Cannabis Banking: Can it help financial institutions minimize the impact of a financial crisis?

Cannabis Banking: Can it help financial institutions minimize the impact of a financial crisis?

Cannabis Banking: Can it help financial institutions minimize the impact of a financial crisis?

 

Consumer and business patterns will be inexorably changed and small to medium-sized business, particularly, will have a difficult time recovering lost profits and liquidity.  In turn, long after the fee boost from PPP has been felt, and absorbed, by the financial services sector, they will face struggles in both the commercial and consumer sectors.  

 

While community financial institutions currently have their hands full in meeting the immediate needs of their customers and institution, they may eventually want to evaluate what may have been a third rail previously in the commercial sector.  After all, while not untouched by the financial impact of COVID-19, many cannabis-related businesses have not had access to leverage and will not drown in lack of liquidity and cash flows to service debt.  The cannabis industry is also a quickly growing market that represents the best opportunity in which to add unserved commercial clients.

 

But, can it be done safely?  The answer to this question is yes, if it is done with proper consideration and not on an ad-hoc basis.  A cannabis banking program requires putting in a comprehensive system that includes ongoing subject matter expertise about laws and regulations, proper vetting and monitoring of the cannabis clients, an ongoing system of reporting and activity tracking, and exercising operational best practices.

 

What if my institution doesn’t have the resources to do all that? There are credible partners with subject matter expertise that can help offload those resources.  Most importantly, after netting the expenses for all of the resources required, the cannabis industry still represents an incredible ROI for financial institutions.

 

In good economies it is easier to pass on some opportunities that may not have initially aligened with the core mission of the bank.  As times get more challenging, it may be necessary for institutions to expand that view of potential core opportunities.  HDCS is pleased to offer a free evaluation of how a very profitable and prudent cannabis banking program can be established at your financial institution.

 

If you would like to request a free evaluation or additional information, you are welcome contact me directly a.montgomery@hdcompliance.com or contact us through our HDCS, Inc. website.

 

Andy Montgomery
HDCS, Inc. | CEO/Founder

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COVID 19, BANK LIQUIDITY AND LOST EARNINGS: HOW CANNABIS CAN HELP

COVID 19, BANK LIQUIDITY AND LOST EARNINGS: HOW CANNABIS CAN HELP

COVID-19, BANK LIQUIDITY AND LOST EARNINGS: HOW CANNABIS CAN HELP

 

For banks that are concerned about liquidity or replacing income, management may want to evaluate a Cannabis banking program. Recently, we sent several financial institutions an analysis of how Cannabis banking can be immediately and significantly accretive to their earnings and liquidity; even after the costs of putting in a comprehensive compliance program utilizing best practices. We are happy to provide that analysis for free to any institution that is interested.

 

Clearly, the Cannabis industry is here to stay and will grow rapidly in the next decade. I hate to call any industry recession proof, but it is unlikely that consumption of cannabis will materially decline in a deteriorating economy. And, we know that financial institutions that are early movers in the space will significantly benefit.

 

HDCS is pleased to offer a free consultation for the team at your bank.You can visit the link below to schedule a video conference at your convenience that goes through the state of Cannabis banking in the U.S., laws and regulations, and the best practices for safely banking the industry. And if you already have an existing or proposed Cannabis program at your bank, we can provide a free assessment with recommendations.

 

Use this link to schedule a time that is convenient for you

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5 Things you need to know before your bank starts its Cannabis Program?

5 Things you need to know before your bank starts its Cannabis Program?

5 Things you need to know before your bank starts its cannabis program:

 

  1. How are you going to keep abreast of all the changing State and Local laws that affect Cannabis Related Businesses and their license status
  2. How are you going to vet, risk rate, and audit Cannabis Related Businesses to ensure they stay compliant?
  3. What is your process for identification of potential problems and documentation for regulators? How will you prove you have adequate controls in place?
  4. How do you intend on augmenting your BSA Program to ensure you train all line staff, management, executives and Board members?
  5. Do you have an adequate system of reporting that can provide executives and Board members real time information so that they can exercise proper oversight to the program?

 

RLR and HDCS will be exploring these issues at our C-Level Roundtable on February 26 and Compliance Workshop on February 27th, in Ontario, California. You can register for the events here.

 

If you cannot attend but would like to learn more about Cannabis Banking, please contact us at info@hdcompliance.com to schedule a meeting or call.

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Have you had the Cannabis Talk with your bank?

Have you had the Cannabis Talk with your bank?

Have you had the cannabis talk with your bank?

 

In fact, as they were preparing to dispatch me to someplace at which I would get some rest, relaxation…..and therapy, I am sure I would have caught the muted undertones of: “That’s too bad! He must have cracked under the pressure.” So much has changed in that time. While I still need rest, relaxation and therapy, banking Cannabis is no longer crazy.

