Do financial institutions have to wait to start a program?
The stories on cannabis banking coming out of Washington are fast and frequent as we approach the summer congressional break. Article after article opines about what all the committee hearings in both houses of congress might yield, along with thoughts on the mixed bipartisan support in all of these hearings. There appears to be some movement on what the future of cannabis banking might be, but no definitive action or timeline for a new set of guidelines has been established yet. This puts a lot of banking executives in an unnecessary holding pattern with ever-increasing and frustrating conversations at their board meetings. The strong consensus opinion is that Washington will continue to drag its collective feet and make this a 2020 national election topic.
So where does this leave the banking industry today?
1. As a financial institution, do I have to wait for Congress?
This is the most frequent question we get asked at Green Check Verified every week. The short, simple answer is “no”. The fuller answer is obviously a little more involved. Financial institutions (FIs) don’t have to wait for new guidelines and regulations. There is a solid set of existing guidelines for FIs that are already published and ready for use. The FinCEN Guidelines issued in 2014 can be effectively used in the 33 states that have state-sanctioned and controlled cannabis-related businesses.
2. Don’t surprise your examiners, or your board - communicate in advance
Your examiner in charge (EIC) has the same challenges as you. They need to understand the regulations and how they are applied to state-sanctioned cannabis businesses. Everyone is learning together. That means early communication and presenting the details of your cannabis banking program should be a requirement. It is a step that we require before engaging with any FI. No one likes surprises, so be up front and get on the same page. Their concerns, justifiably so, are that cannabis banking is being conducted with the utmost visibility and compliance adherence. You can’t simply tell your EIC what you plan to do. You have to show them exactly how, to the detailed dollar level, you are going to make sure only “good” money comes in, while keeping the “bad” money out.
You also need to communicate with your board of directors and get their documented approval before starting your program. Sometimes this requires the EIC conversation in advance. Regardless, communicate equally to all affected parties.
3. I’m a Financial Institution, how do we know what cannabis businesses are compliant?
There isn’t any need for guesswork here. Like any new line of business your FI enters, you need to do the groundwork of defining the program, the policies and procedures that will be followed, but most importantly, how you can exhibit and demonstrate not just your compliance, but the compliance of any cannabis-related business. The FinCEN guidelines are great at telling you what and what not to do, but they don’t tell you how. For a FI, this proves to be difficult for the required enhanced due-diligence and account opening steps required for verification, not to mention the transaction monitoring and ongoing oversight.
Just because a business is licensed by the state, that doesn’t mean that the “business of the business” is in compliance with the state regulations and most importantly as they apply to your own cannabis program requirements. There are clear, programmatic methods for knowing and deciding who the best business candidates are for your program. We’ve created a useful resource, Green Check and FinCEN Guidance, that explains how we deliver the information needed for establishing and maintaining a true compliance platform for FinCEN's guidelines and beyond.
4. Decide to enter the market for the right reasons.
In parallel to all the above processes you should be defining the financial reasons why you want to enter this space. Yes, it is growing faster than any other market segment. The opportunity for new, low-cost deposit dollars is real, but your program needs to be modeled effectively before you start. This step gets overlooked or oversimplified and the downstream consequences are real. Developing a full scale 3-5 year business projections should be a required step before any program gets started.
Considerations should include:
- Size, scale and growth of the geographic cannabis market for deposit dollars
- Cost of implementing and managing this new business line - people, products, services
- Definition of your service offering, especially the price point for these services
- Ability to effectively manage the scale, up or down, of the accounts and dollars involved
- Ensuring that full reporting, as required by all agencies, does not create unnecessary fire-drills for your staff
As is the case with all aspects of any new program, work with firms that have experience in defining the value to be gained, not the perceived opportunity to be lost.
5. How can we do this effectively, with compliance and the right cost?
- You now know that cannabis banking can be done.
- You have defined your program and had it vetted by people experienced in this specific space.
- You have met with your EIC and explained your program.
- You’ve secured documented board approval.
- You have developed and voted on the reasons, financial and mission driven, as to why you are starting a cannabis banking program.
Begin with the end in mind. Start your program properly, with structure and scalable potential, to make sure the outcomes are as forecasted. Focus on what you do best, delivering exceptional products and customer service to your clients. Let other firms, firms that specialize in the definition and delivery of cannabis banking solutions, be the internal infrastructure for your organization and program. Work with a firm that covers all the rules and regulations of the state cannabis programs today, as well as FinCEN, but also can scale programmatically to cover all the changes as and when they occur, without additional personnel.
Be a first mover in your geography by implementing a scalable, verifiable cannabis banking program. The real customers and financial opportunities are out there, even greater than what you might have modeled given the growth of the industry. And the ability to do this today is real.
You can wait for Washington but ask yourself this: when was the last time that ever worked for anyone?
We recently launched a 3-part webinar series, designed to help institution’s develop or enhance their cannabis banking programs. You can listen to part 1, Cannabis Banking: Can I Do It?, and register for part 2 taking place on August 7th.