At the time of this writing, cannabis has been fully legalized in 23 states, including the District of Columbia, with 37 states loosening criminalization and medicinal-use parameters. Cannabis continues to be completely illegal in 4 states, and a Schedule 1 substance under the federal Controlled Substance Act. Cannabis is a polarizing topic yet given the growing popularity and legalization of cannabis-based products; credit unions are grappling with the regulatory aspect as well as their risk appetite for serving cannabis-related businesses.
The legalization of cannabis for medicinal and recreational use in many states has created a booming industry, burgeoning with enormous economic potential, with legal marijuana sales estimated to reach $30 billion in the next two years.
What is cannabis banking?
Cannabis banking refers to any banking services provided to entities throughout the cannabis supply chain, including but not limited to dispensaries, cultivators, or manufacturers. These banking services can include deposits, transfers, and lines of credit.
Weeding through the costs: cannabis related risks to consider
Despite the growing acceptance and legality of cannabis at the state level, financial institutions continue to face significant hurdles when it comes to providing banking services to cannabis-related businesses. This has led to a concerning gap between the growing cannabis market and the ability of businesses in the industry to access safe and regulated financial services. To help address this issue, it is crucial to identify and mitigate the key areas of risk for financial institutions involved in cannabis banking.
An important note: Even if your credit union does not currently serve cannabis-related businesses (either due to choice or lack of interest among your membership) the growing popularity of cannabis is making it nearly impossible to avoid the decision altogether. It is a matter of when not if your credit union is faced with the decision, and accompanying risk, of cannabis banking.
Risk #1: Regulatory risk
The regulatory landscape regarding cannabis is nothing short of dynamic, with ongoing conflict between state and federal laws. This is concerning for credit unions and the discrepancy exposes financial institutions to potential legal risks, including money laundering and aiding illicit activities.
To mitigate this risk, it is imperative for Congress to enact comprehensive legislation that provides clear guidelines and protections for financial institutions operating in states where cannabis is legal. Such legislation would provide credit unions with the assurance they need to participate in cannabis banking without fear of federal prosecution. While we wait for legislation to pass, credit unions must also be aware of other risks.
Risk #2: Reputation risk
Cannabis and marijuana use and business have deep rooted stigmas. Engaging with the cannabis industry can carry reputational risks for financial institutions. Some institutions may fear association with a product that was once stigmatized and criminalized. Additionally, concerns about social responsibility and the potential for inadvertently supporting illegal activities pose challenges for financial institutions interested in cannabis banking.
While many Americans (and lawmakers) are rewriting the script around this substance, credit unions must carefully navigate these controversies and stereotypes – all while maintaining compliance and an image of integrity.
Risk #3: Operational and security risk
Cannabis businesses operate in a cash-intensive environment due to limited access to banking services. This reliance on cash increases the risk of theft, money laundering, and other criminal activities. Credit unions that choose to work closely with cannabis businesses should establish comprehensive security protocols and implement robust anti-money laundering (AML) and know-your-customer (KYC) procedures. By ensuring strict compliance with these measures, credit unions can mitigate operational risks associated with cash handling and protect themselves from becoming unwitting participants in illegal activities.
It’s imperative that financial institutions take proactive steps to mitigate risks associated with cannabis banking. By addressing legal and regulatory concerns, educating themselves and the public about the cannabis industry, and implementing stringent compliance measures, financial institutions can safely and responsibly participate in the burgeoning cannabis market.
The responsibility doesn’t sit with financial institutions alone: it is crucial for lawmakers to act swiftly and pass comprehensive legislation that provides a clear framework for financial institutions, ensuring the industry’s growth while safeguarding against illegal activities.
Clearing the haze of risk
Opening up banking options to a new market will naturally bring risk. Is your credit union prepared for the risks that are associated with cannabis banking?
The future of cannabis banking is hazy, but your risk appetite doesn’t have to be. For a clearer path forward here are five practical next steps:
- Determine your risk appetite versus aversion to cannabis related banking.
- Develop robust due diligence procedures to ensure that the businesses they serve operate legally and ethically, adhering to strict compliance standards.
- Work with your property and casualty provider to ensure your credit union has adequate coverage in the event of a cannabis related lawsuit.
Connect to industry resources like Allied Insights and stay abreast of regulatory shifts.