 

That is not to say that boards of financial institutions across the United States are eagerly welcoming the idea. But each week, more financial institution directors are openly considering the topic. Why? There are a number of different reasons. The most compelling is that legalized Cannabis is a rapidly growing industry that will reach approximately $40 to $50B in the next five years, which is likely to accelerate as Cannabis continues to be legalized and continues to carve into the market-shares of alcohol and tobacco. Thirty-three states have legalized some form of Cannabis and a handful of states have meaningful Cannabis legalization legislation in this year’s election. Polling has indicated that 66% of U.S. voters support the legalization of recreational Cannabis. And, the average Cannabis related business pays 1% to 1.5% interest on their deposits plus fees to the financial institutions that are openly banking them.

 

Another reason that directors of financial institutions are discussing Cannabis is that they want to ensure that their institution is not banking any Cannabis. Other directors want to understand what management intends to do about the Cannabis clients that already exist in their institution. The truth is that many boards that think their bank doesn’t have any Cannabis presence are wrong. And many bank presidents and boards are facing a dilemma as they find out some of their better customers are involved in some way with the Cannabis industry.

 

Let me give you two examples of dilemmas financial institutions are facing. A well-established farmer in an agricultural area may have decided to diversify crop rotation first to hemp and then to Cannabis to maximize yield and fully optimize growing capacity. Of course, that farmer may get paid for the crop yield in cash and have to now uncharacteristically deposit that cash in the local branch. Or a well known commercial real estate owner leases some space to a Cannabis Related Business and is now depositing cash paid rents into the bank. In both of these cases, the customer may be well known to the bank and have ties to various board members.

 

In any case, banks would be well advised to understand the existing and potential exposure of Cannabis Related Businesses to their institution and make sure that their policy statements give them the latitude they may need or want. Given the growth in the industry in the states in which Cannabis is legal, the need to implement adequate controls in financial institutions is destined to be an increasing focus for the regulators. Right now there is scant regulation that has been written and so enforcement is a challenge. That will change. RLR and HDCS are available to help you scrub your deposit portfolio, craft policy statements that make sense for your institution and put in a system of controls that keeps your institution safe.

 

RLR and HDCS will be exploring these issues at our C-Level Roundtable on February 26 and Compliance Workshop on February 27th, in Ontario, California. You can register for the events here. If you cannot attend but would like to learn more about Cannabis Banking, please contact us at:

info@hdcompliance.com to schedule a meeting or call.

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Cannabis: To Bank or Not to Bank… The HDCS, Inc. Solution.

Cannabis: To Bank or Not to Bank… The HDCS, Inc. Solution.

Cannabis: To Bank or Not to Bank… The HDCS, INC. Solution

 

Those R’s are risk, return and resources. Any person that thinks banks don’t take risks doesn’t understand banking. Bank management is all about taking calculated risk and trying to mitigate any adverse consequences of that risk. In my role as a bank CEO, I first had to ensure that my team, my board, and I all clearly understood any risk and ensure we had the ability to mitigate it. Next, I had to evaluate the return on investment associated with the risk to know if it was worth our efforts. Finally, I needed to know that we had sufficient resources to both mitigate that risk and produce the expected return.

 

It was with this in mind that we formed HDCS, Inc., which stands for Higher-Risk Deposit Compliance. As a bank CEO, I ordered the closing of our highest-risk depositors, which were at the time Money Service Bureaus. Despite the great fees and return that they were producing for our bank, I simply felt that we did not have the staff or controls in place to meet the regulatory requirements and, more important, achieve industry best practices. I know that many institutions are now facing a similar question as they evaluate banking higher-risk depositors like the Cannabis industry. Through HDCS, Inc., we are providing both the subject matter expertise and the resources to help these institutions understand and mitigate risks and realize this new source of deposits.

 

HDCS, Inc., in partnership with RLR Management Consulting, will provide comprehensive solutions to financial institutions that are interested in banking higher risk depositors. As you are aware, RLR Management is a venerable consulting practice that has provided regulatory guidance, institution evaluation, and best practices to hundreds of institutions over the past 25 years. Together with RLR, we will offer a banker-led and regulatory focused solution to Cannabis banking that includes:

 

  • Comprehensive Policies and Procedures
  • Enterprise Risk Management Evaluation
  • AML/BSA/KYC Program Evaluation
  • Technology Vetting
  • CRB Vetting, Ongoing Inspection and Risk Assessment
  • CRB Deposit Tracking and Risk Identification
  • Line, Management and Board Reporting
  • Bank and CRB Staff and Board Training
  • Ongoing updates on all relevant changes in laws or banking regulations
  • Introduction to Pre-Vetted Cannabis Related Businesses
  • CRB Deposit Contract Negotiation

 

Research estimates that the legal Cannabis industry will represent approximately $50B in revenue over the next few years. It is anticipated that due to the risks associated with banking Cannabis, that CRB’s will continue to be paying banks healthy fees in return for basic banking services. The financial institutions that implement comprehensive best practices and stay in front of the current and anticipated regulatory requirements will benefit from zero cost liquidity and ancillary fee income. HDCS, in partnership with RLR Management Consulting, is uniquely qualified to help institutions apply those best practices and achieve those returns.

