Cannabis Banking: Real World Success Stories and Cautionary Tales

Cannabis Banking: Real World Success Stories and Cautionary Tales

 

I have visited with several CEOs and Compliance Officers of a financial institutions looking into Cannabis Banking, and here are 4 initial questions I get asked the most:

 

  1. How do I learn about all the laws, regulations and legislation regarding the cannabis industry and how do I stay up to date?
  2. What are the staffing requirements of a fully established cannabis banking program?
  3. What is the most effective way to educate my board of directors on the risks and rewards of a cannabis banking program?
  4. What does a comprehensive cannabis banking program look like, and how has it been received by regulators?

 

HDCS can customize an assessment for your financial institution to help you not only formulate but to also answer the questions that you need to ask as you explore the risks and rewards of cannabis banking.

 

Visit our website at hdcompliance.com.

 

Contact Becky directly at b.postar@hdcompliance.com

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

Cannabis Banking: Real World Success Stories and Cautionary Tales

Cannabis Banking: Real World Success Stories and Cautionary Tales

This webinar, co-hosted by HDCS and RiskScout, will provide a brief update on pending legislation and outline what a successful cannabis banking program looks like. We discuss specific examples of banks and credit unions that have achieved their economic goals and passed regulatory scrutiny.
 
We also will share cautionary tales from financial institutions that have failed to implement best practices and have fallen short of their goals.
Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

Could a Safe Banking Bill Pass in 2021?

Could a Safe Banking Bill Pass in 2021?

This week’s video Becky talks about Safe Banking: Last month, both the House (H.R.1996) and the Senate introduced bipartisan safe banking bills.

 

If passed, this bill would create protections for financial institutions that provide financial services to cannabis related businesses. These protections are not just for depository services but this bill could also open fair lending for the cannabis industry.

 

Safe banking would not only be a game changer for the cannabis industry and provide must needed guidance for financial institutions, but it could also allow for convenience and potentially lower prices for cannabis consumers.

 

HDCS will host a free webinar at the end of this month where we discuss cannabis banking success stories and cautionary tales. Look for registration coming soon on our website at hdcompliance.com.

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

Key Considerations for Cannabis Lending

Key Considerations for Cannabis Lending

Lending to the cannabis industry is complicated, but it can be navigated safely and profitably. In this video, our CEO, Andy Montgomery, covers the key considerations and best practices for cannabis lending.
Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

Hemp is Legal. Why is it Still High-Risk? (Updated)

Hemp is Legal. Why is it Still High-Risk? (Updated)

Hemp is legal. Why is it still high-risk? (Updated)

 

Before exploring the risks, let’s visit some other commonly asked questions:

 

Question 1: What is hemp?


Question 2: What is CBD? And how is hemp different from marijuana?


Question 3: What is the USDA’s and the FDA’s role regarding hemp?

 


 

Question 1: What is hemp?

 

In the U.S. “industrial hemp” is classified as cannabis containing no more than 0.3% tetrahydrocannabinol or THC (by dry weight). This classification was defined in The Agriculture Improvement Act of 2018 or better known as the 2018 Farm Bill. The 2018 Farm Bill was refined to include hemp-sourced extracts, cannabinoids, and derivatives in the definition of hemp, and it also removed hemp from the Controlled Substance Act (CSA).

 

Hemp is way more than CBD oil.

 

There are countless uses for hemp. Here are a few examples:
Industrial Textiles: ropes, canvas, brake/clutch linings, caulking, and more.


Consumer Textiles: fabrics, diapers, denim…and more.
Agriculture Benefits: soil improvement in crop rotation, weed suppression…and more.
Paper: newspaper, cardboard, printing paper…and more.
Building Materials: fiberboard, cement, stucco, insulation…and more.
Foods: salad oil, milk, supplements, granola, bird seed…and more.
Industrial Products: printing inks, fuel, putty, coatings…and more.
Personal Hygiene: soap, shampoo, lotions…and more.

 

Question 2: What is CBD? And how is hemp different from marijuana?

 

Cannabidiol or CBD is one of the two most prevalent cannabinoids found in the cannabis plant, the non-intoxicating cannabis compound. The beneficial properties of hemp-derived CBD are numerous and as it works with the human endocannabinoid system it is thought to have an impact on hundreds of biological conditions. CBD may be taken in multiple ways (e.g. inhalation, oil, hemp extract oil, a capsule, an ingestible, etc.). CBD can be derived from either hemp or marijuana. 

 

To clarify, CBD derived from hemp (which contains no more than 0.3%, THC, by dry weight), is not regulated as a controlled substance and is federally legal; however, CBD derived from marijuana is NOT federally legal.  

