.
Another key consideration is your strategic partners. For example, if the majority of your mortgages are referred from a single mortgage broker, it is vital to be aware of their opinion of your banking the cannabis industry.
Compliance
The compliance requirements for credit unions may appear daunting, but not insurmountable. At this point, most people are aware of the FinCEN’s memo, FIN-2014-G001, entitled “BSA Expectations regarding Marijuana-Related Businesses.” This memo is only seven pages long and is a good starting point, but it is not the final word. With only this limited resource, your regulator has plenty of room to make their own interpretations. It is vital that you maintain close communication with your regulator to ensure they understand your program and you understand their expectations.
Because there are very few experts on cannabis banking, there is a steep learning curve. My recommendation is to control the growth of your program and make sure your compliance department can keep up with that growth. You will hear numbers like “40 accounts per staff member”– I think that is a good number when you have 200 accounts and two years’ experience.
There are several vendors that provide compliance software to monitor incoming transactions. These vendors may be able to reduce the amount of staff required. Generally, I think these vendors provide a good service, however you need to be cautious. Compliance cannot be outsourced; a vendor can provide tools to make compliance easier, but the ultimate responsibility resides with the financial institution. One should note that if the financial institution does not understand the compliance requirements, it cannot provide adequate vendor management. Furthermore, I am not aware of software that reviews outgoing transactions, which, in my experience, are more important than incoming transactions.
Operational Considerations
Congratulations, you made it past the hardest parts! These final details are not hard, but they do require careful consideration and hard work. The first place to start is with your existing vendor relationships. You will want to contact your insurance agent to clarify any impact to errors and omission coverage or director and officer liability coverage. The next significant venders are your armored transport company and cash vault provider. These vendors may not want to touch any cash from the cannabis industry. If you will accept cash deposits, you should also consider cash handling. Deposits over $100,000 are common and counting it takes substantial time. Will you need to upgrade your cash counters or change your dual custody or funds availability policies?
These considerations only graze the surface of what it takes to bank in the cannabis industry. Understanding what you don’t know and who to trust to get accurate information is the most difficult part of working in the cannabis industry.
Alan Hanson created and managed what is now the largest cannabis banking program in the U.S. as general counsel at Maps Credit Union in Salem, Ore. Gleam Law is a practice exclusively focused on advising businesses how to legally operate in the emerging cannabis industry. For info: www.gleamlaw.com