Cannabis Banking Programs: Strategic Considerations for Financial Institutions

Written by: Leonidas Moulis

This is part two of a three-part series on banking and cannabis-related businesses (CRBs). You can find part one, covering the status of the SAFE Banking Act, below:

Currently, 39 states, the District of Columbia, Guam, and Puerto Rico have all legalized the use of marijuana to some degree, and 21 of those 39 states have legalized recreational use. Yet the possession, distribution, and sale of marijuana remain illegal under federal law. This means any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose financial institutions to significant legal, operational, and regulatory risks.

Despite the uncertainty of the regulatory environment, more banks and credit unions are entering the cannabis space. However, prior to developing a cannabis banking program, there are several considerations that financial institutions need to be aware of. Once these have been addressed and discussed, a financial institution can create a program. These preliminary considerations at the senior management and board level would ideally then be incorporated into an initial, comprehensive cannabis banking risk assessment once the board approves the acceptance of these banking relationships.

Here are some of the key considerations that financial institutions must keep in mind when entering the cannabis space:

  • Gauge the level of commitment board members have to discussing/contemplating these relationships and if there is a requisite understanding of the cannabis space to make informed decisions.
  • What is your state’s (or states’) legal framework? Is the legalization limited to medical use, or has cannabis been legalized for recreational use as well? Establishing banking relationships with entities involved in recreational-use cannabis may be riskier than relationships with medical use-only programs. The board and financial institution will consider these aspects when determining their institution’s risk appetite regarding banking with cannabis-related businesses.
  • Have initial conversations with your regulators (state & federal) to get an understanding of your examiners’ expectations in the cannabis field.
  • Be aware of the statistics in your banking area as they apply to the number of other, competing financial institutions that are banking these businesses. Research the number of financial institutions that actually do business with cannabis-related businesses (CRBs) in your state(s) and discuss the specifics such as potential competition you may face to help you judge whether there is a growth opportunity.
  • Discuss the potential for revenue in banking these entities knowing that CRBs face challenges in obtaining services and are willing to pay a premium; contrast this with added expense incurred to manage risk. Consider whether onboarding CRBs will affect other revenue streams such as your existing customer base and deposit and loan revenue.
  • Evaluate the likelihood of gaining market share, your financial institution’s standing relative to other financial institutions in this field, and your financial institution’s risk appetite for banking these entities.
  • Address potential issues a sudden influx of significant deposits from CRBs will have on deposit-to-loan ratios and ramifications to funding outlook.
  • Consider and discuss the risk to reputation that comes with banking CRBs in general, and specifically, to deposit and loan base. What is the public perception of cannabis in the state(s) the financial institution does business in? Risk would depend heavily on this perception. Consider the perception any shareholders may have.
  • Understand the legal and regulatory risks associated with the Bank Secrecy Act (BSA), Anti-Money Laundering (AML), and Know Your Customer (KYC) requirements associated with the cannabis industry.
  • Discuss specifically what products and services will be offered (lending, deposit only, etc.). Offering lending services would be significantly riskier than deposit-only services, as the risks associated with collateralization, underwriting, and monitoring of loans to these businesses would have to be discussed. Additional consideration of federal forfeiture laws in cases of enforcement action should also be included in the vetting process.
  • What kind of technology (such as automated AML software) does the financial institution have, and is it advanced enough, or would it need to be upgraded to handle these types of customers?
  • What are the financial institution’s capital levels? Are they in a healthy state or are they impaired somehow?
  • Are there ongoing strategic initiatives such as a merger/acquisition or branch network expansion? How would these be impacted by such a large undertaking from a resource, capital, and information technology (IT) perspective?

These are some of the considerations for the first step towards getting the “green light” to offer banking services to cannabis-related businesses. Stay tuned for the next installment, where we explore the steps and considerations for creating a sound cannabis banking program.

Our Cannabis Team offers compliance and advisory services to financial institutions and CRBs alike, as well as robust accounting and tax services specifically tailored for CRBs – contact us to learn how we can help.

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