 

Marijuana also belongs to the cannabis genus and is a term most commonly used to describe the cannabis sativa species. Tetrahydrocannabinol (THC) is the second cannabinoid prevalent in cannabis plants, specifically found in higher concentrations in marijuana. Although marijuana is high in THC, you can also find other cannabinoids in varying amounts. The THC compound is what causes the psychotropic or “high” that cannabis is known for. To generalize, marijuana contains around 10% to 30% THC. 

 

For the sake of time, I will simplify the difference. Let’s go back to Question 1. The legal difference from hemp and marijuana is that hemp has been removed from the CSA.  Marijuana is still listed as a Schedule I controlled substance, right along with heroin and meth.  

 

Question 3: What is the USDA’s and the FDA’s role regarding hemp?

 

 Hemp and the USDA

 

The 2018 Farm Bill was signed into law on December 21, 2018 and it directed the United States Department of Agriculture (USDA) to establish a national regulatory framework for hemp production. On October 31, 2019, the USDA released its Domestic Hemp Production Program.

 

 There are several requirements in the interim rule and I have listed six below:

 

  1. State and Tribal Hemp Production Plans will have primary authority (after receiving USDA approval).
  2. Cultivators must give specific land coordinates where the hemp will be produced.
  3. Sampling and testing requirements for Delta-9 Tetrahydrocannabinol (THC) and the disposal of non-compliant plants. Note: The USDA has already modified a requirement for testing.  The original interim rule required all testing to be facilitated by a DEA-registered lab. On February 27, 2020, the USDA released a statement which delayed that requirement, and modified/clarified the disposal requirement for “hot” hemp crops.
  4. Compliance with enforcement procedures including annual inspection of hemp producers.
  5. Information sharing.
  6. Certification of resources…and much more.

 

Hemp and Crop Insurance

 

On February 6. 2020, the USDA announced details of two risk management programs eligible for hemp producers (MPCI and NAP).  However, if the crop is classified as “hot” (over 0.3% THC), it becomes ineligible for the insurance.

 

Which States are cultivating?

 

Here is where we are as of April, 2020:

 

  • 20 States plus D.C. operating under the 2014 pilot rules for 2020
  • 14 States with an USDA approved plan under the interim final rule (it should be noted that Montana has an approved plan; however, it still operates under the 2014 pilot rules, for now)
  • Five (5) States’ plans are under USDA review
  • Five (5) States are drafting a plan for USDA review
  • Three (3) States opted to not legalize hemp production (production is illegal in Idaho, Mississippi and South Dakota)
  • It is still unclear for two (2) States regarding their stance on the production of hemp (New York and Rhode Island)

 

As of April 16, 2020, the USDA has also approved 20 Tribal plans, 13 Tribal plans are under review, three (3) Tribes are currently drafting their plans and one (1) Tribe’s plan is pending resubmission.

 

Hemp and Lending Guidance

 

The USDA released guidance on making direct and guaranteed loans to hemp producers earlier this year.  Even though this document has been rescinded, due to the extension of the 2014 hemp pilot program, this document is relevant therein as it will be similar to the final guidance that is expected to be release in 2021.  

 

Which States are participating?

 

Here is where we are as of November 2020:

 

  • 15 States plus are operating under the 2014 pilot rules for 2020
  • 25 States have USDA approved plans under the interim final rule (it should be noted that some states will continue to operate under the 2014 plan even though they have received USDA approval)
  • Six (6) States’ plans are under USDA review
  • One (1) State’s plan (Idaho) is pending state legislation 
  • Three (3) States did not draft programs and their producers will operate under a USDA license. 

 

Tribes and Territories

 

As of November, 38 Tribal plans have been approved, four (4) Tribal plans are under review, and three (3) are currently drafting plans. Also, the Northern Marianas Island’s plan is under review and both Puerto Rico and the U.S. Virgin Island’s plans have been approved.

 

Hemp and the FDA

 

The relationship between hemp and the FDA is a complicated one and is widely misunderstood.  To simplify, the FDA does not have the research necessary to make the approvals that are in high demand. Proper research has not been conducted because, until recently, hemp and hemp-derived CBD has been listed as a Schedule I substance. Another issue is that the FDA has approved a drug (Epidiolex) that contains CBD. Once something (like CBD) has become an FDA approved drug it technically cannot be added to human or animal food.  

 

I believe that the FDA is working towards obtaining the research needed.  In December, 2019 the FDA completed its evaluation of three generally recognized as safe (GRAS) notices for hemp seed-derived food ingredients.

 

The FDA has also created a resource document that is updated regularly titled “FDA Regulation of Cannabis and Cannabis-Derived Products, Including Cannabidiol (CBD)”. 

