Cannabis, Hemp, & Ancillary Business Banking

March 13, 2020

FLORIDA BANKERS ASSOCIATION

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Is it Illegal to Bank the Cannabis Industry?

The possession, distribution or sale of marijuana remains illegal under federal law, which means Money obtained could be considered money laundering and Expose a bank to significant;

• Legal, • Operational, and• Regulatory Risks

While the Controlled Substances Act historically made no distinction between Marijuana and Hemp, that changed with the 2018 Farm Bill. To put it plainly, the 2018 Farm Bill recognized that hemp is not marijuana, as long as the plant contains less than 0.3% THC.

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Why is Banking Cannabis so Complicated?

While the basics of the Cannabis industry are easy to grasp, there remains much to be learned, and Banks should devote ample time to building their knowledge of the industry.

Understanding Cannabis uses will help financial institutions when working with prospective client that work in the Hemp or Cannabis industry.

Banks can use their knowledge of the Cannabis industry to determine the specifics of their customer’s trade such as:

• Growing,

• Manufacturing Products,

• Distributing Products, or

• Operating in a retail capacity, and

Enable Institutions to better assist prospective clients…

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What Does all of This Mean for Banks?

Three primary steps Banks should take to better prepare themselves for the inevitable moment a cannabis grower, producer, distributor, or retailer walks through your door and you wonder.

1. Understanding the Businesses and Their Products/Services

2. Understanding the Risks to Take Appropriate Safeguards

3. Seek Guidance before Banking the Cannabis Industry

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Understanding the Industry: Products & Services

Understanding the Industry, including the products & services sold.

Cannabis includes two main species:

▪ Hemp

▪ Marijuana

Both contain CBD and THC; however Hemp contains a much higher percentage of CBD and only trace amounts of THC, which is why CBD is typically extracted from the hemp plant (and also known as hemp extract).

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What the Hemp!

Hemp has multiple industrial uses such as:

▪ Textiles

▪ Plastic Substitutes

▪ Rope

▪ Food

▪ Building Materials

And unlike marijuana, hemp can be grown, processed, sold, and consumed following the issuance of guidance from the United States Department of Agriculture and approval of state-specific plans governing the hemp industry.

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Banking Cannabis Considerations and Approach

With legislative changes happeming the Cannabis industry has become much broader due to the network effect of supporting the industry.

Here are a few examples of the broader market:▪ Cannabis related employees▪ Accountants▪ Lawyers▪ Landlords▪ Packaging and non-cannabis material suppliers▪ Financial Firms (Investment Manager & Hedge Funds)▪ Building Contractors (lighting, extraction, ventilation)▪ Manufacturing (vape pens and cartridges, cannabis related products)

Many of the above businesses that participate indirectly in the cannabis space have had their accounts shut down simply by being associated with the industry. This creates another layer of opportunity for banking products.

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Types of Cannabis Businesses

Traditional Cannabis Businesses can be broken down into these typical categories:

❖ Dispensaries❖ Growers❖ Extractors❖ Producer/Processor❖ Lab Testing Facility❖ Distributor

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Market Opportunity for Banks

The market opportunity for bank products for these new customerswill be extensive:

❖ Cash Management❖ Payroll❖ Trust/Wealth Management Services❖ Foreign Exchange (From public Canadian Companies)❖ Commercial Loans❖ Consumers Loans❖ Mortgages❖ Lines of Credit

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Current Regulatory Environment

FinCEN, a division of the Department of Treasury, writes, interprets and enforces the Bank Secrecy Act and Anti Money Laundering laws and regulations.

On February 14, 2014, the Department of Treasury, through its FinCEN Division, released guidance through FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses, which provides guidelines for Banks that seek to provide banking services to marijuana-related businesses.

On December 3, 2019 FinCEN issue joint guidance with the regulators. The joint guidance clarifies FinCEN’s position that banks serving hemp-related businesses need not file suspicious activity reports (“SARs”) based solely on their customers’ otherwise legal hemp-related business. However, the guidance emphasizes that banks remain obligated to file SARs if indicia of suspicious activity warrants.

This guidance revises its interpretation and enforcement of the BSA.

