We have a lot of people in our industry who don’t care for being told they can’t do something and turn to building their own solutions. In the face of the banks’ intransigence, they found often ingenious workarounds to conduct electronic transactions. The problem is that the banks’ other cornerstone function as “essential stewards of commerce” required to guard against its being infected with “dirty” money from cartels, trafficking, terrorism, and the like. All these smart workarounds ignored this vital compliance component and so constituted de-facto money laundering, fraud and non-compliance and were thus ultimately unsustainable.
FINCANN is well-advised via its collaboration with industry, government, banking, payment processing, regulatory, law enforcement and legal professionals and enthusiastically supports best practices. We understand and convey to our clients that implementing the highest standards of compliance and accountability assures the highest level of sustainability. The result is a fully-transparent relationship with the bank or merchant processor.
The nub of the problem is that most bankers are mainstream conservative in their thinking and still feel that marijuana is a shady, stigmatized industry, not unlike pornography, drug trafficking or online gaming. They are eager for pretexts to avoid their responsibility to service this legitimate business, such as:
- “It’s too complicated and/or risky.”
- “It’s too expensive to serve MRBs.”
- “We are at risk of criminal aiding and abetting narcotics trafficking.”
- “We risk losing our banking license, insurance, and/or our federal reserve account.”
There’s some good news: these pretexts are all nonsense.The simple truth for banks and licensees is that there’s nothing to fear when you’re committed to the highest levels of transparency, compliance and accountability. No U.S. financial institution has suffered penalties, sanctions or punishment during this period for making a reasonably compliant (or better) and transparent effort to bank the marijuana industry.
Education, plain and simple.
The truth is that cannabis is neither a dangerous narcotic nor a “gateway” drug. Cannabis is a rather remarkable plant cultivated for thousands of years, up until the last century, for its breathtaking range of commercial, industrial, wellness and relaxation applications. Cannabis was -- and is -- hijacked and scapegoated by selfish industrial and political special interests. Now, as the cannabis industry is finally extricating itself from these constraints, it is incumbent upon the banking community as essential stewards of commerce to embrace the truth. The community should recognize the extreme danger our communities face from laundering in “masked” bank accounts, and even violent and organized crime awash with new billions of dollars of untracked, poorly-accounted-for cash. These resources should be applied responsibly to both avert these crises and profit from a generational opportunity.
A perfect example of this educational effort occurred in summer 2017, when FINCANN proposed to meet with all roughly 50 financial institutions in Nevada and educate them on the misinformation and lack of information on banking risks. Not one of them would take the meeting! The following September, FINCANN CEO Nathaniel Gurien made a presentation to about a half a dozen leading Nevada bankers and asked how they would handle an existing excellent customer’s request to deposit a new (licensee) customer’s retainer. How much of their current overall business portfolio were they risking if they decided against allowing any even indirect cannabis proceeds in their bank? And they had an epiphany– they realized that they would have to learn more right away. The challenge is that one is obliged to first change the way bankers “feel” about the industry, and the prospect of banking it, before any meaningful dialogue can proceed. Part of that is bringing them to fear the real consequences of not banking the industry more than the perceived consequences of providing accounts.
The legal cannabis industry operates with a level of confidence that the real risk of consequences is mostly theoretical rather than actual. This is borne from the industry’s axiomatic experience over the past roughly five years that one’s level of compliance, transparency, reporting and accountability is directly proportional to the level of actual risk one may be exposed to. In other words, there is a reasonably dependable roadmap to remaining above the fray of potential penalties and negative consequences by adhering to demonstrated “best practices.”
No U.S. financial institution has suffered penalties, sanctions or punishment during this period for making a reasonably compliant (or better) and transparent effort to bank the marijuana industry.
In 2018, marijuana-related licensees are projected to reach an aggregated $10 billion in revenue, and anecdotally there is a like additional sum generated by the thousands of businesses and professionals providing support products and services. The current development of the entire industry has been likened to being at the top of the second inning of a baseball game. Combined with its astonishing array of useful cost-effective commercial and industrial applications, enormous pharmaceutical potential, and safer competition with alcohol for leisure use, the industry could easily reach $100 billion in global revenue within a decade.