 

Some of the confusion over the FDA’s stance regarding hemp-derived CBD is because it has released the two sentences below…within the same paragraph

 

  1. “FDA is aware that some companies are marketing products containing cannabis and cannabis-derived compounds in ways that violate the Federal Food, Drug and Cosmetic Act (FD&C Act) …”  
  2. “FDA recognizes the potential opportunities that cannabis or cannabis-derived compounds may offer and acknowledges the significant interest in these possibilities.”

 

A bi-partisan bill (H.R.8179) to legalize CBD as a dietary supplement was introduced in Congress in September, 2020.  If past, this bill would “make hemp, cannabidiol (CBD) derived from hemp and any other ingredient derived from hemp lawful for use under the Federal Food, Drug and Cosmetic Act as a dietary ingredient in a dietary supplement, and for other purposes”.  Without this bill (or other bills currently pending) the consumption of CBD will continue to be an issue. 

 

An oversimplified conclusion to this section is that The 2018 Farm Bill legalized the production and transportation of hemp; however, the FDA has yet to approve several hemp-derived products. 

 

Hemp and the DEA

 

The DEA released their Interim Final Rule (IFR) on the Implementation of the Agriculture Improvement Act of 2018 on August 21, 2020, which is designed to align the agency with the 2018 Farm Bill. 

 

However, there has been much controversy over their interpretation of THC. The DEA’s IFR states, “In order to meet the definition of ‘hemp’ and thus qualify for the exemption from schedule I, the derivative must not exceed the 0.3% delt-9-tetrahydrocannabinol [THC] limit [by dry weight]. The definition of ‘marijuana’ continues to state that ‘all parts of the plant Cannabis sativa L.,’ and ‘every compound, manufacture, salt, derivative, mixture or preparation of such plant’ are schedule I controlled substance unless they meet the definition of ‘hemp’…or are from exempt parts of the plant…As a result, a cannabis derivative, extract or product that exceeds that 0.3% [THC] limit is a schedule I controlled substance, even if the plant from which it was derived contained 0.3% or less [THC] on a dry weight basis.”

 

The definition, if left as is, would essentially criminalize the hemp extraction process.  There are several different variations in which to extract cannabinoids or CBD from hemp; however, all of them result in an increase of THC.  Although a part of the extraction process is to dilute the THC back to 0.3% or less, the DEA’s rule would leave processors of hemp vulnerable to technically possessing a schedule I controlled substance and in violation of the law.   

 

There are lawsuits challenging the DEA’s Interim Final Rule by associations within the hemp industry and others, which may resolve this issue. 

 

Let’s Talk Risk.

 

These risks below are topics to be considered and discussed with your Board of Directors before implementing a hemp banking program. 

 

Risk 1: Monitoring hemp may not be as stringent for financial institutions, but due diligence must be enhanced. Here is what the regulators are saying:

 

On December 03, 2019, there was a Joint Statement issued titled, “Providing Financial Services to Customers Engaged in Hemp-Related Businesses”. I will highlight three points.

 

1) The agencies state that banks are not required to file a Suspicious Activity Report (SAR) solely because they [the customer] are engaged in the growth or cultivation of hemp. So, there will not be a “Hemp Limited”, “Hemp Priority” or “Hemp Termination” SAR requirement.

2) The statement requests for banks to conduct risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers.

3) The statement also advises financial institutions to contact the FDA regarding hemp-related food, drug and cosmetic questions. 

 

FinCEN intends to issue additional guidance after reviewing and evaluating the USDA’s interim final rule. I have not seen an estimated date for this additional guidance. 

 

The National Credit Union Administration (NCUA) released a Regulatory Alert titled “Serving Hemp Businesses” in August, 2019 that provides some guidance for credit unions. This is a resourceful document for any financial institution.  It concludes that, “The NCUA encourages credit unions to thoughtfully consider whether they are able to safely and properly serve lawfully operating hemp-related businesses…”  The NCUA will issue additional guidance once USDA regulations and guidelines are finalized. 

 

On July 25, 2019, the Illinois Department of Financial and Professional Regulation released its “Industrial Hemp” memorandum.  It states that banks are obligated to do the following: continue compliance with existing BSA/AML statues; implement an effective CIP; employ reasonable and effective EDD; file SARs when appropriate (for example, if a crop exceeds the legal limit); and stay up-to-date with the latest regulatory developments.  

 

Summary: The onboarding of hemp-related relationships will still require enhanced due diligence as for all high-risk customers; however, the ongoing monitoring will not be as tedious as with marijuana-related relationships.