 

For more information please contact:

Andy Montgomery: a.montgomery@hdcompliance.com

or

Mitch Razook: mitch.razook@rlrmgmt.com

 

Andy Montgomery is the Chief Executive and Founder of HDCS, Inc. Andy is a banking executive with nearly 25 years of management experience in the industry. Previously he served as Chief Executive Officer and Founder of Western Community Bancshares, Inc. and its bank subsidiaries in Utah and California. He also served as CEO of the North and West Texas community bank for BBVA.

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Banking Cannabis: What you need to know!

Banking Cannabis: What you need to know!

Banking Cannabis: What you need to know!

 

11 of those States have legalized both recreational as well as medical use and the issue of legalization will appear on more State ballots in 2020. At the Federal level, Cannabis still remains illegal and, despite almost certain passage of an act in the House of Representatives in 2019 to legalize Cannabis, mirror legislation is likely doomed under this Senate.

 

However, de-scheduling Cannabis as a Federally prohibited narcotic is a different matter than providing State’s the autonomy to legalize and regulate the cannabis industry according to the wishes of their own voters. The primary problem with a Federal “hands-off” approach when it comes to State’s approving and self-regulating the Cannabis Industry is when it comes to the intersection of federal banking laws and regulations, which all banks need to adhere to in order to be a member of the FDIC.

 

Now there is real hope that banks, and more importantly bank regulators, will be given clear guidance from Congress on allowing banks to safely provide financial services to the industry. In September of this year, the House of Representatives (By an over-whelming bipartisan vote) passed the Secure and Fair Enforcement Banking Act (SAFE Banking), which is the first hurdle to give Federal banking regulators the authority to write the guidance and rules that will give FDIC member banks the legal framework for banking the industry. The bill still has to pass the Senate and its fate there is still murky. While it has been reported that the bill clearly has the necessary votes in the Senate, has two conservative sponsors in Senators Crapo and Gardner, and the President has indicated he would sign it, that offers no compelling certainty that historical bill opponent, Senate Majority Leader Mitch McConnell, will bring it to the floor.

 

Still, with two-thirds of American voters (according to Pew Research) supporting legalization of Cannabis, one would think that it is an inevitability that the bill gets passed and it may want to be a political wedge issue the Republicans want to avoid in 2020.

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The clues and keys to safely baking the industry

The clues and keys to safely baking the industry

The clues and keys to safely banking the industry

 

FinCEN provided initial guidance that has been applied by States to provide Safe Harbors for their banking institutions that engage with Cannabis Related Businesses (CRB’s). But the most comprehensive guidance in our opinion was developed by the State of California’s Department of Business Oversight (DBO). The DBO guidance, combined with the Conference of State Bank Supervisors (CSBS) Job Aid, provides a good framework for future regulation writing and best practice adherence.

That guidance outlines the basic needs a financial institution will have to put in place to avoid an inordinate amount of scrutiny from bank regulators. In summary, financial institutions will need the following:

 

An existing, robust, AML/BSA/KYC/USA Patriot Act Program: This is the core area of concern for safely banking the industry. Make no mistake, there is a fair amount of money laundering that is occurring every day in the Cannabis related industry. It is incumbent upon banks to significantly inhibit that activity. While no bank can assure that no money laundering is ever occurring, the financial services industry has been mandated to have appropriate controls in place to identify that activity and curtail it. For financial institutions that have recognized deficiencies in these programs, regulators will most likely insist that they cure those issues before engaging in this higher-risk deposit business.

 

Subject Matter Expertise: Complying with Cannabis laws is not as simple as adhering to the existing State laws or the anticipated federal banking regulations. There are a host of municipal and local laws that come into play, as well. Knowing who even has jurisdiction is an important part of vetting the individual CRB’s. This web of regulations and laws is ever changing, as authorities discover and respond to loopholes and oversights. For the same reasons, we expect that the federal regulation will remain dynamic for several years after they are written. Many of the regulations and rules will likely be easy to interpret, but there will be many that change as the best practices evolve for the industry. Keeping up with the myriad and evolving authorities are going to cause internal compliance, risk management, and legal personnel no small amount of anxiety.
Resources: A comprehensive Cannabis program is going to require more than a robust set of policy and procedures. It is going to require that each Cannabis Related Business go through a vetting process. Financial institutions will need to ensure that each CRB is licensed, operating in compliance with all State and Local laws, and has no black or gray market activities. They will have to review each CRB’s seed to sale (track and trace) technology, ensure that technology is adequately capturing all cash in and outflows into the business and reporting up to the State’s taxation technology (if required). This is not a one and done audit. The financial institution will need to conduct ongoing audits, investigate any cash anomalies in the CRB, process SARS and CTR’s, and provide a copious record of the financial institution’s actions for the regulators.

 

Technology and Reporting: Tracking the deposit activity and cash flow anomalies is essential to having a program for Cannabis Related Businesses. Multiple CTR and specific SAR filing is going to be a time-consumptive process. The more that process can be automated the easier it will be for both frontline staff and the financial institutions supervisory apparatus that will be monitoring the program. Automated reports that make sense and can be aggregated to summarize the all CRB deposit activity and break out the activities of each individual CRB is going to streamline the oversight responsibilities at each level of management up to the board of directors or audit committee.

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