Banking Cannabis: Screening Safeguards for America’s Top Banks
The cannabis industry has seen explosive growth over the past several years, with mainstream adoption of the drug and its derivatives for medicinal and/or recreational use gaining significant traction throughout much of the United States. Despite multi-state acceptance however, marijuana remains illegal at the federal level – creating a conundrum for American financial institutions lacking specific regulatory guidance and parameters for providing services to marijuana-related businesses (MRBs) while maintaining compliance with respective local and federal regulations. As such, much of the legality of doing business with cannabis-related businesses is still ambiguous, with banks left to navigate these murky waters at their own risk. Today, MRBs – that is, any business operating in the growing, production, processing, distribution, transport or sales of marijuana-derived products – remain “high risk” entities in the eyes of banks small and large given this aforementioned lack of clarity coupled with the propensity of these businesses being cash-heavy enterprises that are more susceptible to financial crimes such as money laundering and tax evasion. Yet while there are inherent risks associated with the industry as a whole, investment into this growing market has undeniable upside. Legal marijuana sales are estimated to reach $92 billion in the U.S. in 2021 – a 30% increase from 2020 alone – with this figure expected to climb to the area of $160 billion by 2025.1 Yet while marijuana dispensaries and other businesses have been forced to sit on their cash as they await access to traditional banking services, many have begun to delve into alternatives (such as cashless ATMs, adoption of digital currency options as a means of payment, and use of applications such as PayQwick that assist in handling the compliance aspects of a MRBs funds transfers) that have helped to alleviate many of the pitfalls associated with all-cash businesses. Relief may soon be on the horizon in the form of the Secure and Fair Enforcement (SAFE) Banking Act of 2021, a bipartisan measure which passed in the U.S. House of Representatives in April. This bill generally prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis-related business.2 Prohibited penalties include terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate cannabis-related business and prohibiting or otherwise discouraging a depository institution from offering financial services to such a business.2 While it remains to be seen whether the bill will ultimately pass the U.S. Senate, the need for banking services to better meet the growth of cannabis sales across the country is undeniable. The Financial Crimes Enforcement Network (FinCEN) also recently offered guidance to banks on cannabis-related businesses (CRBs) including calling for the requests of pertinent information of respective businesses from state enforcement and licensing authorities, as well as maintaining practices for verifying licenses and business registration. FinCEN has also specifically stated that more suspicious activity reports (SARs) will need to be filed as a result of doing business with cannabis-related companies, though given the fact that hemp is no longer a Schedule I controlled substance under the Controlled Substances Act, banks are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. FinCEN has warned that a bank must have a BSA/AML compliance program that is up to par with the level of complexity and risk involved with offering services to CRBs/MRBs, however. The regulatory body does allow for banks to use BSA/AML software to automate the process of risk-rating and flagging of suspicious activity – a practice that has become commonplace for transaction monitoring and know-your- customer (KYC) protocols, but one that is still gaining traction for use in relation to banking cannabis. Fortunately for the modern financial institution, such solutions do exist and are making waves with respect to maintaining compliance with increasingly complex marijuana regulations. CRB Monitor is one such solution that is leading the charge towards safeguarding financial institutions while allowing them to better provide services to cannabis-related enterprises, as the firm remains the only corporate intelligence database focused solely on the marijuana industry. Though their software was originally developed for marijuana-related investment banking, their database became so comprehensive that it allowed the firm to create the most robust cannabis-related screening tool currently on the market today. The company runs on a risk-classification system where risk level is tiered dependent on the distinct level of the supply chain that a MRB/CRB may be operating within. Under their system, Tier 1 CRBs are defined as licensed firms that are directly involved in the cultivation, processing and manufacturing of marijuana-related products. Tier 2 and 3 companies on the other hand are “indirectly” involved, focused more so on providing products and services to Tier 1 CRBs and the marijuana industry in general (i.e. companies providing additional services such as accounting, marketing or supplies to Tier 1’s) – the difference being that Tier 2’s see far greater revenue from their dealings with Tier 1’s than do their Tier 3 counterparts.3 Through the power of their unrivaled data collection capacity, CRB Monitor has been able to acquire and maintain valuable incorporation and other relevant information on marijuana-related entities that is otherwise unavailable to the greater banking sector, giving banks who choose to screen their client portfolios against this data insight into the extent that they are currently servicing CRBs anywhere along the line from Tier 1 to Tier 3. Until all-encompassing legislation is passed to address the glaring holes in cannabis banking regulations, banks are left to cover their own bases against the inherent risks associated with the booming marijuana market. Operating under a risk-based approach remains paramount in staying compliant with respect to offering services to CRBs/MRBs. It is clear that in these uncertain times, American banks and credit unions looking to bank cannabis businesses would be wise to seek access to the wealth of information offered by marijuana-related screening tools such as those offered by Global RADAR in conjunction with CRB Monitor. For more information on the impact of this growing field on the banking sector, download our free eBook: Banking Cannabis.
Citations
1. Cope, Guy. “Weighing the Risks and Rewards of Cannabis Banking.” BAI, 3 Sept. 2021.
2. “H.R.1996 – SAFE Banking Act of 2021.” Congress.gov.
3. Repanich, Tony. “Cannabis Banking: How Well Do You Know Your