By Ray Birch
SANTA ROSA, Calif.—Serving the legal cannabis industry may take North Bay CU from $50 million in assets to more than $500 million in the next five to 10 years.
No, it isn’t hallucinating. Instead, those are projections from CEO Chris Call, whose $58-million credit union has had to dramatically ramp up its compliance team to serve the pot industry—going from one person to 1- today, with more staff expected. In the process, the big compliance department has not become a salary burden for the small shop, and instead is a profit center.
“The sky's the limit for the growth of our credit union,” said Call. “California has the largest cannabis industry in the world, and we can grow as fast as our capital will allow us to grow. If we can produce the capital, we could easily increase our credit union’s size tenfold.”
North Bay’s ROA to date in 2019 is 1.7%, which Call said is being used to fund growth initiatives throughout the CU’s core operations.
Call, however, does not believe serving the cannabis industry is the path most small credit unions should take to remain competitive and grow.
“I'd be cautious,” he said. “I'd be hesitant to tell a small credit union this is a growth option, because it's a lot of work. You have to be really dedicated to educating yourself on this industry and understanding all the risks involved. It's certainly not for the faint of heart. You have to really be committed to doing this and doing it well, otherwise you will be dealing with regulators, law enforcement… This can bring with it a lot of headaches and issues you may not want to grapple with.”
A Member’s Murder
As CUToday.info previously reported, North Bay Credit Union did not choose to serve the cannabis industry simply as a means to grow. It was the tragic death of a long-time member that sent the clearest signal to Call and his credit union that it needed to begin serving the legitimate marijuana business.
“We recognized that marijuana businesses not having access to financial services is a huge public safety issue,” said Call. “There was so much cash on the streets, people were walking around town with huge duffle bags full of money. One of our most beloved members was murdered by people who were looking for cannabis money.”
In making the commitment to serve the legal pot business, North Bay made the decision largely to address public safety issues and not as a means to make money, which Call said can certainly be done in serving this market.
“We’ve calculated we have taken upwards of $200 million off the streets and placed that money in a financial institution where it belongs,” he said.
Growth in Compliance Dept.
Chris Call
But accepting the deposits and doing so in the right way can be two different things. That’s why North Bay’s compliance department now accounts for more than one-third of the credit union’s overall staff of 26.
“We've grown our compliance staff commensurate to the growth of our cannabis accounts,” explained Call. “When we started out, initially we were just taking on one or two cannabis accounts, and we got up about five accounts and we could handle those sufficiently with just a couple of people. But as we surpassed five and moved up to 10 accounts, then we needed to add more people—not only for due-diligence requirements on the applications, but also to monitor the existing account activity and manage accounts.”
Finding People
That meant North Bay had to find people with Bank Secrecy Act (BSA) or compliance experience.
“We were fortunate to be able to find those individuals that have a lot of that background,” said Call. “And it can be hard to find those people. We eventually decided to look at people with a banking background who understood compliance, and then we teach them the BSA side of things. We just ramped up as we have added accounts, growing the department to 10 people to serve 50 marijuana accounts that represent about $13 million in deposits. We will continue to add people as needed.”
Call acknowledged North Bay has to pay very competitive salaries to attract and retain its compliance team.
“We've have had to be aggressive in our salaries, and we've had to pass that cost along to our marijuana member accounts,” said Call, noting that the CU considers its compliance department a profit center today due to the fees associated with providing the service.
The ‘Next Frontier’
Call also said attracting skilled people to its compliance team is somewhat easier because potential hires typically view the marijuana industry as the “next frontier of banking. Many of our new hires said they wanted to learn more about serving the marijuana industry and gain experience.”
North Bay has been serving pot businesses for 22 months. Call said in the first six months the credit union was careful to make sure growth in accounts was “measured.” He explained that as the credit union has improved its processes for working with cannabis businesses it added more automation, which allowed it to increase the pace at which it was able to add the accounts.
Currently, each compliance person serves about five accounts. But Call believes as the credit union becomes even more familiar with the challenges and intracacies of serving cannabis businesses and as its processes improve, in the future one compliance person will be able to service as many as 20 marijuana accounts.
Call told CUToday.info what is also helping build efficiencies is becoming familiar with cannabis accounts as they come on board. He said as the relationship grows the credit union gains a greater understanding of each account, and the CU’s work can be streamlined.
“You gain a greater comfort level with an account, so you know what to expect from them,” explained Call. “When an account comes on board, you have to look at 100% of everything that goes on with them. Then, over time, as you gain a little bit of comfort with them and they know what your expectations are—and we have good automation tools in place the capture any unusual activity—it's not quite as labor intensive.”
Slow Updates by the State
North Bay monitors the source of all funds coming into the credit union, Call said, “which means we have to verify the deposits are generated from state legal sales, which requires we go back and review the license information of the entities that are purchasing the cannabis, or in the case of a dispensary, verifying the process they use to ensure only adults are purchasing a product.
“That's really labor intensive, going through all sales transactions and making sure they're all legal. But as I said, we do have automated tools for the anti-money laundering to capture any unusual activity that's going through an account.”
Call said the most labor-intensive aspect of serving the cannabis industry is verifying each business has a license to operate in California.
“We've had a real hard time getting updated license information from the Bureau of Cannabis Control,” said Call. “The Bureau issues temporary licenses that expire on a fairly regular basis, and they are not really good about cleaning out up their database and presenting information that is easily searchable. It's very time-consuming to go through their list of licenses to make sure that the entity we're serving has a current license.”
‘An Unusual Situation’
Call acknowledged that a small credit union serving the legal cannabis industry is not something typically seen within the movement.
“It's certainly an unusual situation. We have structured our cannabis operation to be self-sustaining, and we have an exit strategy. If we had to exit this business we could do so without harming the rest of the credit union,” said Call, who noted North Bay CU budgets a amount of money every month for “litigation reserves” in case it has to defend itself in court for any reason. “We could cut this business off at its neck, and continue on and be just fine. But it's been quite a ride so far, and we anticipate it will continue to be so for the foreseeable future.”
The Litigation Situation
Alan Hanson, an attorney at Portland, Ore.-based Gleam Law, said his firm has yet to see a credit union criminally prosecuted for serving state legal cannabis activities.
“But there have been incidents of financial institutions being sued civilly,” noted Hanson. “The Racketeer Influenced and Corrupt Organizations Act (RICO) was enacted in 1970 to allow for prosecution of the Mafia and other criminal organizations. The Act provides for individuals to file suit if they are damaged as a result of the criminal enterprise. Anti-marijuana groups have attempted to use RICO to go after state legal cannabis business and anyone related to that business, including financial institutions.
“The plaintiffs generally claim the marijuana activity decreased their property values as a result of the smell, increased traffic or obstruction of views,” continued Hanson. “These suits have been largely unsuccessful for the plaintiffs, but they can be expensive to defend. Having reserves to mitigate these risks is an important part of any cannabis banking program.”