Partially legalised marijuana businesses – how can banks perform their due diligence and protect themselves?

Background and marijuana legalisation

In 1996, California became the first state to legalise marijuana for medical use. The ‘Proposition 215’ was initially focused on the right to obtain and use marijuana for illnesses to provide relief, however, the usage levels coming out of the legalisation exceeded everyone’s expectations. It was estimated that more than 200,000 Californians have received approvals from their doctors to use marijuana[1].

Today, 29 states have joined California in legalisation for medical use, of which 8 have legalised marijuana for recreational use. In 2016 the Marijuana industry was estimated at over $6 billion, with a growth of over 30% in comparison to the previous year. It is projected that sales in North America will exceed $20 billion by 2021[2].

To bank or not to bank?

Marijuana businesses have struggled to open bank accounts, forcing them to operate as cash-only businesses. The Controlled Substances Act (CSA) prohibits any dealings of marijuana on a federal level, therefore banks have been hesitant to collaborate with registered businesses in states where marijuana has been legalised, to ensure they do not violate federal laws and incur criminal and civil penalties.

This conflict at state and federal level remains, making it difficult for businesses in states where marijuana is legal to have support from the business ecosystem. Only a small proportion of registered businesses will have banking relationships, primarily through business owners. These accounts often end up being closed quickly, once the banks have identified their true nature. Credit unions and smaller local banks have been targeted as a way of filling this banking gap, particularly where the nature of the business may not be immediately obvious to them. For example, owners of marijuana businesses might open personal accounts in order to conduct their business banking. These accounts are eventually closed once their true nature is discovered by the banks. Similarly, the official rules of payment processing companies also prohibit the transactions for marijuana purchases, leaving most businesses to operate as cash-only businesses. The danger for financial institutions (FIs) is that if they inadvertently provide banking to these marijuana businesses, then they could face penalties and reputational damage.

Measures to obtaining banking services

Of course, in cases where financial institutions have classified customers or entities as high risk, they are expected to take additional steps in their due diligence processes. Some larger institutions have designated compliance professionals who are focused on customer due diligence (CDD) for marijuana businesses only. Not surprisingly, the on-boarding and monitoring of these businesses as new customers is proving to be extremely difficult. Furthermore, Financial Crimes Enforcement Network (FinCEN) has outlined their expectations for compliance with AML regulations, requiring additional reporting and screening steps. FinCEN stipulates that the decision to open, close or refuse any account or relationship should be made by each financial institution based on a number of factors that are specific to that institution, through thorough customer due diligence using an appropriate risk based approach[3].

It is critical for the USA to align its state and federal laws, to protect anyone who is acting under state law, but breaching federal laws and facing federal prosecution. The focus of such protection should be on the FIs, which could be providing banking services for marijuana businesses inadvertently. However, aligning US law would have benefits for banks and marijuana businesses. If banks were able to provide formal banking services, then marijuana businesses would have the visibility of transactions they need to operate as legitimate businesses, which is not always the case with cash-only organisations.

In the meantime, FIs face all of the complexities of the due diligence processes in making decisions about whether to onboard a new business customer, especially if it is a marijuana business. In order to make this decision as quickly and cost effectively as possible, they need appropriate data infrastructure that includes data on these businesses, if they are to ensure they remain compliant with regulation. Data offers a new dimension to the debate over marijuana legalisation, and getting the banking industry to think about marijuana not as a banned substance, but as a new legitimate product.

Author: Nina Kerkez, Accuity Product Director


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