FINCANN asks bankers to bear in mind that there are many sectors and verticals in this space, and it is not required that one jump in 100% or not at all. For example:
- Investment, hedge, family offices and/or PE funds derived from qualified and institutional investors may seek banking without “touching the plant,” and therefore require much less rigorous compliance reporting and supervision.
- Attorneys, accountants and consultants whose practice includes service to industry clients may be attractive customers.
- Institutions still hesitant to provide cannabis licensees with accounts may be enthusiastic about accepting state-issued Economic Development Authority grant proceeds as deposits from hemp-related entities.
Other examples of non-plant-touching verticals within this industry are:
- Business and capital formation advisors
- Leasing and asset management
- Regulatory and compliance consultants
- Business insurance and risk management
- Internal and external security consultants and vendors
- Real estate brokers
- Marketing, advertising, and branding professionals
- Website developers
- Social media marketers
- Public relations professionals
- Plumbers, electricians, and general contractors
- Personnel and human resources
- Manufacturers and distributors of vapes, dabs, glassware, and other smoking accessories
- Clothing and other non-plant-derived merchandise
- Automobile and truck dealers
- Capital equipment manufacturers and distributors
- Lighting, irrigation and cultivation systems
- Soil, nutrients and hydroponics
- Investment advisory, venture capital and angel investors
- Printing and publishing
- Trade shows and conferences
- Trade show exhibits
- Data and reporting services
- Trade associations
- Trade media
- Advocacy and campaigns
- Medical practitioners
- Tour operators
- Information services
Such entities represent excellent opportunities and may provide a more comfortable incremental step to cannabis banking, since fully-transparent compliance protocols and reporting for these business types is considerably less burdensome.
The fundamentals of compliantly banking the cannabis industry are quite simple although execution is granular and labor-intensive. The gateway financial institution is primarily obliged to verify:
- Know your customer (KYC) and source of funds verification, including “hands-on” familiarity with the legitimate scope of licensed operations and that the beneficial owners and principal operators are and remain not bad actors.
- The licensed account-holder must operate in compliance with applicable state and federal requirements.
- There can be no co-mingling of deposited funds with those derived from other operations, legal or otherwise.
- The amount and value of plant-derived inventory legitimately available to the licensee must support the reported revenue.
- Marijuana-related suspicious activity reporting (SARs) must be filed with FinCEN on a timely basis.
FINCANN urges banks that the most important first step to take is to first consult with their regulators and examiners to solicit recommendations and guidance. Assemble a team of stakeholders and collaborate to develop protocols and policies. Anyone improperly left out of this preliminary process has the potential to sabotage the best-intentioned efforts.
At the end of the day, we ask: “So have you done a full analysis on the risks and rewards with providing banking services to marijuana-related businesses? Time is of the essence!”
Although cannabis (and hemp) are classified federally (and therefore internationally) as Schedule I narcotics (dangerous and without medical benefit), the federal government has demonstrated its lack of intention to take action against compliant, state-licensed entities or the compliant financial institutions or ancillaries that service them.
Politics aside, the federal government encourages financial institutions to bank the industry. The U.S. Department of the Treasury, FinCEN, and the FDIC do so via written guidance and examination practice, and the U.S. Department of Justice (DOJ) and Congress do so via legislative protection from law enforcement. The DOJ is prohibited from deploying any resources against state licensees under the Rohrabacher-Blumenauer Amendment. The U.S. Department of the Treasury, via FinCEN, issued guidance to financial institutions in 2014 to encourage the availability of financial services. You can read FinCEN’s full statement here.
In further support of this written guidance, it’s worth noting that FinCEN director Ken Blanco reasserted this position while addressing the Association of Certified Anti-Money Laundering Specialists (ACAMS) annual conference in April 2018. There, FINCANN heard Blanco explicitly state that the agency was grateful for the excellent anti-money laundering (AML) compliance and reporting his agency receives from financial institutions, especially in filing well-written SARs, and that such was pointedly not a game of “gotcha,” but rather one of collaboration and cooperation. He went on to say that unintentional errors and misinformation would be treated as an opportunity for improvement, not punishment.
