Cannabis Banking and 3rd Party Support… On Board or Not?

Posted on November 2, 2018

Why do financial institutions fail to serve the cannabis industry? You’ve certainly heard that question enough. It’s probably a little more complex than many realize.  There are regulations, laws, complexity, reputation, etc. to consider. However, it is not just the financial institution telling you ‘NO’ because they won’t bank your cannabis business…. Third Parties play a major role in this national banking issue. A good question is whether they will continue to present roadblocks or will they see the need to work through this strange time where state and federal laws are in conflict? Remember, since most financial institutions are federally insured, federal laws cannot be ignored!

Not too long ago, I was emphasizing to a third party how we strive to follow the rules, prioritize compliance and at our very foundation, do not want to do anything wrong when, well, I had to pause mid-sentence, realizing what I was saying and just a bit embarrassed, finished very slowly with…. “OK, except maybe the big elephant in the room… banking funds derived from a federally illegal substance.”  That’s where we all get when we are in the industry long enough…. It becomes normalized and yet it is NOT! Until federally legal, banking is a violation.

Back to third parties…Let’s just look at a few of the third-party issues that may be still roadblocking your next bank account…. I know, who’s counting?  I cannot address all third-party issues we have and still face in just one article, so I will address just a few now and cover other issues in the future. Take into consideration that because I manage a credit union, I will speak from that perspective, but I am sure banks run into similar issues when considering whether to bank the industry or not.  

Corporate Credit Unions: REAL Roadblock to Consider !

Many credit unions process their financial transactions through a corporate relationship and rely on that processing daily to move money everywhere. By no means am I implying ALL corporate credit unions will roadblock you! However…. not once, not twice, but THREE times in just the last 30 days, I have heard that three different corporate credit unions will close credit union corporate accounts if they go into any type of cannabis banking. Coincidental? I don’t think so.  Even worse, a credit union could expect notice that may not provide sufficient time in which to make a transition elsewhere!  Talk about causing safety and soundness issues!  One would and should expect more from a corporate level banking relationship! You can certainly understand why financial institutions won’t bank the industry here as this is a real threat to operations.  Lucky for those seeking to bank the industry, there is an option.    

Later in the article I make a technical argument on depositing to our account at the Federal Reserve, so I must also provide one here in all fairness. A Corporate Credit Union, as I understand it, has their account at the federal reserve and then provides services from that one account to many financial institutions. If they view the money being deposited into this account as CANNABIS money, then, well, Red Flags. However, consider the question as to who really owns the money by the time it reaches the Federal Reserve. We are still navigating uncertain times and much is still left to individual interpretations…so which interpretation is right?   There are many processes not tried and true in banking and this merits further clarity for all financial institutions at some point.

Navigating this issue requires Financial institutions seeking to bank the cannabis industry to consider a direct relationship with the Federal Reserve. This can easily take months to establish and move operations from a corporate relationship to the Federal Reserve; not an easy process.  I suggest you protect yourself by carefully navigating around this situation. Maybe, open your Federal Reserve account prior to having any discussion with your corporate institution and consider having a third party (i.e., counsel) inquire on your behalf to see how your corporate has positioned itself and possibly protect your institution from negative preemptive actions.  By the way, we saved a great deal of money going direct to the Federal Reserve and taking out the middle guy – maybe that is a nice upside to consider. I’m not sure it would matter to try to name institutions because often enough, if one is taking a certain position, the others probably will as well.

Federal Reserve: Potential Roadblock, but maybe less than you think,

So, how we can place money into our Federal Reserve account? I think many have the perception we simply count, verify and then recycle it though our branches.  At $120 million a month, we’d have to recycle about $5.4 million per business day! Just think how much work that would be, not to mention the potential safety issue! Using third parties to move the cash at this level becomes imperative. Access to the Federal Reserve may very well be a hit & miss for financial institutions depending on their nearest Federal Reserve.  We have not had an issue using our Federal Reserve, but others have been blocked.

