Risks exist in states where cannabis is illegal
Myth #1: Cannabis is illegal in my state, so the risk is minimal and not of concern.
Just because cannabis is illegal in a financial institution’s state footprint does not mean it can be ignored. With talks of legalization at the federal level heating up once again, banks and credit unions need to be prepared should legalization happen in their state. Every state where cannabis is currently fully illegal borders at least two other states where it is legalized medically or recreationally. Financial institutions need to consider how to handle transactions with CRBs and what to do if they discover a customer or member is operating a CRB or receiving income from a CRB in another state. The first step is staying up to date with all state laws that may affect their customers.
Ensure compliance when not servicing CRBs
Myth #2: Institutions that do not service CRBs simply need to state their decision to be compliant.
When asked if they plan to offer banking services to CRBs, banks and credit unions cannot rely on a simple yes or no answer. Stating that they are or are not planning to service CRBs is only the first step in an extensive list of actions to ensure compliance and do proper due diligence. No matter their decision, banks, and credit unions will have to update their policies and procedures to reflect it.
Questions for consideration if an institution does NOT offer cannabis banking services include:
- How will they handle an account that is found to be tied to a CRB?
- Will they offer banking services to indirect CRBs (those not “touching” the product)?
- Will they bank hemp-related businesses? CBD-related businesses?
- What extra due diligence will they implement to ensure an account isn’t tied to a CRB?
- What transaction monitoring will be performed to ensure there are no CRBs in the institution’s customer/client base? How will they effectively identify and manage CRB-related risk?
Determine your tier of acceptance for cannabis banking
Myth #3: All CRBs carry the same amount of banking risk
There are multiple tiers to cannabis-related businesses. Steven Kemmerling, CEO of CRB Monitor, first introduced the idea of CRB tiers in 2016 to differentiate the types of marijuana-related businesses and their perceived risks.
The tiers are broken down as follows:
Tier 1 – Direct
This tier includes businesses that touch the actual cannabis plant at some point and those that have a financial or controlling interest in businesses that do. This tier has the highest perceived risk for financial institutions.
Tier 2 – Indirect with “substantial” revenue from Tier 1
This includes companies that sell cannabis or CBD products and derive a majority of their profits from those products. The definition of “majority” or “substantial” is defined by each financial institution’s risk tolerance. This tier is of moderate risk to institutions.
Tier 3 – Indirect with “incidental” revenue from Tier 1
Companies that fall under this tier can include CPAs, payroll companies, cleaning companies, etc. that service Tier 1 businesses. While these businesses earn some profit from Tier 1 companies, it is a nominal amount of their overall business. This tier is the lowest risk to financial institutions.
As BSA officers analyze each level of risk during the risk assessment process and decide their risk tolerance for banking CRBs, they should define how to handle the different tiers as well. While the tiers are not official regulations, they are a good industry standard to adopt when defining where a financial institution’s risk tolerance stands. This analysis is critical to the final decision-making process by the board of directors and executive management.
Hemp vs. marijuana in banking
Myth #4: Banking hemp is the same as banking cannabis.
The term cannabis covers hemp, marijuana, and CBD, which all come from the same cannabis plant but have different properties. Marijuana is cannabis with over 0.3% Tetrahydrocannabinol (THC), the psychoactive properties tied to the drug, while hemp is cannabis with less than 0.3% THC and has a variety of uses as an industrial fiber. CBD can fall into either category depending on its THC content. The passing of the 2018 Farm Bill removed hemp from the Controlled Substances Act (CSA) and made it federally legal as long as certain requirements are met. States may still regulate hemp production, so BSA professionals need to reference the state and local laws where they have branches and/or customers. Because hemp was removed from the CSA, there is much less risk to banking it as opposed to marijuana or even CBD.
The gray area of banking CBD
Myth #5: CBD businesses are becoming more common and therefore are not as high-risk
CBD is a grey area in the cannabis world. If a CBD product contains less than 0.3% THC, it falls under the hemp category and is federally legal. But when the product contains more than 0.3% THC it is still considered marijuana. Testing CBD products for their THC levels is not well regulated, which makes many CBD products a gray area on the cannabis spectrum. Financial institutions should consider the source, extraction process, and laws when considering offering banking services to CBD-related businesses. Additionally, the Food and Drug Administration, which regulates food and health-related products, has not approved CBD for consumption or medicinal purposes. This adds another layer of risk associated with CBD and the way it is sold and used by the consumer.