David Barr, Director of Communications for the FDIC, told FINCANN that their agency’s position on member institutions banking the cannabis industry is limited to directing their examiners to follow this FinCEN guidance as a supplement to current KYC/AML compliance protocols. In fact, this FinCEN guidance is noted or footnoted with the BSA AML Examination Manual in three instances. In addition to the FDIC, the Federal Reserve, CFPB, NCUA, OCC and state liaisons all follow this manual.
This 400+ financial institution figure is a misinterpretation of a memo issued by the anti-money-laundering enforcement agency Financial Crimes Enforcement Network (FinCEN) in Sept. 2017. This memo reported that 400+ banks filed marijuana-related suspicious activity reports, which is true. However, nearly half of those filed were “marijuana-terminated” SARs, meaning the bank discovered an MRB account and closed it. Many others were from similar scenarios, such as banks filing marijuana SARs upon discovering that a commercial real estate loan portfolio contains a lease to a licensed dispensary.
In reality, there are a few dozen small financial institutions around the country transparently, sustainably and successfully banking the industry, and another few dozen providing “quiet” service to one or a few pre-existing customers.
FINCANN has built a strong cannabis banking financial network comprised of financial institutions willing to conduct business with MRBs. FINCANN locates and adds banks to the network in several ways:
- We work with the community banks and credit unions around the country known to accept cannabis customers. Unfortunately, many of these known banks are currently obliged to waitlist new applicants.
- Our clients engage us to find banks. Once established, they become part of our network.
- We present potentially-cannabis-friendly banks with basic facts about the risks and opportunities of banking the industry.
- We attend banking trade conferences to educate and attract financial institutions to our cannabis banking financial network.
- Many of our compliance and referral partners identify and introduce us to banks seeking information and opportunity.
- Notwithstanding the “politics” of legal marijuana, banks are beginning to understand the more important issue of neighborhood safety. Flooding a community with billions of dollars in untracked cash brings dangers, including promoting violence, organized crime, tax evasion, non-compliance and illegal diversion of product to minors and/or out of state.
- Contrary to conventional wisdom, both the U.S. Department of Justice and the U.S. Department of the Treasury (plus FinCEN) are fully committed to encouraging the banking industry to provide checking accounts, supervision, compliance, and accountability to state-licensed legal cannabis entities for the preceding reasons.
- Slow progress is being made with U.S. banks due to:
- Many of the banks’ existing long-standing business customers are accepting MRBs as customers and clients.
- Community bankers and credit unions are discovering that competitors are now profitably and successfully providing accounts to MRBs, representing more opportunity and less risk.
It’s a non-starter, and the California officials from the STO, CDTFA and DBO we’ve spoken to admit this. Compliant cannabis banking requires full transparent supervision by a regulated financial institution. No solution is sustainable otherwise. Further, any newly-established financial institution, public or otherwise, cannot properly function without a master account with the Federal Reserve to provide check clearance, ACH, wire transfers and debit cards.
The bank must be insured for account holders to trust in the integrity of their deposits, and conventional deposit insurers such as FDIC, OCC or NCUA limit the bank’s “high risk” portfolio to 10 percent of the bank’s account holders. If one establishes a new bank (public or otherwise), it will be bound by this restriction unless it is covered by alternative credible deposit insurance. The State of California could insure the accounts of its public bank, but after the 12 to 24 months it will take to clear all the regulatory hurdles and actually be ready to open such a bank, the Federal Reserve won’t grant a master clearing account (i.e. routing number) to any cannabis-centric bank and probably not to any financial institution disclosing its intention to bank the cannabis industry to any extent.
Based on the trajectory of banks looking favorably at entering the market, the issue will be moot by the time California even most optimistically could open such an institution. Many of us on the front lines believe that this issue will soon no longer trouble our industry and there will be good access to depository banking and merchant processing for all compliant operators.
We understand that folks are disheartened by banking in the industry, especially after years of being presented with schemes presented as solutions. There is so much B.S. out there, that we knew we’d have to differentiate ourselves from the noise. That’s why first presenting our programs to industry veterans for review and suggestions provides the comfort necessary to recommend us to their colleagues seeking legitimate banking.
As much as they need a proper and sustainable bank account, some licensees are initially hesitant to move from their current less-expensive but non-compliant, unstable and often fraudulent banking arrangements. It currently costs a few thousand dollars up front, mostly to cover the bank’s rigorous onboarding process, plus a deposit processing fee between 0.25% - 2.5%. It’s worth noting, however, that these costs will inevitably drop, benefiting from both increasing access to cannabis-friendly financial institutions as well as emerging technology solutions.