 

Risk 2: The global market for hemp consists of more than 25,000 products in nine submarkets: agriculture, textiles, recycling, automotive, furniture, food and beverages, paper, construction materials and personal care. The FDA has not approved a large portion of hemp-related products, as previously mentioned. However, the extent of the FDA’s enforcement is sending warning letters (for the most part).

 

Risk 3: The USDA has stated that “no State or Indian Tribe may prohibit the transportation or shipment of [legal] hemp”; however, currently there is no protocol for transportation or how law enforcement tests shipments.

 

Risk 4: What if a cultivator’s hemp tests “hot”?  Or what if the DEA decides a cultivator’s legal hemp is illegal? See Apothio, LLC v. Kern County Sheriff’s Office filed 04/10/2020.

 

Risk 5: Hemp crops qualify for federal crop insurance, which will provide more certainty for cultivators. However, if the crop is “hot”, it is no longer eligible for the insurance.

 

Risk 6: Concentration and liquidity risks. What is your institution’s risk appetite and related thresholds?

 

Bonus: If you want to impress your hemp cultivators, watch this YouTube video.

 

If you would like to learn more about how to safely implement a hemp  banking program, please visit our website at hdcompliance.com, or contact me directly through LinkedIn.

 

Becky Postar
HDCS, Inc. | Director of Product and Business Development

 

*It should be noted that the USDA released its 301page Final Rule, effective March 22, 2021.

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

How Ready Is Your Cannabis Banking Program?

How Ready Is Your Cannabis Banking Program?

Is your institution’s cannabis banking program ready for prime time? It is difficult to enforce regulations that haven’t yet been written.  This has been the dilemma for state and federal regulators as they have reviewed cannabis banking programs.  But that is all about to change as the SAFE Banking Act has a good likelihood of passing in the next few months. 

 

We have seen several successful cannabis banking programs and unfortunately, we are already seeing some enforcement actions and consent decrees on institutions that have created pilot programs but have not engaged in proper consultation and put the right infrastructure in place to avoid significant BSA/AML findings.

 

Here are 7 things to think about in terms of your existing or proposed cannabis banking program:

 

  1. Does your team have the subject matter expertise to really understand the unique nature and complexities of the highly regulated cannabis industry?
  2. Do you have the appropriate process for vetting cannabis customers to ensure you don’t inadvertently bank illegal customers?
  3. What is your process for monitoring the deposit transactions to the cannabis businesses seed-to-sale or track-and-trace programs?
  4. How do you track and understand all of the rapidly changing laws and regulations that are affecting the ongoing compliance and legality of the overall program? 
  5. Is your program built to be able to scale without substantially increasing your compliance staff and training them to have the necessary subject matter expertise?
  6. Is your program built to be profitable enough to justify the increased risk?
  7. Who has the capacity to audit your program to prevent any regulatory disasters?


There is a Solution

 

All of the 7 things outlined above are very solvable. As with everything, there is a hard and expensive way to solve them and there are easier and more cost-effective approaches. How do you know your institution has effectively done the research to determine the optimal path for your program?

 

When SAFE Banking is passed, we at HDCS have an idea of what that guidance may look like. To ensure your financial institution is prepared, contact us for a free, no-strings-attached assessment of your current or proposed program.

 

Andy Montgomery
HDCS |  Founder and CEO

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

A New Day for the Cannabis Industry

A New Day for the Cannabis Industry

A new day for the cannabis industry

 

 

January 5th was a seminal day for the cannabis industry in the United States. In what most pundits thought was an unlikely event, both Georgia Senate seats went to Democrats.

 

This, combined with a Democratic administration, which has been much more friendly to cannabis initiatives and the passage of new cannabis legalization initiatives in multiple states, offers a unique opportunity for federal legislation efforts to bring the industry on par with other federally regulated and taxed industries like alcohol and tobacco.

 

So, what will happen now? Well, there are two bills which have been pending in Congress that would substantially provide a catalyst to and a reshape of the industry. The House of Representatives passed H.R. 3884, the MORE Act (originally sponsored by Kamala Harris, Vice President Elect), on December 6 on a bi-partisan 228-164 vote to federally decriminalize cannabis. The House has also passed on three separate occasions by bi-partisan vote H.R. 1595, the SAFE Banking Act, which provides a federal safe harbor to financial institutions (FI’s) that choose to offer financial services to the cannabis industry. The SAFE Banking Act was effectively killed by Senate Banking Committee Chairman Mike Crapo in 2019 and the MORE Act expired without a vote in the Senate when the last congressional session expired. Even though both bills would have been reintroduced in 2021, they remained unlikely to pass in a Republican controlled Senate. But, as January brought the Democratic surprise, both bills are very much alive and well.

