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Committee Blog: Four Tips for Cannabis Businesses to Maintain Cannabis Friendly Financial Services

by Kameron Richards and Steven Schain
Members of NCIA’s Banking & Financial Services Committee

Obtaining legitimate, cannabis-friendly financial services is among the cannabis industry’s biggest hurdles. Obtaining financial services is challenging for dispensaries, marijuana grows, and testing labs but it could also be an obstacle for non-plant touching businesses or individuals engaged in the cannabis industry. Without cannabis-friendly financial services, individuals and businesses related to the cannabis industry are deprived of simple financial solutions, like checking accounts, resulting in large amounts of cash being held at company facilities or the operator’s residence, posing significant risks.

Because only a small amount of insured banks and credit unions offer cannabis businesses financial services, finding cannabis-friendly financial services offered by FDIC or NCUA/CUNA institutions is challenging, and following a certain approach may fortify the longevity of a relationship with a financial institution.

Know Your Company Information and Banking Needs 

Thorough onboarding initiates the account opening process for cannabis companies seeking financial services. Cannabis-friendly financial institutions exercise enhanced due diligence at account opening for compliance purposes, which will be further discussed in this article. 

Financial institutions may require information on state licensing, corporate structure, and governance documents. Institutions generally collect information regarding the company’s underlying products and whether those products or services violate The Controlled Substances Act (“CSA”). Information collected during the onboarding process often determines the institution’s fee, risk-based categorization, and willingness to provide financial services to a particular cannabis company. 

During the onboarding process, cannabis companies should determine if the financial institution provides all services necessary for its specific operation. The services offered by cannabis-friendly financial institutions may vary based on its risk tolerance.

Know Compliance Requirements and Cannabis-Specific Programs 

Financial institutions serving the cannabis industry must comply with The Bank Secrecy Act’s (“BSA”) requirements set forth in the Treasury Department’s Financial Crimes Enforcement Network’s (“FinCEN”) BSA Expectations Regarding Marijuana Banking (FIN-2014-G001) (“FinCEN Guidance”). To mitigate the possibility of money laundering, institutions assemble extensive risk-based BSA programs centered around assessing the risk of each cannabis account and detecting and reporting “Red Flags” set forth by FinCEN Guidance. 

To understand the constraints under which financial institutions are forced to operate, cannabis companies should familiarize themselves with relevant cannabis industry regulatory guidance and, if possible, structure its operations to ease its financial institution’s compliance efforts. Further, cannabis companies should understand any contractual terms and operation of any specific cannabis programs required by its financial institution (e.g., participation in cannabis-specific programs to support loan approvals, liquidity management or the coordination of cash courier services).

Know the Risk-Based Approach

FinCEN Guidance requires institutions to perform enhanced due diligence on cannabis companies, because the risk category of each cannabis account is determined during the onboarding process, institutions are required to obtain corporate and state licensing documentation and detect any negative news on the potential account signers and the business.

Because there is no mandated risk-based structure for institutions to follow, it is critical that cannabis companies know its institution’s specific risk-based structure. Further, if a cannabis company is utilizing more than one institution, it should understand that each institution’s risk-based categorization may have specific factors or considerations. Some institutions use a tiering structure (which can vary by institution) or make this determination based on the direct or indirect relationship that the account’s source of funds has with cannabis prohibited by the CSA. An institution’s risk-based categorization could determine an account holder’s compliance obligations or eligibility for financial services such as lending, treasury services, payment processing, and 401(k)/retirement solutions.

Know What Could Cause Account Termination

After completing the onboarding process and placing cannabis accounts in the requisite risk profile (which may vary among institutions), institutions are obligated to conduct ongoing enhanced due diligence on cannabis accounts in accordance with the risk each account poses. 

This enhanced due diligence encompasses staying abreast of corporate changes, confirming that all licenses are up to date and conducting periodic negative news checks that indicate FinCEN Guidance “Red Flags.” It can also include a litany of happenings that cannabis account holders may not be aware of. While cannabis account signers may be compliant, without any negative news on them or their business, their institution could also close an account due to adverse information from tax and state licensing authorities or wrongdoing by employees or vendors. Cannabis account holders should also be aware of transactions prohibited by its institution’s policies and procedures like commingling funds between non-plant touching and plant touching accounts or transferring funds to and from vague accounts at unaware institutions unwilling to serve the cannabis industry. 

Cannabis account holders with multiple relationships should be aware that each institution’s closure protocol may vary in response to adverse information or conducting transactions prohibited by internal policies and procedures (account termination terms are often contained in the depository agreement between the institution and cannabis account holder). 

Conclusion 

Beyond assisting a business’ core functioning, maintaining relationships with legitimate financial institutions leads to strategic advantages for a cannabis company and its owners and operators, like financing or payment processing.  

Further, because FinCEN requires institutions to monitor and report cannabis account transactions and file a Suspicious Activity Report (SAR) when a cannabis account is opened or closed or if “Red Flags” are detected; cannabis companies can protect their accounts and businesses by knowing applicable laws and regulations and their institution’s cannabis-specific programs’ policies and procedures. 