Unlikely. Why should they? Say you’re a big bank regional director and have 500 subordinates managing the many moving parts in your marijuana banking program. A few significant screw-ups, and you can say goodbye to that corner office you’ve been eyeing. Plus, after federal prohibition ends, the "big banks" figure they’ll snap up at least 50% of the market within a year anyway.
We can introduce licensed operators to compliant, transparent stable depository local banking in California, Nevada, Florida, Louisiana, Maryland, D.C., Pennsylvania, Ohio, Michigan, New Jersey, Colorado, Oregon, Washington, Arkansas, Massachusetts, Alaska and Arizona. A few of the financial institutions in our network are also willing to conditionally welcome marijuana-related businesses (MRBs) from outside their home state, so we can often provide service to companies located in other states as well.
With few exceptions, we can also provide transparent checking accounts in all 50 states for ancillaries who provide goods and services to licensees.
Potential clients complete a pre-qualification questionnaire. Then, we work with you to prepare your bank account application and supporting documents, shepherding you through the bank’s rigorous onboarding process of “know-your-customer” (KYC), “enhanced due diligence” (EDD), and compliance review and physical site inspection(s). When approved, the checking account is opened by the bank and functions normally and transparently.
When applicable, we then suggest installing one or more merchant processing or B2B electronic payment solutions to minimize excessive cash transactions. When tethered to a compliant, supervisory bank account, these solutions also become compliant and sustainable. Contact FINCANN to begin your application.
Contrary to conventional wisdom, the solution to banking for our industry does not lie with politicians or the federal government. Simply stated, the banking industry is still generally opposed to associating itself with what it considers a disreputable trade. The solution is the persistent lobbying and education presented to the banking industry and individual banks every day, combined with the accelerating growth of mainstream acceptance of first medical and industrial, then adult-use cannabis.
In truth, nothing short of an end to cannabis prohibition, as well as a positive evolution of prevailing mainstream conservative thinking, will provide bankers with enough comfort to unreservedly provide full-service banking to the cannabis industry. However, numerous bills have been introduced and/or are pending before the Congress, including S.1152 SAFE Banking Act and the bipartisan “Strengthening the Tenth Amendment Through Entrusting States” (STATES) Act.
Since MasterCard/Visa merchant processing is a banking product, it is subject to its own variation of obstacles similar to depository banking. MasterCard and Visa consider use of their marks for marijuana transactions to be detrimental to their brand, and so they may impose substantial fines and threaten to revoke their licensees’ charter for habitual offenders. There is no standard industry code provided for MRB merchants and their transactions.
FINCANN and its partners have viable, compliant, transparent electronic payment solutions so licensed dispensaries, cultivators, and manufacturers, as well as ancillary entities that provide goods and services, can accept electronic payments from licensees and the general public.
Since it remains undisputedly illegal under federal law, the state-licensed legal marijuana industry currently primarily operates under a presumption of prosecutorial forbearance and perceived rather than actual risk.
The Cole Memo is a “feel-good” U.S. Department of Justice guidance that does not actually restrain local U.S. attorneys general from enforcement, but sets department priorities with regard to marijuana. Sales to minors or diversion of products out of state are of higher priority, for example. The Rohrabacher-Blumenauer budget amendment prohibits use of federal funds for DOJ enforcement of federal marijuana laws against state-sanctioned medical marijuana licensees.
However, it is politically unfeasible and therefore unlikely that the amendment will be changed to include “recreational/adult-use” licensees, setting up the possibility of battles between legal states and the federal government.
Nonetheless, the genie is out of the bottle for this industry, especially in light of now-historical evidence of substantial generated tax revenue, and there's no turning back. It is inevitable that there will be casualties, speedbumps and hiccups as this industry grows up, and this is an example.
Given that much of industry confidence is based on the perception of (as opposed to actual) risk, this development will undoubtedly have a temporary chilling effect particularly on new investment and banking.
However, it is also likely to drive marijuana-related businesses to higher levels of accountability and compliance, making their businesses less susceptible to targeted enforcement and overall more sustainable in the long run and this would be a positive outcome.