Banks, credit unions considering cannabis banking get advise

Banks and credit unions are getting more involved in banking with cannabis business operators, enough that now the regulators are offering some cautions.

The California Department of Business Oversight recently released guidance focusing on what due diligence banks and credit unions need to perform on a legal California cannabis business before they begin banking their money or extending lines of credit.

“If financial institutions choose to serve the cannabis market, they must understand risks and build out their compliance infrastructure accordingly,” said Commissioner of Business Oversight Manuel P. Alvarez in a statement. “By making this questionnaire available to our licensees, we hope it can serve as an additional resource for banks and credit unions as they roll out their cannabis banking programs.”

The questionnarie is aimed at state-chartered banks and credit unions considering banking with state legal cannabis and cannabis connected businesses.

The guidance also comes on the heels of federal movement towards allowing state legal cannabis businesses access to the banking industry through the SAFE Banking Act, which passed the U.S. House of Representatives late last month and is up for consideration in the U.S. Senate. Cannabis is still an illegal substance under federal rules.

In a press release, the state DBO said the guidelines are the result of more banks and credits unions looking to bank cannabis cash.

Focusing on ensuring financial institutions thoroughly examine a Marijuana Related Business, or MRB, the first section of the questionnaire is titled “Program Governance,” with the first question asking “Is there a comprehensive risk assessment of the business line?”

Other questions in the section ask whether a financial institution has a contingency plan, including an exit from the business, if federal or state guidelines change.

Determining where an MRB’s money comes from is also critical in the due diligence part of the questionnaire, as is the increased cash handling responsibilities and related security concerns created by banking cannabis businesses.

Since many cannabis businesses do not have access to banking services because the plant is still largely illegal at the federal level, many state legal businesses operate in cash.

“Has the board considered and addressed the practicalities of cash management, including the facility’s capacity and security issues associated with handling greater amounts of cash than with other merchants?” the guidelines ask.

Beth Mills of the California Bankers Association said the guidance is helpful to have in written form but that much of it is a reiteration of what the department has said verbally in the past.

“It is helpful for banks who are sort of weighing the pros and cons of trying to wade into that,” Mills said. She added that her organization is “Still focused on a federal fix,” in the form of a change “that would really, truly make it okay for our members to bank this industry.”

That focus meant that Mills’ organization did not take a position on a state bill, SB 51, which was put on hold during the most recent legislative session in Sacramento.

The bill’s author, Senate Majority Leader Bob Hertzberg (D-Van Nuys) hoped the bill would create a separate category for banks and credit unions to handle cannabis cash. He decided to shelve it until next year however, saying in a statement the legislation needs work on the details before it can go forward.

The bill passed a senate floor vote and the Assembly Business and Professions Committee before it headed to the Assembly Appropriations Committee.

The SAFE Banking Act making its way through the halls of Washington D.C. has seen bipartisan support. That bill would prevent federal banking regulators from punishing banks for working with cannabis- and hemp-related businesses that are obeying state laws.

The California DBO guidance also pulls from the now rescinded Cole memorandum, an Obama-era guidance to federal prosecutors instructing them not to prosecute marijuana crimes where it is legal at the state level and where effective laws are in place.

The guidance asks, “Does the financial institution specifically monitor for the eight priorities found in the Cole memo?” which include preventing the distribution of marijuana to minors and ensuring profits do not go to criminal enterprises.

The guidance and Cole memo also single out preventing the diversion of marijuana from states where it is legal under state law in some form to other states, stopping marijuana trafficking being used as cover for distributing other illegal drugs, preventing violence and protecting public health and avoiding growing marijuana on public lands.

Staff Writer Chase DiFeliciantonio covers technology, banking, law, accounting, and the cannabis industry. Reach him at chase.d@busjrnl.com or 707-521-4257.