Political change comes in fits and starts. Cannabis laws did incredibly well at the state level in the 2016 election cycle, but it looks like we are going to be facing the status quo at the federal level for the foreseeable future. That is good news to some extent, as it is seeming less and less likely that the worst case scenario of the Trump/Sessions Department of Justice will come to fruition. We aren’t expecting to see mass arrests, seizures, and shut-downs in the cannabis industry. On the other hand, we also aren’t expecting to see any major positive changes on cannabis banking or taxes coming out of this government either. The unsteady status quo will remain, where agencies at the federal government will continue to grapple with balancing the criminality of marijuana with the fact that they cannot treat it as wholly criminal, lest they bring about more crime by burying their heads in the sand.
With banking in particular, things have remained relatively consistent since 2014. In February of that year, the Department of Justice and the Financial Crimes Enforcement Network (FinCEN) at the Department of Treasury released simultaneous memoranda creating a civil structure where financial institutions like banks and credit unions that provide services to the cannabis industry could comply with their regulatory obligations. They would still potentially be committing crimes, but the DOJ would treat them as the lowest enforcement priority.
That 2014 announcement of criminal and administrative enforcement strategy was scoffed at by large financial institutions, for good reason. If you are Bank of America, marijuana simply isn’t a large enough market for you to take any sort of criminal risk. But for smaller banks and credit unions, especially those that had been hit hard by the financial crisis, the memoranda provided just enough cover to take the cannabis risk. Between 2014 and now, Washington and Colorado have developed a small but stable network of financial institutions willing to serve the cannabis industry. Oregon has fewer institutions, but it is coming along as well.
California, however, was left behind, and medical marijuana businesses there still struggle to find banks willing to take their money. This is because of the particular wording in the 2014 FinCEN guidance. In order to comply with their regulatory obligations, part of what banks and credit unions that work with marijuana-related businesses have to do is verify that their cannabis business customer is duly licensed by a state that has robust regulations for its marijuana businesses. Until now, California has not had state-licensed marijuana businesses. It has worked under a series of vague state laws, with individual cities and counties coming up with their own regulations for marijuana businesses that have ranged from outright bans to open licensing processes. These local regulations have worked well in some circumstances, but they are insufficient for banks or credit unions that want to provide services to the marijuana industry without facing FinCEN’s wrath.
This is important for the banks because it isn’t only FinCEN that cares about compliance with their guidance. Federal providers of deposit insurance (the FDIC for banks and the NCUA for credit unions) are unlikely to renew a financial institution’s insurance policy if it looks like that institution is working with marijuana businesses but not following the FinCEN guidance. And that deposit insurance is key in separating banks and credit unions that provide real security for your funds and fly-by-night institutions that could potentially lose all your money.
But things are finally changing in California as we coming up on the issuance of state cannabis licenses in January 2018. This will finally give California’s banks and credit unions a system that allows them to comply with the FinCEN and DOJ guidance. And we predict that much like in other states, the early movers will be small banks and credit unions that are willing to take on a little bit of risk to gain the first-mover advantage. I have said for a long time that I don’t think a “cannabis-only” financial institution is the answer. A bank that only serves cannabis businesses would be subject to too much risk because it is only exposed to a single industry that happens to be criminal at the federal level. They would be completely uninsurable. So the best bet is for financial institutions that already have robust and diverse holdings to work with a number of cannabis businesses up to a maximum based on the size of the rest of the bank’s or credit union’s business.
For banks and credit unions looking to do this, it isn’t too early to start working on developing cannabis specific procedures. Well-run financial institutions have a compliance program in place that includes standard operating procedures and one or more employees dedicated to complying with the Bank Secrecy Act and other federal regulations. Those compliance officers will need to update standard operating procedures to include additional scrutiny for marijuana businesses and regular account updates. It is imperative for financial institutions to make sure those procedures are well-tailored so they are sufficient to meet the FinCEN guidelines while not being so cost-prohibitive that the bank or credit union will lose money on cannabis clients.
Most financial institutions in Washington and Colorado and Oregon that operate in the cannabis industry do so with little fanfare and rely on customer networking to get business. That will likely be the case in California as well, so there may not be much fanfare from banks and credit unions that are getting into the market. But we are confident that very at least some California banks and credit unions will start taking on cannabis accounts in the coming months.