Committee Blog: Cannabis Banking – Regulatory Outlook and Effective Compliance

by Angela Lucas, Managing Partner and Co-Founder, Sterling Compliance, LLC
Member of NCIA’s Banking & Financial Services Committee

During a recent webinar, we polled the audience on their current positions on offering financial services – traditional financial services – to direct marijuana-related businesses (MRBs). The results, as you might imagine, were mixed but we identified one common theme: The vast majority have taken action to address cannabis banking issues. This has been the theme we’ve been championing for years. The dichotomy between state and federal cannabis laws has placed our financial institutions in a precarious position: Bank the cannabis industry, be first to the market in doing so, create a non-traditional revenue stream and help to solve public safety and other logistical issues by solving the all-cash conundrum OR continue to watch from the periphery as others take the leap?  

We see the number of financial institutions – banks and credit unions – that offer financial services to cannabis businesses expanding, but not to the level suggested by FinCEN SAR data. There remains a critical need for financial services within the cannabis industry.

Why the hesitancy in tackling this issue?

The current regulatory environment is a critical factor. As it stands, our industry is relying primarily upon the FinCEN guidelines to offer financial services to cannabis-related businesses. These guidelines, coupled with a surge of proposed legislation and a regulatory perspective on risk-based risk-taking, have allowed financial institutions across the country to effectively provide financial services to cannabis-related businesses. There is a key term we’ve been using: cannabis-related businesses. Within this term, we encompass direct and indirect marijuana-related businesses, hemp, and CBD entities. The majority of those polled feel more comfortable with hemp and CBD entities primarily due to the passage of the 2018 Farm Bill. Getting into the intricacies of how the Farm Bill and the USDA’s resulting interim final rule have added a layer of complexity to banking hemp and CBD businesses is more than we can cover in this blog post. Let’s focus instead on those providing financial services to direct MRBs, those that are state-legal, licensed cultivators, extractors, and dispensaries.

It IS possible to actively bank direct MRBs, to offer stable banking services that bring the cash off the street and provide a means for these businesses to operate more effectively and efficiently, and surely in a less costly manner than an all-cash business. The regulators are not criticizing financial institutions for providing financial services to MRBs; they review these services as they would any higher-risk, complex activity. When an institution takes on too much too fast or does not have sufficient controls to know whether it actually has a higher risk or complex business concentration within its customer base, the regulators will be critical… as they should be.

So, what are they looking for?

This goes back to the theme we mentioned: Financial institutions actively addressing cannabis banking issues.

Every financial institution, whether it intends to bank direct or indirect MRBs, hemp or CBD should have a Cannabis Banking Program that assesses the inherent risks of doing so, speaks to the controls necessary to effectively manage those risks, and determine whether they are well-positioned, or have a risk-appetite for, providing financial services to the cannabis industry. Conversely, if a financial institution that has no appetite for, or does not reflect sufficient regulatory health to bank cannabis, it must establish effective controls to ensure that position can be maintained.  

But, this post is about empowerment. It is about speaking to the regulatory environment in which we find ourselves. It is about providing the perspective that banking marijuana, hemp and CBD CAN be done effectively, safely and soundly. Yes, there is a significant level of infrastructure needed to do so. Yes, it does come with the need for ongoing, strong risk management and control enforcement. Yes, it can be a bit scary. By establishing a Cannabis Banking Program, comprised of a comprehensive risk assessment that drives an equally comprehensive policy, a financial institution can provide financial services across the spectrum of marijuana, hemp and CBD, and undergo regulatory scrutiny with confidence. Moreover, such a program has become a regulatory expectation to support a financial institution’s cannabis position. This is also not a program where a financial institution will set it and forget it. The risk assessment and policy must remain dynamic as legislation evolves, as regulatory perspective changes, and as a financial institution’s position or outlook may shift.

This is an industry that has already proven prolific. This is a time that will be ingrained within our nation’s history. Let’s be remembered as those who championed the issues, established the country’s infrastructure, and set the standard for those who follow.  

As a former Federal bank regulator and seasoned consultant, Angela’s knowledge of regulatory compliance, risk management and investment advisory services has established her reputation as a leading resource within the financial consulting industry, spanning consumer protection and anti-money laundering statutes, fraud and cannabis banking issues.  

Angela is the Managing Partner and Co-Founder of Sterling Compliance, LLC, a consumer compliance consulting firm based out of Pittsburgh, Pennsylvania.  Sterling specializes in consumer protection and anti-money laundering compliance within the community banking industry and enjoys a significant online presence with a client base spanning the coasts.  

In December 2019, Angela joined Integrated Compliance Solutions, LLC (ICS) upon the ICS acquisition of Sterling Compliance as an independent operating subsidiary.  Angela oversees the firm’s Compliance Strategies division, of which cannabis banking is a significant component. ICS is a financial technology, banking compliance and innovative payments solution provider helping financial institutions with complex solutions.  In joining the ICS team, Angela has continued the firm’s mission of bringing its complete SEED-TO-BANK™ solution to financial institutions and cannabis-related businesses throughout the United States, and has expanded the firm’s industry engagement as a well-respected authority on the regulatory and compliance issues surrounding cannabis banking.  

 

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