Credit union to offer financial services to cannabis industry in March
Starting next month, cannabis business owners in Alaska will have access to financial services for the first time.
Credit Union 1, an Anchorage-based credit union, expects to launch its pilot program serving licensed cannabis businesses in March. CU1 has been working on the details of the program closely with business owners for more than a year and announced the pilot program in November, said Joseph Martin, who manages the marijuana-related business program for Credit Union 1.
“The whole plan all along has been to launch it sometime in March,” he said. “We announced it so early because we wanted to give the industry hope, because they’ve been struggling for awhile now.”
Because cannabis is still listed as a Schedule I narcotic under the federal Controlled Substances Act, financial institutions have been skittish about serving the businesses. Banks are federally insured and inspected, and taking on the risk of serving a business technically still considered illegal by the federal government could present risk.
Thus, cannabis business owners and customers to date have largely had to work in cash, with huge deposits of cash going in and out of businesses by hand.
That’s something that’s both inconvenient to businesses and dangerous to the public. Martin said that was one of its concerns as a community credit union — business owners are taking on a risk by having to transport large sums of cash down the street to pay bills and holding their payroll in cash.
Credit Union 1 is a relatively small player in the larger world of financial institutions, with about $1 billion in holdings — for comparison, JPMorgan Chase has about $3 trillion — but its nonprofit status and community orientation allows it to take on more risk, Martin said.
“Credit unions typically take on bigger risks than banks to serve the underserved,” he said. “I think marijuana kind of fits into that. It’s a big community safety issue to have all this cash running around on the streets.”
Essentially, the pilot program will hinge on improved software to serve the cannabis industry. Because of the nature of the business, the credit union has to keep close tabs on what is coming in and out of the accounts and file reports on every deposit over $10,000 — which is basically all of them, Martin said — to report them to the federal government.
That helps CU1 prove to the federal government that everything is above board and the accounts are not laundering money, he said.
The financial industry occupies a strange tidepool in the world of back-and-forth cannabis legalization legislation. After Obama-administration U.S. Deputy Attorney General James M. Cole issued a memorandum in August 2013 essentially telling all federal prosecutors to defer to states’ legalization laws on cannabis, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network developed its own guidelines for banks wishing to serve the cannabis industry.
Even after President Donald Trump’s former Attorney General Jeff Sessions retracted the Cole memorandum, the Financial Crimes Enforcement Network let its banking regulations stand, as long as banks complied.
For those looking to open accounts, there will likely be a significant charge, at least at first. The cannabis banking programs are expensive. For one, the additional burdens of tracking the industry to comply with the FinCEN’s guidelines require significant manpower. Credit Union 1, which usually files about 2,000 reports of transactions more than $10,000 per year, expects its annual reports to increase to about 15,000, Martin said.
“When you’re thinking of (the service) from inside the financial institution, it’s not information that we have readily available,” he said. “It’s very invasive … we have to know their product lines, their normal customer base, we have to know all their owners, anyone tied to the business.”
But the software improvement should help Credit Union 1 bypass some of the staffing increases other banks have had to take on. For example, other banks have developed cannabis departments in which individual employees handle specific cannabis accounts and know the ins and outs of each business. The software Credit Union 1 has been working on will help avoid some of that, Martin said.
Over time, he said he thinks the program will get cheaper as CU1 onboards more businesses and the employees get better at serving the cannabis industry. The federal burdens of reporting may decrease, too, as bills move through Congress to change the regulations on serving the cannabis industry.
The U.S. House Committee on Financial Services held a hearing on just such a draft bill on Feb. 13. The bill, which would encode safe harbor banking practices, is championed by the National Cannabis Industry Association and supported by the Marijuana Policy Project. Though it’s only a draft, a final version could be introduced shortly thereafter, said Morgan Fox, the communications manager for the National Cannabis Industry Association.
“There’s a number of comprehensive bills being introduced that all approach the issue from different directions,” he said. “Almost all of them would basically solve the banking issue.”
Since the midterm election, many of the “obstructionist” legislators have left Congress and the NCIA feels the banking bills have a better chance of passing, Fox said. The particular bill being discussed on Feb. 13 would carve out a safe harbor for banks, but he said he had never heard of a bank being prosecuted for serving the cannabis industry.
There aren’t very many of them, though. Though FinCEN’s official tracking documents roughly 486 banks maintaining service for cannabis businesses, Fox said the true number is significantly smaller than that — something like 40 financial institutions nationally have cannabis departments, he said.
Having access to banking services is important for cannabis businesses from an economic angle and for states from transparency and regulatory perspectives, he said.
“Without access to banking, they have to institute much more expensive measures … even paying taxes, security,” he said. “I think it’s really important from a regulatory standpoint.”
Martin said Credit Union 1 has plans in place to unwind the program if the federal government is uncomfortable with it, but they’re fairly confident in the plan they’ve written out. One of the core things the bank hopes for is to normalize the legal cannabis industry as members of the business community in the state.
“We don’t have a political or moral sense about this. You’re not going to see us sponsoring (bills) … but because it is legal in the state of Alaska, we’re going to service it like a business like any other,” he said.
Elizabeth Earl can be reached at [email protected].