With potential regulatory guidance for cannabis banking on the horizon, these community banks are positioning themselves strongly and safely within this growing industry.
This past September, the Senate Banking Committee passed the Secure and Fair Enforcement Regulation (SAFER) Banking Act on a bipartisan basis. Advocates hailed the vote as the biggest advance to date toward a safe harbor at the federal level for cannabis-related businesses (CRBs) and banks. As of this writing, the bill’s prospects for becoming law appear remote but not impossible. While industry observers view the SAFER Banking Act as an advance for CRBs, they also predict that its enactment would have limited impact on CRB banking. Compliance costs, for example, are expected to remain high. Community banks must undertake considerable due diligence to bank CRBs—and that won’t change.
“There’s a lot of tracking of where funds come from and go to and a lot of investigation of the people associated with the business,” explains Troy A. Peters, president and CEO of $895 million-asset Jonestown Bank & Trust Co. (JBT) in Jonestown, Pa. “It’s a lot of work. You have to dedicate a lot of resources to it.” Ben Shreffler, AVP, BSA CRB customer success for $1.7 billion-asset Regent Bank in Tulsa, Okla., agrees. “You need a team at the financial institution that has the resources and ability to delve into the business and have policies and procedures in place that help the bank monitor these types of businesses.”
The current state of cannabis regulation
What the SAFER Banking Act would require is something woefully lacking in the CRB banking world: updated, more detailed, and more consistent regulatory guidance. The FinCEN guidance of 2014 remains the only official guidance for banks.
“It’s very bare bones guidance,” says Erin Moffet, policy director for the Cannabis Financial Industry Group, an educational and advocacy organization. Moffet notes federal regulators are prevented from publicly recognizing banks they believe are doing a good job banking CRBs. Regulators don’t publish best practices among financial institutions or consult with each other to establish consistent regulations.
“There’s no detailed compliance advice and no unified playbook,” Moffet says. “SAFER would allow for more communication between state regulators and financial institutions. The ability to have best practices and uniform standards would be huge.”
Serving CRBs nationwide
Despite regulatory uncertainty, the CRB industry continues to grow. As more states enact some level “You have to have BSA-minded people that will dig in and
do those investigations [for cannabis-related businesses].” —ASHLEY HESS, JONESTOWN BANK & TRUST CO. of legalization of marijuana and cannabis—24 states have legalized recreational use as of February 2024 and another 14 states allow it for medical use—CRBs have expanded across state lines. Their bankers have followed.
Regent Bank now banks CRBs nationwide. “The need came from our current client base who were expanding into new markets,” explains Shreffler. “We wanted to
be able to help bank their business under one umbrella. Wherever there’s a legal program, we can bank into that market.”
JBT has also expanded across state lines as its customer base has grown. “We bank businesses with some connection to our bank or our market,” Peters reports. “There’s a lot of consolidation happening with larger companies buying other companies that had the original license. These are multiple state operators [MSOs] that may have facilities in four or eight states. If they’re our customers, we want to bank them.”
Easing compliance with technology
Expanding across state lines does multiply compliance concerns. Banks need the right staff and technology to handle the increased requirements. “It’s an investment to get started,” says Ashley Hess, VP, cannabis banking manager at JBT. “We have a staff of five people that only do cannabis-related business. You have to have BSA-minded people that will dig in and do those investigations.”
Hess adds that JBT has also pursued strong technology partners. “Automation is the way to go,” she says. “That’s what examiners are looking at also.”
Not all states are created equal in terms of the veracity of their licensing and enforcement of cannabis regulations.
A good fintech partner facilitates compliance across multiple jurisdictions. “Not all states are created equal in terms of the veracity of their licensing and enforcement of cannabis regulations,” observes Tony Repanich, president and CEO of Shield Compliance, a cannabis banking compliance platform for financial institutions. “In states that have great oversight, bankers can rely on activities of the state. In those markets where there are inherent weaknesses, bankers have to fill in those gaps.”
Shield Compliance maintains updated information on states’ rules and has shared best practices with regulators as to what’s working in other states. “Part of the reason there is good availability of banking within a state is because the banks feel comfortable with what the state is doing,” Repanich says.
Ironically, the extensive monitoring and investigation associated with the CRB accounts often reinforce a bank’s comfort with the business.
“It’s a lot of work from a BSA and compliance perspective, but it means there’s full transparency between us and the clients,” explains Kim Rossa, chief compliance officer of $1.3 billion-asset Cogent Bank in Orlando, Fla. “We’re forthright with them, and they are with us. It makes the banking relationship very open and easy.”
CRBs are opening new markets for banks
The intense scrutiny that marijuana license holders undergo contrasts strongly with hemp and CBD businesses. The passage of the 2018 Farm Bill removed hemp and hemp seeds, including low-THC derivatives of cannabis, from the DEA’s schedule of controlled substances. The resulting proliferation of CBD-oriented businesses hasn’t been all positive for banks.
“Everybody and their brother decided to get into that business,” says Chris Hartman, EVP, CDO of Cogent Bank. Hartman adds that since selling CBD products doesn’t require a cannabis license, many providers offer a limited range of these products online or through businesses that also sell various other goods or services.
Hartman adds that banking CRBs has opened new markets for Cogent. “There’s a whole ecosystem that supports that industry that have come to us for banking services because we have knowledge of the industry,” she says. “Whether it’s a manufacturer that manufactures containers or a marketing company that is servicing the industry, or attorneys and CPAs, it’s opened up an avenue to new businesses.”
Currently, most banks limit their CRB banking relationships to depository services. Any lending is limited to a real estate entity that is a separate legal entity from the business that holds the marijuana license and derives income directly from marijuana and cannabis sales.
“We’re doing some real estate lending to mortgage holders who may be leasing space to a dispensary,” Hartman says. “We lend on hard assets such as equipment or vehicles, but we are not doing any lending on an actual grow house or the property it sits on unless the property can be used for another purpose.”
The somewhat fragile equilibrium between state and federal legal status of cannabis looks to continue for the foreseeable future. Community banks value their CRB customers and intend to maintain the relationships, however.
“We believe in the cannabis business and will continue to invest resources into the program,” Shreffler says. “We’re here for the long haul.”
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This article was originally published in Independent Banker by Judith Sears.
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