“It’s a marathon, not a 100-yard dash.”
The methodical approach to developing a cannabis banking program described by Stearns Bank Director of Cannabis Banking Services Michael O’Neill is playing out in a number of ways at the St. Cloud, Minn.-based bank.
The nationally-chartered Stearns has experienced strong loan growth during its pilot cannabis banking program, launched last October. To prepare for the rollout, the bank hired four experienced Denver-based cannabis bankers, including O’Neill.
Stearns Bank focuses on CRE lending, construction loans and equipment financing, generally wrapped into a blended loan product for marijuana-related businesses (MRB), in states with mature cannabis markets. Staff tackles compliance, analysis, lending, sales and underwriting. The bank’s compliance committee must unanimously approve every cannabis applicant before the loan heads to the loan committee for approval. The pilot, built on the foundation of Stearns Bank’s initial foray into cannabis banking from 2014 to 2016, includes an updated risk assessment, risk matrix, and policies and procedures. Stearns will focus on meeting proprietary key performance indicators before developing a permanent cannabis banking program.
O’Neill sees Stearns as gaining a foothold in an underbanked sector — he’s aware of only 14 financial institutions that directly lend to MRBs. Most banks shy away from doing so because of the industry’s historical risk and stigma. “This is positioning Stearns for an even bigger turn,” O’Neill added. “There’s enough business out there for everybody, there really is.”
As of April 2022, 37 states had legalized medical marijuana. Eighteen had legalized recreational sales. Only four U.S. states have not decriminalized cannabis. Stearns Bank is among the minority of banks taking advantage of the market, however. Most banks have steered away from banking cannabis, skittish because Congress continually sidesteps passage of The SAFE Banking Act, which would provide a safe harbor to banks that service MRBs. However, both banks and industry consultants say that by adopting a stringent compliance program, banks operating in states with legalized medicinal or recreational cannabis can, by utilizing an effective compliance program, set themselves up for long-term revenue opportunities that more risk-averse banks will miss out on.
THC-cannabis revenue is expected to reach $30.5 billion this year, according to the banking compliance firm RiskScout. Despite the growth of the industry, only 200 U.S. financial institutions offer banking services to MRBs, and half of those have fewer than 10 customers, noted RiskScout co-founder and CEO Justin Fischer. Even though many banks are not directly advertising their programs and instead rely on word-of-mouth outreach, demand is still proving to be overwhelming. Banks only approve 30 to 40 percent of the account opening applications they receive from marijuana-related businesses, Fischer noted.
Though banking CBD, recreational marijuana and medical marijuana markets are likely already safe, the drug remaining illegal federally leaves banks with the fear that the federal government will raid marijuana-related businesses, said Jason Tarasek, founder of the Minnesota Cannabis Law firm. Though such raids haven’t happened, many banks still shy away from banking businesses with the word cannabis in their names, even in markets where the drug is legal.
“Everything in this space is risky,” Tarasek said. “Banks in my experience are extremely risk-averse. There are some banks doing it, and they are the ones getting the cannabis business. Obviously their boards of directors or leaders have decided they’re willing to take the gamble. It’s just a judgment call.”
A heavy lift
Though banks servicing MRBs still work from guidance issued in 2014 by the Financial Crimes Enforcement Act, the guidance effectively captures the experience of banking cannabis, said Tony Repanich, president and chief operating officer at Shield Compliance. “The playbook has been established,” he said.
Despite the lack of a formal go-ahead from the federal government, there is breathing room for banks operating in states with either medicinal or recreational cannabis, noted John Geiringer, a banking attorney with the Chicago-based firm Barack Ferrazzano. Guidance established by The Cole Memo states that federal prosecutors should focus on preventing the biggest threats marijuana poses, including “the distribution of marijuana to minors; marijuana revenue migrating to criminal elements, the diversion of marijuana into states where it remains illegal; marijuana activity being used as a pretext to engage in illegal activity,” and other illicit activities.
To effectively service the industry, banks must adopt an effective compliance system and understand the complicated industry. For instance, there are three “tiers” of cannabis banking accounts. Tier one accounts include the growers and dispensaries — operations that “touch” the plant. They require licenses, strict monitoring and consistent Suspicious Activity Reports, which are regulators’ primary concern. Distinguishing between tier two companies (firms such as landlords whose activities support the “touchers”) and tier three accounts, those ancillary businesses that support second tier companies, will vary depending on the institution.
