PORTLAND, Ore.–When it comes to extending services to marijuana-related businesses, credit unions here and in Washington State have shown a great deal of interest, even if remaining reluctant to act—with the exception of one pioneering CU.
Oregon and Washington both permit marijuana-related businesses, although laws in both states have taken different forms with different implications. That has led to well-documented problems for both the cannabis industry and the piles of cash it has accumulated with few places to put it, and financial institutions, which are facing compound challenges around a business that is legal on the state level but largely illegal under federal law, and the resulting implications and compliance demands.
During the Amplify meeting hosted by the Northwest Credit Union Association, which serves both states, an attorney, a private business owner who serves the pot industry, and a credit union that has crafted a program specifically for marijuana-related businesses all offered their perspectives.
Here’s a look at what each had to say.
Chip Lazenby, an attorney with Lazenby & Associates, who serves on an advisory group to the state of Oregon and who has numerous cannabis industry clients.
“About two years ago, the U.S. Justice Department issued the Cole Memorandum (named for U.S. Deputy Attorney General James Cole), or what I call the ‘Don’t let me come over there,’ memo from the Feds. This has traditionally been a low priority for the Fed. It basically said that as 23 states now move on (to loosen marijuana laws) we are going to keep this a low priority as long as you do the following eight things. Things like keeping excess (pot) out of the illegal market, keeping it away from kids, avoiding money-laundering, not growing on public lands, etc. For (credit unions) purposes it’s the money laundering piece. From my standpoint as a lawyer some of my clients have mortgages, and their mortgages prevent them from doing anything illegal on the premises. There are landlords worried about forfeiture of real estate as a result.
“Something that should be of concern to everyone is that this is a sacks of cash business. People running the retail stores over in Vancouver, Washington--they are the largest grossing retailers in the state–some are doing up to $1.7 million a month in sales. It goes into big black, plastic sacks, and that’s untenable.
“The other issue is the 280e (tax code) problem (related to expenditures in connection with illegal drugs). Say we are in the cookie business and we have a bakery and we have a lease and materials and baking equipment and with that, depreciation, and we do a million dollars in gross sales. Not so fast, says the IRS–you can’t take depreciation on equipment involved in an illegal business.
“My primary issue is where the Oregon Liquor Control Commission (OLCC) is going with this. For the financial industry, there is no help for you on the state level. In Oregon, you need a change in the federal law, or a much heavier lift to establish what Washington has, which is to have a state Department of Financial Institutions. I think what they are doing in Washington is absolutely appropriate. They screen everyone and do background checks. They dedicate people to monitor those accounts on a daily basis. And the cannabis people are thrilled with that kind of scrutiny, because they have a bank. The question is how quickly will the Feds move?
“There are now draft rules from the OLCC…As you think of the business opportunities, for the next five years there is a preference for Oregonians to be participating in this business. You have to have been a resident of the state for at least two years to get a license. There are going to be lots of opportunities out there.”
Noah Stokes, CEO, CannaGuard Security
“About two years ago we got our first phone call saying, ‘Hey, you guys do security systems, right?’ And now I know what that means.
The big, federally regulated security companies are discouraged from getting into this business. So we branded a company specifically for cannabis industry. We focus on higher-end systems, for those without a banking relationship who are interested in protecting their assets.
“About a year ago, naïve as we are, we told our bank that we need to add my DBA, CannaGuard Security, to my account. And we also get our first $25,000 bag of cash; it didn’t smell great. It was a very interesting time. We were depositing fund for a while, and then a few months later all of our accounts were shut down. So we had to find another banking relationship, didn’t attach the DBA. We are now using TwinCity Bank, which comes and picks up his cash.
“It is amazingly inconvenient. These businesses can’t open until they have a security system, but if I take their money, I get shut down. Oregon is about to license (marijuana) businesses. I think you would be surprised at how professional these organizations are getting. But right now we are forcing a lot of people into a black market.”
Lynn Ciani, EVP and General Counsel with the $1.5-billion Numerica Credit Union in Spokane, Wash., which has developed a full program for serving the cannabis industry that is also offers to other credit unions.
“Our board began thinking that this is going to be a billion-dollar industry and what are they going to do with all that cash. In the first 15 months in Washington there was $357-million in sales. We looked at the Cole Memo and at the Fincen guidance; the latter talked about how it was so important that marijuana-related businesses be subject to a robust regulatory scheme. And I give credit to the Washington Liquor Control Board, that’s exactly what they did. And that allowed us to bank that industry.
“We put together a group of our personnel who we thought would be relevant. First we had branch representation: how do we handle security around all this cash? Require them to use armored cars? No armored car service will contract directly with the marijuana businesses. So we have to do it with armored car services to go to our (marijuana business) members Right now only Garda will do it. We also thought whether to limit business to certain branches, or just ATMs, or whether to require appointments, and what about all this smelly cash? What about branch personnel not thrilled about serving this industry?
“The most important person on the team is our BSA officer. Her input affected every decision. Under the Fincen guidance, you still have to file your CTRs, and that would mean with every single deposit. So we said no more than five people and we need all their information. For SARS, Fincen provides three SARS you have to file. File a SARS Ltd., and then every 90 days additional SARS. If we feel there has been some sort of violation, we file a SARS priority. Also a SARS termination if an account is closed. Your BSA personnel are going to hate you for doing this. Since we started the number of SARS has increased by 35% to 40%. We have added additional staff.
“We also got the finance department involved, because there are potential liquidity issues here. How would it affect us if we had to give all this cash back? We considered whether to limit total deposits, and also put together a plan for the orderly return of deposits if things went south. We established fees for all our costs associated with this program, as they are a fair amount of work.
“We had a business representative from our Business Services Dept. take this on, because technically these are commercial accounts. You have to talk to all your vendors: shared branching, debit cards armored cars, etc., because some vendors are not thrilled with these businesses. What about overdrafts? Will we make loans? We had our enterprise risk management people involved to ensure we mitigated all these risks.
“We had marketing involved, because the press was going to hear about it eventually and there were going to be unhappy members.
“You have to do ongoing due diligence; at a minimum, monthly. We read the Cole Memo, and all the Fincen rules, and the Liquor/Cannabis board regulations. We established internal procedures and have an initial review of applicants. We reviewed any violations issued by the Liquor Cannabis board. We have Know Your Member on steroids. We talk to them. We do site visits. It’s really important to spend some time and look at the facility to make sure they are complying, too.
“We created our own underwriting criteria separate from (the Liquor/Cannabis board) and we did that due to reputation risk. You have to look at collateral, but the collateral remains a federal crime. So what are the chances that the feds might come in and seize? If you have to foreclose, you can’t take possession.
“I highly recommend you establish written policies and procedures; update your BSA. Most importantly, work with your DFI or your own regulator to make sure they are happy with your program.”