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Discuss with Your Regulators

FDIC: Met first in California to learn what they have experienced and then to

Atlanta.

FinCEN:o Adhere to their guidance

o SAR/CTR Filing

o Due Diligence (7 Considerations)

o Red Flags (we have client sign our process, 5 days to clear and if not close account within

10 days)

o Get It In Writing!

FRB: Cash activities or any issues with the BHC

OFR: Met with Tallahassee (representatives, FBA, OFR and CFO office)o Great partnership in which they were thanking us for taking this on the right way, like

what we have provided and what we are doing▪ Share your due diligence packages

Understanding the Risks

System Risk• Did we capture everything?

• Contingencies if systems go down

Vendor Management Risks

Reputational Risk• Marketing

• Compliance

• Political

Impact to Safety and Soundness (CAMELS)

• Capital

• Asset Quality • Lending

• Management • BSA/AML Impact

• Earnings

• Liquidity • Set Limits and Include in Analysis

• Sensitivity to Market Risks

Appropriate Monitoring and Safeguards

• Due Diligence and Ongoing Monitoring

• Pre-Due Diligence (7 Considerations)

• Ongoing Red Flags (FinCEN )

• Timely filings for SARs and CTRs• Marijuana Limited

• Marijuana Priority

• Marijuana Termination

• Alerts

• Vendors

• Payments• Cash

• Checks

• ACH

• Wires

• Debit/Credit Cards

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Current Legal Environment

The Rohrabacher-Farr Amendment prohibits the Department of Justice from using federal funds to prevent states with medical cannabis regulations from implementing laws that authorize the use, distribution, possession or cultivation of medical cannabis.

Racketeer Influenced and Corrupt Organizations Act (RICO) is a federal law designed to combat organized crime in the United States. It allows prosecution and civil penalties for racketeering activity performed as part of an ongoing criminal enterprise. There has a been a recent rise in RICO based lawsuits in the marijuana industry as an attempt by some to use these laws, despite being legal in the state, to prevent marijuana related activities.

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Current Legal Environment on Lending

Banks have considered whether assets could be seized as a result of a RICO lawsuit and therefore the collateralized assets of the loan would be in jeopardy.

There is further concern on the tail risk if the loan can’t be called in the event of violation by the borrower and having to shut down the activity.

Lack of Federal Law Protections

▪ Claims Under Federal Law Generally Inapplicable

▪ No Federal Bankruptcy Protections

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Current Bills w Bi-Partisan Support

States Act Bill, S. 1028 (H.R. 2093): would recognize legalization of cannabis and the U.S. state laws that have legalized it through their legislatures or citizen initiative. It was introduced on June 7, 2018. The act would amend the Controlled Substances Act of 1970 to exempt from federal enforcement individuals or corporations in states who are in compliance with U.S. state. As of June 5, 2019, the House bill had 206 cosponsors, and the Senate bill had 30 cosponsors.

Safe Banking Bill, H.R. 1595 (S. 1200): The banking provisions of the STATES Act have been reintroduced as the Secure and Fair Enforcement (SAFE) Banking Act of 2019. On June 6, 2019, the House bill moved out of committee and was placed on the Union Calendar, separate calendar under the house for tax and appropriations, for a vote. September 2019 passed in House.

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Seek Guidance and Be Proactive

The global legal marijuana market is expected to reach $146.4 billion by end of2025, according to a new report by Grand View Research, Inc.

The newly-legalized Hemp industry is expected to generate tens of billions of dollars of revenue nationwide over that same time. From a financial institution’s perspective, this presents both Opportunities and Challenges.

While not every financial institution may choose to bank cannabis, it is still important for all institutions to familiarize themselves with the Cannabis industry, Hemp and Marijuana, in order to make an educated determination as to how to proceed.

Banking is risky, we must always be on guard and not become complacent and hope that DOJ stands on the guidance they have published and focus on the true criminal activity that violates those 8 priorities.

We are taking cash off the streets and putting it in the banking system where it belongs, can be monitored and hopefully keep people safe.

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Thank You!Melissa Atkins

melissa@bekindworkhard.us