Bankers must also know the difference between marijuana, hemp, and various CBD products, and whether they are comfortable engaging with both indirect and direct cannabis-related businesses, Geiringer noted. Banks need to analyze their current staffing needs and responsibilities and properly train their directors and employees. After banks decide whether banking the cannabis industry aligns with their risk tolerance and risk management capabilities, they must develop and implement processes and controls to ensure that risks are controlled, conduct performance monitoring, and review systems, Repanich said.
As more states legalize marijuana, banks operating in areas that recently legalized either medicinal or recreational cannabis must ensure they do not accept “legacy funds or lingering profits” from the pre-legalization market, Repanich added. “Whenever you have businesses with a high degree of cash and a large illicit market that co-exists alongside a legal market, unsavory people want to attach themselves to these businesses,” he said.
Another key consideration is following the requirements outlined by the FinCEN, with respect to complying with BSA and anti-money laundering requirements. “Basically, the BSA rule is the square [hole] and the cannabis industry is the round peg, and we’re trying to put that round peg into a box that was made to keep the round peg out,” O’Neill said.
Financial institutions that have faced regulatory heat from banking marijuana-related businesses have either failed to meet an excessive compliance standard they’ve set for themselves, been tardy in filing SARs, tried to undertake cannabis banking while experiencing other lending challenges, or jumped in immediately after losing a key Bank Secrecy Act officer, Fischer said.
One example of this occurred in 2021, when a small Michigan credit union was penalized for inadequate compliance reporting for cannabis-related accounts. It was publicized as the first example of regulatory misconduct in cannabis banking. Under an enforcement action, Live Life Federal Credit Union was required to stop opening new cannabis-related accounts and file its missing SARs. The NCUA also required the institution to implement a transaction monitoring system.
Despite the heavy compliance lift, banks are overcoming those challenges by proactively reaching out to regulators and regularly examining their own internal operations.
The hemp program at West Town Bank & Trust in North Riverside, Ill., began after the 2018 farm bill separated hemp from marijuana in the Controlled Substances Act. It has since grown to provide banking services to more than 200 customers. West Town officially launched its dedicated cannabis program earlier this year following a months-long development process. West Town is set up for cannabis banking in seven Federal Reserve Districts, allowing it to reach 20 states.
West Town Bank & Trust serves customers in all three tiers, noted cannabis program director Mel Barnes. To combat the risks tier-one businesses face because of their extensive reliance on cash, the bank partners with a third-party armored courier service that picks up the money, and verifies its legality. The cash is then taken to the closest Federal Reserve office to be deposited into the customers’ West Town bank account.
Oklahoma State Bank, in Guthrie, Okla., researched states with mature legalized cannabis programs before launching its program in 2019. Initial growth expectations were low. As the state’s medicinal market exploded to include more than 300,000 medical marijuana patients, the most in the nation, the bank exceeded its projections. Oklahoma voters legalized recreational marijuana in 2018. As of April 2022, Oklahoma State Bank, which only banks marijuana-related businesses within the state, had 300 licensed tier one accounts.
The bank monitors outgoing and incoming wires and efficiently flags suspicious transactions, noted Delene Gilbert, director of sales and marketing for the bank’s marijuana-related banking program. Oklahoma State Bank undertakes regular internal audits, randomly evaluating transactions to flag illegal activity. Oklahoma State Bank has also tinkered with its account fees during the past few years, settling on a $500 monthly account fee, which Gilbert said is setting up the bank for growth.
Another bank that has successfully navigated the compliance landscape is Colorado-based The Gunnison Bank & Trust. Considered one of the early adopters of medicinal cannabis banking in 2009, the bank immediately started servicing the recreational marijuana industry when statewide use was legalized.
Today, the bank has approximately 150 customers. Ashley Burt, president and CEO, described its growth strategy as deliberate. He attributed the success of the program to the bank’s early move into the space, allowing administrators to learn the industry alongside regulators. “When this option came to be, we didn’t know what the structure should be that we should build,” he noted. “Perhaps more importantly, our regulators didn’t really know either. It’s not because they hadn’t done their homework; it’s because there was this vacuum of regulation surrounding this space.”
Even today, the retail/dispensary side of cannabis banking is cash-reliant — requiring The Gunnison Bank & Trust to track where every dollar comes from, a task requiring multiple employees. Despite the intensive compliance process, banking the industry is “doable,” Burt said. “It needs to be done very carefully. And it has the potential to do good for your community as well as be good business to be involved in. But every banker has to make their own decision.”
Editor’s note: An earlier version of this story misstated Stearns Bank’s process to approve MRB loans. The bank’s compliance committee must unanimously approve the cannabis loan applicant before the loan heads to the loan committee for approval.