By Geoff Bacino
The good news when it comes to cannabis banking is that the recent focus on this issue has brought new and emerging risks to the forefront.
Cannabis banking continues to attract the attention of investors, legislators, regulators and law enforcement; but as the market matures, those that take a proactive stance on mitigating the risks will be the leaders of this industry. Any credit union either working with cannabis or considering the option should be aware of these emerging risks, because they are not going away.
One of the original leaders in this space is Partner Colorado CU and their CUSO, Safe Harbor Services. Safe Harbor has been able to pinpoint these risks because of their broad base of knowledge and involvement in cannabis. As the cannabis market continues to grow – and it is growing exponentially – so do the risks that credit unions must understand be able to mitigate.
Thinking About Risk
As a former regulator, risk mitigation is one of the top concerns that I would have when it came to cannabis banking. The interesting thing about the risks being mitigated now is that the correct path must be established first–it’s not black and white.
A number of members of Congress have either introduced legislation or voiced support for enacting bills that would allow better access to financial services for those involved in the cannabis industry. And while legislation will provide some protections, the bulk of the issues involved in cannabis banking are related to Bank Secrecy Act (BSA), Anti-Money Laundering (AML) and FinCEN activities.
Banking cannabis is mainly about BSA regulations and legislation will answer some questions but is not a panacea for safety and soundness.
Some New Trends
Some of the other new trends include:
- Investment Funds. Created to fund cannabis enterprises, these funds are surfacing faster than they can be banked. If the fund is not properly managed and overseen, the accounts in the fund are better not opened in your credit union. Investment fund managers and financial institutions must ensure that the monies being invested as “clean” investor funds and the returns to investment funds are earned from the cannabis industry. They must truly be derived from legally licensed and compliant businesses. Financial institutions must be sure that all dollars are validated;
- FinTech, MSBs and Technological Solutions. The delay in securing banking options for the cannabis industry has created an entire tech sector to create “non-bank” entities to solve the problem. However, these entities are not regulated thus forcing the financial institution to manage and understand if all the funds flowing through the FinTech accounts are legit. What if the FinTech account includes “dirty money?”
- Illicit Organizations. When asked why he robbed banks, Willie Sutton allegedly said, “that’s where the money is.” A simplistic answer but one that crystalizes why any financial institution dealing with cannabis must remember. The growth of the cannabis industry allows for illicit organizations to penetrate the financial services sector. Money launderers are always looking for new delivery methods.
In these cases, the question is not whether the credit union can pinpoint the illegal activities, but rather if credit union can learn the cannabis industry quickly enough to know what to look for when it comes to these higher levels of illegal activities. Processes on the front end must be so strong that illegal entities will think twice before banking illegal funds in the credit union.
- Canadian Take-Over. Our friends to the north have legalized cannabis and are finding a number of willing and ready partners in US-based cannabis businesses. While the U.S. debates legislation, Canada is buying up the industry. Moving funds to and from Canada presents another new risk for those U.S. financial institutions serving the industry. Source of funds and validation becomes more complex but even more necessary when dealing with another country.
Burying Heads Won’t Work
I wrote about this issue three years back and it generated a significant amount of emails and phone calls seeking guidance. I continue to believe that financial institutions – especially credit unions – must figure out a way to serve this growing industry. Burying our heads in the sand will only create more problems as this industry is only going to get bigger.
Credit unions have an opportunity to be the leader and when presented with that challenge it is incumbent on us to answer that challenge.
Geoff Bacino is a two-time presidential appointee having been appointed by President Bill Clinton to the NCUA Board and by President George W. Bush to the Federal Housing Finance Board. He currently runs Bacino & Associates, a DC-based lobbying and consulting firm. He can be reached at Geoff@bacinoassociates.comor 202 549-0253.