Regulators, Legislators and Associations – Friend or Foe?

Posted on November 8, 2018

Let me just state right up front …. If you need positive reinforcement, acceptance or encouragement to venture into cannabis banking, give it up now.  Cannabis banking is NOT for the faint of heart.   We remain in a time where many continue to hedge their bets: trying to determine when to get on board, or wait it out to see where this goes, or jump in when it’s almost safe, or take a stand against providing services to the industry.   You might be surprised by the truth in what we have faced and continue to face.  Still on the bleeding edge here! 

It’s not that the subjects in this article are against what we do…. I interpret it to be more about affiliation with the cannabis industry.  What will people think about me if I serve this industry coming out of its black-market history?   

Honestly, I never thought I’d grow up to be a ‘Marijuana Banker’!  One credit union CEO here in town likes to refer to us as ‘Marijuanaville’ because we bank the industry; albeit at only 12% of our asset base…. The stigma remains.  Cannabis is just one division of the credit union and it remains our greatest risk.  My reputation no longer really reflects my years of being a normal CEO but now, one that banks cannabis, right?   I know I have been right out front on the topic, but sharing knowledge is a necessary part of the process to help bring more access to banking.

Cannabis Regulators:  Having met with different regulators in different states, I can advise that they want the business banked as much as the next agency.  Certainly, they don’t want to receive license and renewal fees in cash.  They have, in the last couple years, tried to find ways to support the banking system and make it easier for financial institutions to obtain the necessary information to remain compliant with FinCEN Guidelines, which is to ensure we, the financial institutions, are aligned with state activities as it pertains to cannabis licensees.  One state even thought to have a website for financial institutions to allow them access to necessary information on licensees.  It does behoove us to be aligned as we certainly don’t want to bank anyone the state doesn’t think worthy of a cannabis license.  The state, on the other hand, has access to financial records through legal channels to remove ‘bad players’. 

What does alignment with the state mean?  Financial institutions cannot make the mistake of serving non-licensed entities so if licenses are being delayed or revoked, we need to know and act accordingly. Likewise, violations and citations must be monitored by financial institutions.  A ‘one-time’ citation does not mean licensees must necessarily lose their bank account.  It depends again on the risk appetite of the financial institution and the guidelines they have established.  Licensees cannot depend on any one standard here.  I can tell you from our experience that it is dependent upon the type of violation, frequency or number of violations, and most importantly, how the licensee responds to the violation.  Our greatest concern is ‘how will you prevent such violations in the future’ unless, of course, the violation is so egregious that we don’t want to bank the risk.   

Financial Institution Regulators:  I have stated many times that our federal and state regulators are NOT taking a position for or against the cannabis industry.  The regulators are in place to ensure the safety and soundness of the financial system.  Take a step back into the great recession when financial institution failures were an unfortunate, regular occurrence and the American public tapped to provide bail out money.   This is what regulators want to prevent; no small task!

In doing so, they must evaluate each financial institution individually.  Here again, there is not a standard answer because all financial institutions have different risk tolerances based upon their history, experience and management choices. I can’t say we wanted the additional risk of cannabis banking when we started but we did think we could manage and contain the risk so as to keep our credit union in a ‘safe and sound’ position.  What we did not expect was the ever-emerging market issues that would cause a great demand to constantly mitigate new risks.

So, the question continues to be asked as financial institutions enter the cannabis banking arena…will regulators support this?  We have endured 9 federal and state joint exams since the start of our program in the last 3.5 years, where the normal number of exams would have been 3.  This was not necessarily just because regulators did not trust us to mitigate risks although ‘trust but verify’ would definitely apply here!  Additional exams were because the risk was so new to all of us and the size of our cannabis portfolio too big to ignore.   In order for us to continue banking the industry, regulators needed to be on-site more often to verify our risk mitigating strategies and learn the risk themselves.  How can one regulate a new market and line of business without learning it in great depth?  I would consider this a bleeding edge consequence that just comes with the territory; albeit, quite stressful on the organization and management.  

Just remember one key point here, regulators do NOT endorse any programs of any sort, they monitor and regulate.   They allow us to continue in the business based upon safety and soundness measures we put in place to do ONE thing, protect the financial institution.  We always know the difference when we see ‘Compliant’ programs being advertised…. One can strive to be compliant, but Bank Secrecy and Anti-Money Laundering standards are a moving target based upon the complexity of the financial institution portfolio.   

Legislators:  This is an interesting situation probably for legislators as well as those of us banking the industry. I recall our congressman telling us that early on when the word ‘marijuana’ would come up in committee that it was more than a bit humorous and a conversation that was difficult to broach or take seriously.  That was about 4 years ago.   I think banking professionals faced or still face similar situations in the board room.   How does one bring up the topic gracefully when so much controversy exists on a morale level?  One never knows how people will respond, but we do know that the national approval rate in support of legalization is somewhere around 65% at this point.

At the state level, this has become such a normal subject.  This is not the case in many other states yet and I continue to be surprised by the level of indifference at the federal level. I think it is a difficult up-hill battle for our legislators to bring the topic to a level required to address the conflict between state and federal laws.  Colorado Congressmen Perlmutter & Polis have not only shown support for what we are doing but have consistently tried to move legislation ahead to make life easier for those of us working in or serving the industry.  Even those legislators that were never in favor of legalization, like Senator Gardner, have openly fought for protective measures.   

One would think that with only 4 states in which some form of cannabis is not legal, that the battle wouldn’t be so uphill for our legislators to gain legislative support in Washington DC, but it appears that it still is.

From my experience, it is not that legislators in DC don’t think the money is better banked than unbanked.  Again, it’s being associated, or the fear of being associated, with intentionally working to help the industry flourish.  Look how many people still stay under the radar on serving the industry on any level to avoid that judgement.  Likewise, some financial institutions think lending would be a mistake because it sends a message ‘we support the industry and will fund growth’.  I don’t buy into that for more than one reason, but the first reason is that I would rather take DEBT money from another financial institution than INVESTMENT funds from the ‘unknown’ that require validating and verification.     I don’t think the scrutiny of transactions will be as severe as it exists today, but will be for some time yet.

This brings us to another question that begs to be asked…. Will proposed legislation open banking options for the industry?  I would say don’t hold your breath, but that’s a future article.   The good news is that there is a surge, a fast-moving surge, of financial institutions preparing to bank the industry…. It just takes time!  It can easily take a financial institution 6 months to prepare and implement a cannabis banking program.

Financial Institution Associations:  Financial institutions banking the cannabis industry are still so few in number that we are represented the same at the association level.   It is difficult to ask a national association to work with us to obtain more secure positioning when this situation impacts so few of their financial institutions, not to mention that many morale judgements continue to guide some decisions.  As I started the article, if you need a great deal of ‘outside’ support, you probably should not go down this path… this path requires thick skin and a sharp machete to cut the path… who cares about the horse and cart and in what order they are at this point?

Now, not all associations are the same.  We formed a MRB Roundtable of credit unions across the country that work together on education and advocacy as well as keep each other informed of potential roadblocks and issues that might impact all of us.  The California/Nevada Credit Union Association has been generous with us and took our group under their wings to assist in organizing our advocacy.  So, a big thanks to their assistance and leadership! 

Banking the cannabis industry remains in conflict with federal laws and the great majority of financial institution are federally insured.  So, can you buy or start a bank or credit union just to do cannabis banking and solve this national problem?  …. Next article!