 

Prospects for The MORE Act

 

Even with the slightly changing balance in the House, the MORE Act is likely to be passed again in this House of Representatives. So, now that Democrats are in control of the Senate it will get immediately passed right? I would personally guess not. I think the Senate is going to take its time to make sure that all the law enforcement and regulatory concerns are addressed before passing the bill. Also, there is the matter of the treaties we signed with other nations, in which we urged those nations to classify Marijuana as a “Schedule 1” narcotic. All of those considerations will take some time in the Senate. But, the Congressional Budget Office (CBO) has scored the MORE Act and estimates it will bring in an additional $11B in revenues to the economy and save another $1B in federal prison expenses. And right now, every penny counts.

 

The bottom line: Democrats are going to be acutely aware that they have to get their agenda passed in the next two years before the next election could shake up the balance in Congress. Federal cannabis legalization is definitely part of that agenda.

 

Prospects for SAFE BANKING

 

As previously mentioned, the bi-partisan Secure and Fair Enforcement Act (SAFE Banking Act) has passed in the House as a standalone bill and twice as part of doomed COVID-19 Relief Bills. As a standalone bill, it would have passed in the Senate if Senator Crapo of Idaho had let it out of the Senate Banking Committee and Majority Leader Mitch McConnell had brought it to the floor. But, these two men had extraordinary power to prevent its passage. Obviously, the operative word there is had as Democrat Chuck Schumer is now Majority Leader and Democrat Sherrod Brown of Ohio is Chairman of the Senate Banking Committee.

 

The bottom line: Democratic leadership in the Senate desires passage of the SAFE Banking Act and are likely to push it forward in the first few months of the new Congress. If SAFE Banking is attached to another COVID-19 Relief Bill in the House, like it was with the doomed HEROES Act, it could pass soon after inauguration as Democrats will be likely to want to increase stimulus payments from $600 to the $2,000 that they sought at the end of the last Congress.

 

What happens after SAFE Banking passes?

 

After Congress passes the SAFE Banking Act, the joint interagency body of regulators, FFIEC, will convene to begin writing the rules and regulations for financial institutions that engage with Cannabis Related Businesses. Generally, when a new law is enacted, this process can take a couple of years. However, I would anticipate that initial guidance from the agency will come out fairly quickly as the individual regulators have inevitably been considering this issue. They have been studying state regulators actual experience with current institutions in the space, and they have an existing regulatory apparatus pertaining to higher risk industries.

 

Will financial institutions rush into bank cannabis after SAFE Banking passes?

 

No! That is the short answer. Banking the cannabis industry will never be for every financial institution. Why? Because it takes a commitment from the institution to put infrastructure in place to safely bank cannabis businesses. Banking cannabis businesses on an ad-hoc basis could be a recipe for disaster for the institution. The onus is on the bank to make sure that each cannabis business (or any business) is completely legal. As the state laws regarding legalized cannabis have been written, what legal means in the cannabis industry is that the business is licensed and compliant with all the state and local laws. If an in institution takes on cannabis businesses, it would be well advised to have the subject expertise and a mechanism to insure the legality and compliance of the businesses. The institution also needs to be able to monitor the cash flows in and out of the cannabis businesses and compare them with “track and trace” software.

 

Will financial institutions that are early movers into the industry see benefits?

 

Yes! That is the short answer. While not all financial institutions will provide banking services to the cannabis industry, many more will move into the space in anticipation of SAFE Banking and even more will follow after its passage. This is because institutions will realize that they are unlikely to experience Federal Regulatory backlash just for banking the industry, which has been a gray area since the initial cannabis state initiatives were passed. Cannabis is a net new industry for institutions that rarely see net new industries. Early movers into the space will be able to capture what will be a growing and loyal business segment. As cannabis related businesses have been shut out of the financial services industry, the businesses and the employees are hungry for a variety of banking products (a cross-seller’s dream). And, because cannabis businesses pay to put their cash into banks, the depository alone is a significant profit center.

 

“What about lending?”

 

Less than a handful of financial institution are currently, openly lending to the cannabis industry. After SAFE Banking passes, we don’t expect lending to open up quickly. But we anticipate that over time more and more institutions will gradually move towards lending; especially if the secondary or collateral support issue can be resolved. That concern has already been alleviated in the Hemp industry as crop insurance became available with the passage of the 2018 Farm Bill. However, even though federally legal, the Hemp industry still struggles with obtaining long lasting banking relationships. But, beyond that, financial institutions have to address the concern of what happens if they have to liquidate collateral for a cannabis business. If it is a commercial building that is not single purpose, the prospects are better. However, if it is any cannabis product (crop, seed, retail item), then the financial institution can not only not take possession, but also can’t sell the product to a third party. (HDCS is developing a product to solve for this issue). The lack of institution lending has put a premium on the yields of loans offered by private money lenders (i.e., commercial real estate loan at 14% with a 2% origination fee on a 1 year term). This leaves a lot of interest margin for institutions that can get comfortable with the risk.

