By Ray Birch
ARVADA, Colo.—At the start of the year Partner Colorado CU introduced its marijuana banking program, a new business platform serving the pot industry in this state, and a program the CU plans to offer to FIs across the country.
The initiative’s developer, CEO Sundie Seefried, said the program markedly shortens the lengthy learning curve FIs face in serving the pot industry, reduces the FI’s risk exposure, and outlines how to effectively serve this business to generate income. Partner Colorado expects to make $300,000 in the second year of the program.
But most important to the credit union, and the reason why the $287-million CU began serving pot businesses, is that a lot of money is being taken off the streets. Since the program began, $55 million in deposits have rolled in.
Despite marijuana being legal in Colorado, pot businesses—as they do nationwide—face great difficulty in accessing the financial services system. Banks and credit unions shy away from serving these organizations, and often close pot company accounts after they are opened due to concerns that marijuana is still illegal on the federal level. As a result, that is leaving a lot of cash on the streets and threating not only the lives of the marijuana business owners but those who live in the local communities, Seefried said.
Backpacks Full Of Money
It is not unusual for a pot business owner to walk into a business where money orders are sold, including Walmart and grocery stores, with a backpack filled with $40,000, said Seefried. “A situation that is not safe for anyone in those stores.”
She said the businesses convert the cash into money orders to pay electric bills and other overhead expenses, including costs for maintaining their own homes. And if they are fortunate to have an account at a financial institution, Seefried said they will convert the cash into money orders that are just under $10,000 to avoid a BSA report and potentially being kicked out of the FI.
“When I learned this, I said, ‘Oh my god. By these businesses not being openly served by financial institutions we are making criminals of them,’” said Seefried. “We are teaching them how to structure deposits, which is illegal. That’s horrible. Here is a legitimate industry that the people of Colorado have voted in and we won’t give them banking services. Instead we throw them into the gray area of banking, have them hiding money.”
The marijuana banking program is what the CU is calling the effort internally. To the public the program is known as Safe Harbor Private Banking, a business name the CU has rights to on a national level.
Following The Money
Much of what Safe Harbor Private Banking will share with other FIs who buy the program is intellectual capital acquired by Seefried and the new CU division’s staff. Seefried did not say how much the program would cost and when it might be available.
“The program takes all the information we have gathered in terms of learning the marijuana industry, and offers a system of forms and processes that allow the financial institution to accurately monitor the money flow from these businesses,” said Seefried, noting that of the $55 million the CU has taken in to date, much if it has flowed back out. “We have a real robust post-account-opening monitoring system that we have created that does everything from look at deposits and withdrawals, to actual product being grown on site, and monitors that every month. That is the key here, accurately following the flow of the product and money. I promised my board that we would develop a program to keep the credit union safe, the clients safe, and me safe—out of harm’s way from prosecution.”
Partner Colorado currently has 24 marijuana business clients, and Seefried acknowledged the CU is not openly marketing Safe Harbor Private Banking, knowing that would attract more marijuana businesses than the credit union could serve.
Seefried said the platform is based on a private banking model where one individual exclusively serves a list of clients—something done so the staff member gains familiarity with each business it serves, which is critical to success, she said.
The model relies on a formula that pairs the right number of staff with the right number of pot businesses. “By the end of year two we should be making $300,000 annually,” Seefried explained.
Lessons Learned
It has not been easy establishing Safe Harbor Private Banking, acknowledged Seefried, with the CEO and her team learning a great deal since Jan. 1 from their interactions with pot companies.
“I knew all the regulations and the mitigating strategies, but what I did not know was the marijuana business,” said Seefried. “It was like entering unbelievable new territory for me. And I had to learn this industry because FinCEN requires you to know enough about each business to monitor it. This is labor intensive. FinCEN requires that you know the business, the owners and the money—and you can’t leave that to a computer.”
It took Seefried getting out of the office to personally see what a grow farm is, a dispensary, a hemp farm and other aspects of the industry to get an understanding of the business. “You have to know which has more risk—a grow house or a dispensary, or a hemp farm or marijuana farm. You won’t know that until you visit with and interact with these businesses long enough to gain the proper perspective.”
For example, with a grow house, Seefried said FinCEN makes the financial institution responsible for making sure the business is compliant with Cole Memo priorities.
The Cole Memo is guidance issued in 2013 by former Deputy Attorney General James M. Cole regarding marijuana enforcement.
“The first priority is not letting marijuana slip into the hands of minors, and the third priority is not letting the product move over state borders. So how do you watch that? Well, you don’t know until you get into a grow house and watch how they grow every single plant from nursery stage to grow stage to when the plants are 12 inches tall and tagged into a system at the state level.”
Breaking Off The Pot Biz
Long term, Partner Colorado wants to separate the pot business from the CU, creating a separate charter for Safe Harbor Private Banking—and it is not excluding a bank charter.
“Banking this business requires substantial expertise and focus, and by separating it into its own entity, we can increase our efficiencies in the long run,” said Seefried.
Seefried added that while serving the pot industry can be labor intensive, it is profitable, and should not be something that scares away FIs.
“I think some banks and credit unions fear what they don’t know,” said Seefried. “But you can follow guidelines and find strategies to protect yourself, the CU and the board. And most important, you are getting a lot of cash off the streets.”