With the congressional effort to remove federal restrictions on marijuana banking still ongoing, a coalition of financial institutions has released new guidance for cannabis businesses trying to secure banking services.
While compliance can be onerous compared to banking for most businesses, the report published on Monday by the Cannabis Industry Financial Group (CFIG) says it’s nevertheless possible for the marijuana industry to obtain above-board, reliable financial services without waiting for passage of the Secure and Fair Enforcement Regulation (SAFER) Banking Act.
“While conflicts between federal and state cannabis policies remain, some financial institutions have chosen to offer banking services to state-legal cannabis related businesses (CRBs),” the guidance says. “If done properly, in a highly compliant manner in accordance with Financial Crimes Enforcement Network (FINCEN) guidance and in open cooperation with financial regulators, financial institutions can permissibly serve the state legal cannabis industry without adverse action and enforcement.”
The document, “Keeping Your Accounts Safe & Sound: A Guide to Selecting a Financial Institution with a Strong Cannabis Banking Program,” comes on the heels of advice CFIG offered in July to banks and credit unions looking to service the state-legal marijuana industry.
“Given the continued growth of state legal cannabis operations and the importance of CRBs having access to banking services for safety and soundness,” the new report says, “this document seeks to help CRBs understand the requirements financial institutions have in place if servicing businesses and businesses involved, either directly or indirectly, in the state legal cannabis industry.”
First, the guide says, potential cannabis clients should understand that onboarding marijuana businesses can be daunting for banks, which are required to engage in so-called Know Your Customers procedures, follow anti-money laundering requirements and file suspicious activity reports (SARs) around cannabis-related transactions.
“Although FINCEN guidance exists relating to the filing of SARs, the guidance does not prevent prosecution for violations of federal law,” it notes.
The bulk of the new guide is about ensuring businesses ask the right questions when seeking financial services—and ensuring institutions are asking the right questions of potential clients.
It advises operators to ensure that institutions service their particular type of business, specifically with regard to what it calls Tier 1, Tier 2 and Tier 3 business. As the CFIG report describes, Tier 1 businesses are plant-touching, while Tier 2 and Tier 3 businesses derive more or less than 50 percent, respectively, of their revenue from plant-touching companies. It adds that institutions “typically also differentiate between the type of Tier 1 business (i.e., cultivation vs. retail).”
The document also encourages would-be clients to ask how long the institution’s marijuana banking program has been in place—assuming one is in place at all. “The onboarding process for cannabis banking is time intensive due to the need for enhanced due diligence,” it says, “and if a bank does not yet have an established program with compliance mechanisms and staff in place, this can create a longer timeline for onboarding.”
“Furthermore,” the guide continues, “if an FI [financial institution] does move forward with a client before compliance mechanisms are in place, the client is at risk of their funds not being appropriately handled that could threaten their operations, licenses, and ultimately, legality. Without proper programs in place, banks run the risk of commingling funds, opening them up to potential implications of money laundering and asset forfeiture.”
The guide also advises potential clients to ask whether the institution has “gone through a regulatory exam” and what the outcome was. “Just as the FI wants to know your house is in order before engaging with your business,” it says, “a successful exam demonstrates that the FI has their house in order.”
And, of course, ask what banking services the institution can provide—including to workers at marijuana businesses. “Make sure your FI relationship also extends to your employees and that they will also have access to financial resources,” the report says, “from payroll to checking accounts to personal loans that are too often denied to workers that receive a paycheck tied to cannabis.”
In terms of what businesses should expect to be asked by a financial institution, CFIG says banks should ask for a state-issued cannabis license; business documentation, such as tax ID and registration; financial documentation, like balance sheets and income statements; and operational information, such as an organizational chart, statement of ownership, payroll list and other details.
“CRBs should not enter into a banking relationship with an FI that does not engage in such due diligence,” the advisory says, “as that program is most likely not on the up-and-up – exposing you and your business to serious risks.”
After enrolling as a client, CFIG said, it’s also important to maintain the business relationship by monitoring to ensure the bank is transparent and stays on top of regulatory issues.
The guide notes that it’s not intended to be legal advice and should not be relied upon as such. “None of the recommendations in this document can protect one from potential federal enforcement actions due to the contradiction between federal and state cannabis laws,” a disclaimer says, “but are rather intended to help those with direct or indirect ties to state legal cannabis operations to be better informed in choosing a financial institution.”
Meanwhile, legislation is pending at the federal level that would remove major banking restrictions for the cannabis industry.
Senate Majority Leader Chuck Schumer (D-NY) said last month that bringing the Secure and Fair Enforcement Regulation (SAFER) Banking Act to the floor is a now matter of securing more GOP votes. Schumer said that task is made more difficult by the fact that some lawmakers are afraid that their constituents, “particularly the older ones,” don’t want them to embrace reform despite overall majority voter support.
Regardless of broad support from voters, the majority leader said modest cannabis banking legislation that cleared the Senate Banking Committee in September is still being held from the floor as senators work to assembly a firmer bipartisan coalition.
“It’s bipartisan. It has support in the House. We could make it law soon,” Schumer said, without giving a specific timeline for floor consideration in his chamber.
That perspective appears to depart from that of the lead GOP sponsor of the SAFER Banking Act, Sen. Steve Daines (R-MT), who has maintained that enough of his Republican colleagues in the Senate are already prepared to advance the bill on the floor.
The key question at this stage, Daines has suggested, is whether the measure has enough support to pass the House. He said last month that senators are working with their House counterparts “to get alignment between both of the chambers.” (Full Story)