 

“What changes do you anticipate after the regulations are written?”

 

Ernest regulatory enforcement is the first answer. It is impossible to enforce rules and regulations that haven’t been written. This has been true for both State and Federal regulators when it comes to their member institutions that have waded into cannabis. Once the regulations are there to enforce, some institutions will find out they have done it correctly and some will find themselves with material weaknesses in their programs. The more intention and thought they dedicated to setting up those programs, the better they will fair. The biggest surprise will be for those institutions that have maintained that they don’t bank cannabis. We anticipate that the regulatory response will be: “Ok, but you need to prove it.” The hidden truth is the great majority of both legal and illegal cannabis revenue is going through financial institutions today. It may be disguised as other businesses (i.e., IT companies and consultants that deposit a lot of cash). We anticipate that many institutions are going to realize that they have a cannabis problem.

 

If you have questions about the information above, or want to find out more information about how your institution prepares for cannabis banking, please contact a.montgomery@hdcompliance.com

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

Do You Need a New (and Safe) Profit Center?

Do You Need a New (and Safe) Profit Center?

Do you need a new (and safe) profit center?

 

More and more teams at financial institutions are exploring the idea of banking the cannabis industry as it flourishes in their communities. In banking the industry, community-based financial institutions are not only being responsive to the community, but also finding a new profit center and a loyal clientele that is going to be hungry for whatever products and services the financial institution is willing to provide.  

 

Of course, this is all contingent upon the financial institution putting in place a thoughtful and well researched program.  As a subject-matter expert in both the cannabis industry and banking, here are a few of the important considerations I would have in building that program:

 

  • The Regulatory Rules Haven’t Been Written Yet! Some states have written regulatory guidance, but until FFIEC writes regulation regarding cannabis banking there is little regulatory apparatus for State and Local Regulators to enforce. 
  • How are you going to vet the cannabis related businesses? We all know the illegal cannabis trade exists right alongside the legal trade.   This means the financial institution needs to have a process to determine that the cannabis business is legal and compliant with all state and local laws.  As importantly, what audit processes are you going to put in place to ensure those businesses stay legal and compliant.
  • Do you have the resources to monitor the deposit activity? Every legal and compliant cannabis business has to institute a seed-to-sale or track-and-trace program.  Ensuring all deposits are consistent with the activities on that track and trace program is essential to prohibiting money laundering and illegal activity. Furthermore, the FinCEN guidance requires specific SAR and CTR filings, which can be an enormous amount of work.
  • What are you going to do with the cash? How you are going to handle the cash in this nearly all cash business is important. Generally, it is not a very good idea to handle it through your normal retail deposit system.
  • How do you price your banking services to the industry? A pricing structure based on a monthly fee may not be enough to cover the infrastructure cost that the FI may need to comply with future regulations.  Pricing on a per deposit basis may not be competitive and restrict the FI from building critical mass and maintaining a profitable program.
  • Do you build it entirely in house or outsource? The first question to ask is how many subject matter experts on cannabis do you have currently inside of the institution.  How long will it take to build that subject matter expertise?  What is the breakeven in manpower cost that can be saved by outsourcing elements of the program to Subject matter experts and technology?
  • Pricing and Building A Profitable Program. Even if the financial institution enlists help to implement a safe cannabis banking program, pricing it correctly from the beginning can ensure long-term sustainability for the program and a loyal customer base.

 

We strongly encourage financial institutions to resist pulling a cannabis banking program together on an ad-hoc basis. When regulatory enforcement begins in earnest, meaning after the federal regulations have been written, makeshift programs could be hard to pivot to meet the required guidance.  Whether a program uses all internal resources or relies on external resources, it should be put together very intentionally and with some consideration as to what federal regulation is likely to entail.

 

A Solution Created for Bankers by Bankers

 

At HDCS, one of the many things that separate us from our competitors is that we have an affordable solution for vetting your cannabis customers created by bankers for bankers. 

 

We would be happy to meet with you to understand your objections and risk appetite and share our view of the best practices involved in establishing a safe and profitable cannabis banking program. Let us give you a tour of our data portal and demonstrate what a risk-focused and profitable cannabis banking program could look like for your financial institution. 

 

Use this link to schedule a video conference at a time that is convenient for you and your team, or you can email me directly at a.montgomery@hdcompliance.com.

 

Andy Montgomery
CEO and Founds | HDCS, Inc.

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

Can Cannabis Safe Banking Become Law in 2021?