Here is how I view access on a very technical level…remember, only my opinion and I have had to rationalize or interpret many things in the last four years. By the time the funds are deposited to our Federal Reserve, it technically does not belong to the cannabis businesses, but rather belongs to Partner Colorado Credit Union.  Once the money has been counted and verified, the cannabis business is provided credit at that time.  The funds from all our businesses are then consolidated and carried to the Federal Reserve for one lump sum deposit into OUR Federal Reserve Account, not a cannabis account. Partner Colorado CU is responsible for ALL BSA obligations on the money entering the financial system. The Federal Reserve should and does count on our diligence and obligation to upholding anti-money laundering & BSA regulations and protecting the financial system from illicit funds. Hence, in our case, 8 Federal and State joint exams in 3.5 years to ensure compliance! Compliance, by the way, is not a set standard in the financial system, but rather compliance depends on the transaction complexity, source of funds, volume and many other things to set a compliance standard. Ultimately, it is a moving target always requiring improvements in internal processes. Compliance at one financial institution is not necessarily the same at another financial institution, so claiming a compliant banking program becomes a false sense of security.

Let’s consider another logical point here…. there are, according to FinCEN, nearly 400 financial institutions across the country presently banking cannabis businesses and they maintain a relationship with their Federal Reserve.  I would say that this speaks for itself… access has not been denied for the most part.

From what I have seen, the issue here is If you ask. what other possible answer could we expect than ‘NO’ based upon federal illegality surrounding banking the industry from a federal entity. A formal inquiry forces a formal response that most certainly would be based on the federal laws. If you ask, you might prepare for a potential roadblock.   I am very transparent about what we do, but this is one time, I didn’t ask for permission and hoped the Federal Reserve would support us. 

I was worried when we first started 4 years ago and just thought…well… we are in test and this will be one more test! If I fail the Federal Reserve test, we stop the test! About 3 months in, a Federal Reserve President was visiting our state, I decided to attend and speak to banking cannabis…. I held my breath once more, but I needed to know, not just exist in test. Will I get thrown out of the Federal Reserve? I wondered, and then thought … ‘better now when I am only 3 months into the program than a year or so later.’ Could you imagine the negative ramifications of closing a financial institution out of the federal system? I openly spoke to banking the industry at the Federal Reserve and was more than pleasantly surprised…. when the president of the Federal Reserve sought me out after the talk to thank me for working to improve safety issues surrounding the removal of excess cash from the community. I went home breathing much better after that!  I’ve said it a thousand times by now that most federal agencies want the money to be banked transparently, monitored and validated! They just want it done RIGHT!   Finding ‘RIGHT’ is the difficult part! 

Insurance/Bond Coverage: Potential Road Block!

Financial Institutions must carry many types of insurance coverage and coverage can be in question should a financial institution decide to bank the cannabis industry. No insurance is not an option for a financial institution!   Consider this conversation early in your research. Coverage could be negated when you file a claim or even terminated if not transparent with your insurer.  Additionally, consider, discuss and understand, the ‘illegal activities’ coverage in any contract. If a board is NOT willing to accept an unknown or untested situation here, banking the industry becomes a challenge and maybe even a ‘show stopper’. 

We (a group of credit unions serving and/or planning to serve the industry) recently asked our insurer to consider a new coverage and / or revised contractual language for those of us banking the cannabis industry. We are all willing to pay for the coverage. They listened and at least the conversation has started. Perhaps when enough of us are in the business, new coverage or better contractual language may present. 

Shout out to CUNA Mutual, our insurer, is required here! Not only have they continued our coverage, but, unfortunately, we have had to test that coverage and were NOT denied merely because we are banking the cannabis industry. Thank you CUNA Mutual! Another uncertainty clarified!

Safety in Numbers!!! It’s the name of the game at this point! As more financial institutions enter the market, it will get easier, but this is still a bleeding edge endeavor!   We have found a way to bank the industry, but far from the finish line where all financial institutions will have comfort doing the same.

Next week…. Legislation, Regulations, Associations… 4 years later, I’m surprised!

Note: Opinions and statements contained in this article and others posted on my site reflect my personal interpretation or position ONLY and do not reflect the position of Partner Colorado Credit Union or Safe Harbor Private Banking.