Recreational marijuana is now legal in 16 states – with medical usage legal in 36. It’s now a thriving billion-dollar industry in those states — but it remains in an uncertain position, heavily reliant on cash and with uncertain prospects for banking partners due to the continued federal prohibition.
The challenges are more difficult than some industries, to be sure; due to restrictions from Mastercard and Visa, it remains an extremely cash-intensive business, and that makes AML compliance challenging, as banking professionals discussed at a recent webinar hosted by cannabis industry newsletter Grown In.
“For any high-risk industry you need to have a pretty tight compliance program,” said Michael Busch, President and CEO of Burling Bank. “And it’s important that your client understands that. We’re not out there to hassle our clients unnecessarily, but at the same time we have a lot of exposure, and a burden to meet with our regulators; we don’t want to jeopardize our charter.”
Much of the compliance challenges are due to the unique position the cannabis industry continues to find itself in; while it’s legal in several states, it remains illegal on a federal level, and guidance has not been particularly clear on how safe it is for banks looking to get involved as partners. Banking legislation through Congress continues to merit discussion, but the likelihood of a bill passing remains uncertain.
“We encourage our clients not to wait for some legislative magic moment,” Busch said. “I don’t think, when it comes, that it’ll change a lot – it may give some bank boards some peace of mind that what they’re doing has the approval of the law, but I don’t know that it would change much in our recommendations to our clients.”
Setting those clear expectations is important, even in the murky waters the industry finds itself in, but it can be a challenge, and in the meantime a number of services are simply not available to cannabis businesses.
“Obviously Visa and Mastercard are the biggest gap; that is what it is,” said Karla Haglund, CEO of Live Life Federal Credit Union. “And a lot of the payroll companies want to dabble in cannabis, but they don’t want to take the full responsibility to be burdened to the credit union to process payroll.
“On top of that, a lot of our cities have decided they want some kind of bond prior to licensing now, and some of the expectations are totally unreasonable, they want six years, ten years in the industry.”
The risks of running afoul of the law, or of Visa or Mastercard policies, are very real, and front of mind for many bankers.
“We’re not interested at all in being anywhere near the Visa or Mastercard rails,” said Todd Gunderson, President and CEO at Credit Union 1. “They’ve made it very clear they don’t want you operating on them. There’s been things in this industry where people have mislabeled the sale code or – quite frankly – lied about the address. We want to stay away from that, not because we’re unsympathetic jerks, but because Visa and Mastercard could turn around and remove our bank’s ability to process them for every single business that uses us.”
Beyond the gaps in service, fees also remain high for cannabis businesses looking to bank – but that is a product of the high costs involved in providing the compliance necessities still vital to the industry.
“We have to file suspicious activity reports regularly,” Haglund said. “We have criteria for suspicious and normal activity, or if they need to be alerted of something extraordinary.
“That’s where it’s very taxing on us to get the information we need to make the decisions to file those reports. You have several people’s hands in those accounts to make the reports. We can’t just send a services wire out; we need to know what those services were for, we need an invoice. Just ‘services’ is not a sufficient answer.”
Still, though it’s been a slow process as financial institutions take these shaky steps forward, progress is being made, and more and more of the types of services that would be available in any other legitimate industry are starting to be offered.
“We’ve been doing real-estate lending for a few months,” Busch said. “That was the next level for banks to get comfortable. Standard commercial mortgage loans – we’re not there yet as far as lending on inventory or something like that. A lot of times your collateral isn’t something we’re going to be able to take and dispose of if it’s inventory.”
The cannabis industry only continues to grow, and more and more banks are likely to enter the market – and with time and normalization, many of these burdens should ease.
“I don’t think the cannabis industry is making the mistakes — I think they got it right the first time,” Gunderson said. “I think the banks are making the mistakes. A lot of banks think they can hold the cannabis businesses hostage because they don’t have many alternatives, rather than treating them as business partners. A lot of the problem was caused by the banking industry not providing services in a way that was going to provide value. I’ve yet to see one cannabis business unwilling to do whatever we asked.”