Can Cannabis Safe Banking Become Law in 2021?

Those that acutely follow the cannabis industry and the path to legalization in various states know that the 2020 election was another watershed event for the industry. Among other things, the following occurred:
Arizona Recreational Proposition 207 ✔️ Passed with over 59% voter approval
Mississippi Medical Initiative 65 ✔️ Passed with over 74% voter approval
Montana Recreational Initiative 190 ✔️ Passed with over 56% voter approval
New Jersey Question 1 ✔️ Passed with almost 70% voter approval
South Dakota Medical Measure 26 ✔️ Passed with over 54% voter approval
South Dakota Adult-Use Amendment A ✔️ Passed with almost 70% voter approval

This means that 6 GOP Senators saw the addition or expansion of cannabis in their home states. The implication of this is that those Senators may lean in on the issue of cannabis “safe banking” as it is in the interest of their states and constituencies.  Currently there is the Secure and Fair Enforcement (SAFE) Banking Act that is awaiting committee and floor votes in the Senate. While many believe that the bill has enough votes in the current GOP-controlled Senate, Senator Mike Crapo, Chairman of the Senate Banking Committee, has declined so far to bring the bill to a vote in his committee, which is necessary to make it eligible to bring to the Senate floor for a vote (27 GOP Senators now have some form of legalization in their home states). The SAFE Banking Act has already passed in the House of Representatives twice (three times if you include the last House’s COVID-19 relief proposal).

 

However, the stalemate may be changing in the new Senate.  Of course, there is the chance that the balance of power shifts in 2021 in the unlikely event that the two Georgia races are decided in favor of the Democrats-in that case, almost certainly “Safe Banking” would pass in the first half of 2021.  Beyond that, the Senate Banking Committee is likely to be chaired by Pat Toomey of Pennsylvania rather than Mike Crapo. Senator Toomey has said that he is sympathetic to the need for cannabis safe banking (cannabis is legal medically in Pennsylvania).

 

Another contributing factor is that 34 bipartisan State Attorney Generals and 16 State Treasurers are urging Congress to act.  For the Attorney Generals the primary issue is enforcement of the laws and assistance in reduction of the flourishing illegal cannabis business.  The assumption is that by bringing the legal and compliant cannabis industry into the banking system and having them operate as a typical commercial business makes it easier to identify and crack down on the illegal businesses that will be forced to continue operating in all cash. And for the State Treasurers, who are contending with significant COVID-19-related budget shortfalls, driving cannabis consumption revenues from illegal providers to legal providers means more tax revenue.

 

Finally, while Vice President Biden personally is not an ardent supporter of the legalization of cannabis, it can be anticipated that his administration will be at the very least supportive of decriminalization and safe banking for cannabis. This means, given the enforcement and additional tax revenue concerns being pressed to bipartisan Senators, that the administration is more likely to strike a bargain on “SAFE Banking” with whomever is in leadership in the Senate. 

 

More About HDCS

 

We would be happy to meet with you to understand your objectives, risk appetite, and share our view of the best practices involved in establishing a safe and profitable cannabis banking program. Let us give you a tour of our data portal and demonstrate what a risk-focused and profitable cannabis banking program could like for your financial institution. At HDCS, one of the many things that separates us from our competitors is that we have an affordable solution for vetting your cannabis customers created by bankers for bankers. 

 

Use this link to schedule a video conference at a time that is convenient for you and your team, or you can email me directly at a.montgomery@hdcompliance.com

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post. 

SIMPLIFYA, NATURETRAK, and HDCS Form Alliance

SIMPLIFYA, NATURETRAK, and HDCS Form Alliance

SIMPLIFYA, NATURETRAK, and HDCS form Alliance to Deliver a Cannabis Banking Compliance Solution for Financial Institutions

 

Denver, CO and Sacramento, CA, December 1, 2020 — Simplifya, NatureTrak, and HDCS jointly announce a strategic alliance to provide a comprehensive, cost-effective solution to help financial institutions build and maintain compliant and profitable cannabis banking programs.

 

Despite legal cannabis markets in 35 states, and continuing record-breaking sales growth, the financial services industry has been reluctant to bank the industry due to the risks associated with Anti-Money Laundering and Bank Secrecy Act regulations.

 

While it remains federally illegal, the cannabis industry is compelled to comply with a myriad of competing laws and regulations. Navigating the minefield of often changing requirements can be difficult for cannabis businesses and represents a significant challenge for financial institutions to ensure that they and their CRB (cannabis-related business) customers maintain operations in compliance with all state and local regulations. This challenge of implementing and managing a compliant cannabis-banking program for financial institutions can be a complicated, resource intense, and time-consuming undertaking.

