By Paula B. Givens
Most cannabis-related businesses do not have a transparent and ongoing relationship with a financial institution, reflecting the fact that banks are wary of servicing the marijuana industry.
In recent months, though, a small number of financial institutions have quietly begun to work with cannabis companies. And more will likely do so in the near future.
The reason: Solutions are starting to arise through private services that allow banks to perform the intensive due diligence required under federal guidelines issued in February by the Departments of Justice and Treasury.
Under the guidance, banks interested in opening an account for a marijuana-related business must ensure the company’s operations do not conflict with any of the eight priorities outlined in the so-called Cole Memo released by the Justice Department a year ago, and that a long list of “red flags” do not exist.
If the company passes muster initially and the account is opened, the banks must aggressively monitor these accounts as the relationship continues.
The effort required to simply open a single account for a marijuana-related business is too much for the risk management personnel of most banks, so the guidance had little impact at first. But the new services are helping banks streamline the process and ensuring they stay within the federal guidelines.
The program I created, for instance, involves the examination of every aspect of a marijuana-related business, from the source of capitalization to accounts payable and withdrawals of owner equity. This helps banks determine the source of funds that started the business, where the income is going and whether the distribution of equity are all compliant with the anti-money laundering provisions of the Bank Secrecy Act.
Banks in several states – including Oregon and Colorado – are starting to use these services or are creating their own internal systems of risk analysis.
As more financial institutions move in this direction, they will encourage others to do so as well. If front-door banking for marijuana businesses has not reached your state yet, it is coming.
There are several steps a marijuana related business should take now to prepare for the application process when banking does become available:
#1. Create and follow written cash-handling procedures that account for all cash received and all cash payments, i.e., create a paper trail to record all transactions;
#2. Cease taking credit cards. Visa and MasterCard do not do business with dispensaries or cultivation centers. If you accept credit cards, as opposed to cash advances on a credit card, then your business has been falsely represented to Visa/MasterCard by your merchant service provider. The willingness of a business to misrepresent itself to other financial institutions will negatively impact your ability to demonstrate global compliance to a prospective bank;
#3. Make certain that you have current financial statements and that they reconcile internally and with your sales and income tax returns;
#4. Ensure that you are in compliance with all local, state and federal laws; and
#5. Ensure that the source of all contributions of capital into the business and/or withdrawals of equity from the business are thoroughly documented.
Marijuana-related businesses also might want to consider utilizing a closed-loop payment system (think of Pay Pal for cannabis) like the one being launched by Portland’s MBank, which is called Pay With Change.
It should be noted that the typical application process for getting an account with a bank operating under the recent federal guidelines will be quite long and detailed – more detailed, in fact, than the application for a dispensary permit in many states.
While this information requirement has been off-putting to a few business owners, most understand that it’s simply a necessity for banks to protect themselves and comply with federal guidance.
Some businesses are also surprised to learn these banks often charge a monthly fee for an account.
But for the few banks that have a cannabis risk management program, there is a substantial amount of work required in order to comply with the obligations imposed upon them by the federal guidance. Some banks hire new workers specifically for this task, while others have a third party perform this work.
In any event, the additional cost to banks servicing cannabis companies is substantial – hence the fee.
So what can you do now if no bank in your area is openly working with the industry? I’m contacted regularly by marijuana-related business owners from across the country who ask that question.
My advice is to approach a small local bank, provide them with a copy of the federal guidance, suggest they read it, tell the banker you can supply them with information to sustain their due diligence obligations, and ask that they open an account.
Paula B. Givens is the founder of Industry Assurance and Oversight LLC, which offers financial services to cannabis companies and banks