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By Rachel Backus, BSACS – Internal Audit and Compliance Manager, Financial Institutions Group

Over the past few years, the United States has experienced continued growth in the cannabis industry. According to the National Conference of State Legislatures, 18 states to date have legalized the adult use of marijuana for recreational purposes and medical use. This has put additional pressure on financial institutions’ monitoring of potential marijuana-related business (MRB) activity in their portfolios – leaving many evaluating whether the revenue is worth the hassle of conducting banking services for these types of businesses. 

Regulatory Background

First passed as a standalone bill in the U.S. House on April 19, 2021, the Secure and Fair Enforcement (SAFE) Banking Act is aimed at explicitly prohibiting federal regulators from handing down penalties to financial institutions for serving legitimate businesses, such as MRBs. If signed into law, this would allow financial institutions to operate with safer, more trustworthy financial practices rather than relying entirely on cash.  

To date, the SAFE Banking Act has passed the U.S. House six times, most recently in February 2022 as an amendment to the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education and Science Act of 2007 Act (COMPETES Act). With each version that is passed, the bill gains more bipartisan support bringing hope that the regulatory hurdles to provide banking services to MRBs will become easier to overcome in the near future. 

Putting the Right Policies and Procedures in Place

If your financial institution is contemplating, or already offering services to MRBs, make sure you’re taking into account the extra operational steps and the policies and procedures you’ll need in place to remain compliant. 

When marijuana became legalized in several states, policies and procedures began only including MRBs. Since the industry has continued to evolve, now all areas of cannabis should to be considered, including hemp and cannabidiol (CBD). Today, there are three tiers of marijuana to identify when integrating these service offerings into your policies and procedures: 

  • Tier I – Product touching (seeds, processing, product testing, planting, any area of cultivation and dispensaries). 
  • Tier II – Supporting cannabis or a business who has customers/members that are Tier I MRBs (packaging suppliers, hydroponic suppliers, licensing consultants, industry associations and software providers). 
  • Tier III – Incidental businesses with Tier I and II, and is subject to interpretation by many in the industry (lawyers, accountants, food delivery persons and property owners). 

Since MRB accounts are all-encompassing, each related area should be identified – marijuana, hemp and CBD. You’ll also want to consider what type of policies and procedures your financial institution will put in place for the industry. For example, will you allow someone who is a W-2 employee of a Tier I MRB to apply for a loan with your institution? Will you allow business accounts for CBD only, but not hemp and marijuana, or a varying combination of them? These questions, among others, will need to be determined and addressed in the related policies and procedures. 

Account Monitoring: What to Look For

Monitoring MRB accounts is critical for ensuring compliance and detecting unusual and suspicious transactions. Here are a few considerations related to account monitoring you can’t afford to overlook when doing business within the cannabis industry. 

  • Consider looking into businesses that changed the product they farm. For example, a farmer who once grew sugar beets may have switched to hemp or marijuana. 
  • Scan your accounts against licensing databases in your state. Staying proactive will keep your institution in-the-know so you aren’t caught by surprise when an auditor or regulator informs you that you have cannabis-related accounts you were unaware existed. 
  • Educate staff on the ownership structure of cannabis-related accounts to ensure beneficial ownership certification forms are completed with accuracy. Staff should know how to dissect and understand legal documents and the related requirements.  
  • Establish monitoring software for both money laundering, suspicious activity and tracking sales for MRB accounts. This will aid in understanding what your consumer is engaged in and the expected activity. 
  • If you have private owner automatic teller machines, due diligence needs to be completed and documented on where those machines are located, who owns the machine, and who replenishes the machine. A private owner could have placed the ATM inside a dispensary and is filling the ATM with dirty money obtained from an illegal source. Expectations of cash flow for the source for replenishment of the ATM is key in the monitoring for money laundering.  
  • Be on the lookout for cannabis-related business vending machines. Machines have been active in several states for a while now, however each state has their own licensing requirements. Be mindful of the business owner who only discloses that they own “several vending machines”. More due diligence may be required by your organization to learn more about where the vending machines are located, the quantity, if licensing is accurate and more.  

Whether your institution is new to banking MRBs, exploring whether to offer services to them, or needing assistance in reviewing or establishing effective monitoring and reporting systems, Doeren Mayhew’s Financial Institutions Group is here to help. Contact us today to learn more.