 

As leaders in the cannabis compliance marketplace, Simplifya, NatureTrak, and HDCS have formed an alliance to provide financial institutions with a comprehensive, efficient solution to implement and manage a successful, profitable cannabis banking program.

 

Simplifya is the leading provider of regulatory and operational compliance systems, and its Oversight Portal provides financial institutions with insight into the compliance status of their CRB customers. NatureTrak offers an enterprise software solution built for financial institutions that bank CRBs; streamlining operations across risk mitigation, risk scoring, pre-deposit verification, electronic transaction verification, entity and license verifications, standard cannabis industry metrics, and much more from a single platform. HDCS (Higher-Risk Deposit Compliance Solutions) assists financial institutions in developing cannabis banking programs including policies, controls, enterprise risk management, enhanced due diligence, monitoring, and reporting for management and regulators. Together, the three companies provide a comprehensive solution to assist financial institutions in establishing and scaling cannabis banking programs safely and profitably.

 

“As a former bank CEO and builder of de-novo banks, this is the kind of comprehensive solution that I would need in order to feel comfortable with banking the cannabis industry,” said Andy Montgomery, CEO and founder of HDCS.  “Simplifya is the standard-bearer in ensuring that its licensed cannabis customers become and remain legally compliant with the myriad of state and local laws and NatureTrak offers a single technology platform which is very comprehensive, easy to use, and works with every “seed to sale” system to monitor the daily transactions of each cannabis business.”

 

“Simplifya was a pioneer in creating standards, protocols, and audit systems to help hundreds of cannabis businesses in their requirements for compliance,” said Marion Mariathasan, CEO of Simplifya. “Our ‘Oversight Platform’ provides financial institutions with real-time visibility into each customer’s compliance record and audits.”

 

The legal cannabis industry will generate nearly $20 billion in revenue in 2020.  Most law enforcement experts believe that the illegal or illicit cannabis industry dwarfs the legal industry, causes myriad consumer safety issues and is substantially reducing the tax revenues that were projected when various state cannabis initiatives were passed.

 

“Servicing cannabis businesses inside the banking system is simply safer and produces higher tax revenues than keeping them outside of the banking system,” explained Jontae James, CEO of NatureTrak. “The software platform we developed for financial institutions can monitor all cannabis transactions from seed to sale and identify any anomalies. This provides the financial institution with the ability to restrict transactions that may not be legal and protect its clients against adverse findings in audits.”

 

The three companies are actively engaging with financial institutions interested in providing banking services to the cannabis industry. The alliance was formed anticipating that the number of financial institutions looking to serve the cannabis industry will rapidly increase with the advent of federal safe cannabis banking regulations.

 

# # # #

 

Simplifya (www.simplifya.com) is the leading regulatory and operational compliance software platform serving the cannabis industry. Its platform provides a user-friendly software that enables cannabis businesses to stay compliant with all state and local laws and regulations.

 

HDCS (www.hdcompliance.com) is a banker developed and managed company, which provides comprehensive solutions to financial institutions that are interested in banking the cannabis industry. We provide a vast array of digital content including cannabis-related policies and procedures, risk assessments, audits, enhanced due diligence, training protocols and reporting. In addition, HDCS can also serve as an ongoing extension of your compliance team to vet, audit and monitor the activity of cannabis-related businesses (CRB’s). Finally, HDCS can help financial institutions attract compliant and legal cannabis businesses to build and scale a profitable and safe program.

 

NatureTrak (www.naturetrak.com) offers an enterprise risk management solution that is built for financial institutions that bank cannabis – streamlining your operations across risk mitigation, risk scoring (through its proprietary Marijuana Anomaly Detection (MAD) cannabis rules-based engine), cash pre-deposit verification, electronic transaction verification, entity and license verifications, standard cannabis industry metrics and much more — all from a single platform. After vetting multiple solutions, HDCS has determined that NatureTrak is the best and most comprehensive technology solution for managing cannabis banking risk, pre-verifying all deposits, monitoring transactions and the overall compliance of cannabis businesses with laws and regulations. Having one technology with all of this functionality and that contains a complete record of your cannabis banking activity is critical to scaling efficiently, effectively, and safely.

 

CONTACT:

 

Amy Larson
Simplifya
303-217-3154 | amy@simplifya.com 

 

Andrew Montgomery, CEO
HDCS, Inc.
760-399-2322 | a.montgomery@hdcompliance.com 

 

Jontae James, CEO
NatureTrak
707-492-5868 | trakteam@naturetrak.com 

Share on facebook
Share on twitter
Share on pinterest

Subscribe to our Newsletter

Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

Each week, we’ll notify you of any new articles we post.