Up in Smoke: Cannabis, Credit Unions, and You

A question is getting asked these days that you probably never thought would be on the minds of credit union executives: should we get involved in cannabis banking?

Even 10 months ago it was a topic broached only by the boldest financial institutions. Why? Because one recent US Attorney General had been adamant that marijuana is against federal law, period. And, although his successors have been vaguer about marijuana, the volatile character of the current White House gave pause to many in financial services.

In a worst-case scenario, the whole of an institution’s assets possibly could be tied up over a single, small cannabis business, and who needs that?

Not too many, in fact. For the quarter ending in March 2020, just 710 banks and credit unions reported serving marijuana businesses, down from 739 for the quarter ended in December 2019.

With about 10,000 banks and credit unions in the US, that means 93% percent say no thanks.

So, what is different today?

You’d prefer podcast suggestions? We have you covered. Jump to the bottom of this blog for links to four CU 2.0 cannabis-related podcasts.

 

Covid-19 Trashes the Economy

Two things are different today, and the first is Covid-19. Suddenly, credit union executives, who had been luxuriating in the comfort of a growing, high employment economy, are confronting the frightening reality that many loans on their books that had looked rock solid in winter now look shaky.

Droves of borrowers are seeking to defer payments on mortgages, car loans, and credit cards as the US economy sputters with no revival in view. This is especially as surging Covid-19 infections persuade states to return to lockdown status in many economic sectors.

Suddenly, those executives are scouting for untapped potential members. Cannabis businesses are known to be attractive because, usually, cannabis businesses pay significantly higher fees for the services they get. Mainly, this is because those services typically require many more steps than do more ordinary businesses (filing a SAR on a plumber is rare, filing one on a cannabis business may be the norm).

Then, too, the big banks have largely ducked doing business with cannabis-related companies. So, this is a fertile field for smaller players to thrive in.

 

Right now, too, medical marijuana is legal in 33 states plus Washington DC. Recreational marijuana is legal in 11 states (including California, the nation’s most populous).

 

FinCEN Green Lights Hemp Businesses

The other thing: FinCEN in late June issued clarified guidance for financial institutions with hemp-related business accounts. The good news is FinCEN has essentially normalized hemp.

Per FinCEN, “This guidance explains how financial institutions can conduct due diligence for hemp-related businesses, and identifies the type of information and documentation financial institutions can collect from hemp-related businesses to comply with BSA regulatory requirements. This clarification is intended to enhance the availability of financial services for, and the financial transparency of, hemp-related businesses in compliance with federal law.”

The FinCEN guidance imposes no onerous demands. Here’s what it says: “Financial institutions must conduct customer due diligence (CDD) for all customers, including hemp-related businesses. Financial institutions should obtain basic identifying information about hemp-related businesses through the application of the financial institutions’ customer identification programs and risk-based CDD processes, including beneficial ownership collection and verification, as they would for all customers. Financial institutions must also establish appropriate risk-based procedures for conducting ongoing CDD.”

FinCEN makes this clear: “This guidance does not replace or supersede FinCEN’s previous guidance on the BSA expectations regarding marijuana-related businesses.”

Hemp is legal. Noted FinCEN: “The 2018 Farm Bill defines ‘hemp’ as the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (THC) concentration of not more than 0.3 percent on a dry weight basis.”

THC is the active ingredient in marijuana. So, FinCEN’s guidance does not directly apply to marijuana businesses.

Here’s the reality: FinCEN appears to be shining a bright green light on banking hemp businesses. And, when it comes to marijuana businesses, there remain risks (mainly uncertainties about federal law enforcement policies), but there also is a reality that those marijuana businesses are legal in many states—but nonetheless operate often as cash businesses and that creates risks of violent armed robberies.

 

Is Cannabis Banking Right for Your Credit Union?

An oft-repeated message by credit unions is that service hemp and marijuana businesses are grateful members. When other financial institutions have turned their backs on them, they value and appreciate the credit union that helps them.

It’s not a decision to take lightly. Think hard about it. Talk with lawyers. Know the local laws and environment. But also know that now this is a business opportunity more credit unions are eyeing in the Covid-19 Age.

 

Additional Reading Regarding Credit Unions and Cannabusiness

For more about BSA/AML issues, digital ID may help with KYC needs.

For regulatory compliance, a strong risk/audit department is key. Check out some cannabusiness guidance from Redboard here.

For small business lending support, check out what Capiform is doing to streamline the lending (and PPP forgiveness) process.

The CU2.0 Podcasts, Cannabis Style

Up in Smoke, Part 1: Many viewpoints on cannabis and credit unions. Lawyers, lobbyists and more.

Up in Smoke Part 2: Hear from the Connecticut Credit Union League and CUSO Safe Harbor Services

Up in Smoke Part 3: Paul Stull of the Credit Union Association of New Mexico on why he sees cannabis as a major opportunity.

Up in Smoke Part 4: Dan Mayfield of LeveragePoint on Cannabis and Credit Unions