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Top 5 myths about cannabis banking

Terri Luttrell, CAMS-Audit, CFCS
February 16, 2024
Read Time: 0 min

Misconceptions about banking tied to cannabis-related businesses

Understand these myths about offering banking services to businesses tied to marijuana, hemp, or cannabinoids (CBD) to remain compliant with AML rules and regs.

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The demand for CRB financial services

Understand misconceptions tied to cannabis banking

The cannabis industry has grown rapidly in recent years, and demand will continue increasing as further cannabis legalization initiatives are passed at the state level. The availability of safe banking and secure financial services products is essential for the growth and credibility of cannabis-related businesses (CRBs), whether they are tied to marijuana, hemp, or cannabinoids (CBD), which are all by-products of the cannabis plant. In addition, CRBs are a potential source of local deposits that could fund additional lending, which appeals to some financial institutions.

However, many banks and credit unions are still unsure whether they should offer cannabis banking to these potential clients.

Offering banking to cannabis businesses: A huge market

According to analysis from the MJ Biz Factbook, retail cannabis sales are projected to reach $54.3 billion by 2027. Although marijuana is now legal – either medically or recreationally – in most states today, it remains illegal on a federal level, hamstringing cannabis-related businesses (CRBs) from accessing traditional financial accounts.

While there is certainly demand for traditional banking services, financial institutions are, understandably, skeptical. Is banking cannabis safe? How do you provide financial services to them? How do you navigate compliance? Are there safe banking harbors in place?

While providing financial services to CRBs can be risky, it can also be advantageous. As more states legalize marijuana, the onus is on financial institutions to complete thorough due diligence and know the clients that cross state lines for services. Even if a financial institution wants to avoid banking cannabis businesses, it must take certain steps to maintain a lower risk profile.

Below are five myths about banking services for cannabis-related businesses. Understanding these myths can help financial institutions remain compliant with anti-money laundering (AML) rules and regulations – whether they bank CRBs or don’t.

Stay up to date on federal and state laws relating to cannabis banking.

A cannabis plant. Cannabis-related businesses have a tough time getting banking services.

Know your risk

5 myths surrounding cannabis banking

Myth #1: Cannabis is illegal in my state, so the risk is minimal and not of concern.

Fact: Risks exist in states where cannabis is illegal

If cannabis is illegal in a financial institution’s footprint, it does not mean it can be ignored. With talks of cannabis safe banking and legalization at the federal level heating up once again, banks and credit unions should be prepared if legalization happens in their state. Every state where cannabis is currently illegal borders at least two other states where it is legalized medically or recreationally. Financial institutions must understand how to handle transactions with cannabis-related businesses (CRBs) and know 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 and federal laws that may affect their clients and the decision on whether to provide cannabis banking services.

Myth #2: Institutions that do not service CRBs simply need to state their decision.

Fact: Even if a financial institution decides against offering services to CRBs, it must ensure BSA compliance with updates to policies and procedures and other actions.

When asked if they plan to offer cannabis 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 required to ensure compliance and perform 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 provide financial services to cannabis-related businesses 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 customer 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 client base? How will they effectively identify and manage CRB-related risk?  

Myth #3: All CRBs carry the same amount of banking risk.

Fact: Financial institutions should determine their tier of acceptance for cannabis banking.

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 companies 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, and other firms 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 AML risk assessment process and decide their risk tolerance for banking cannabis, they should define how to handle the different tiers. 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.

 

Myth #4: Banking hemp is the same as banking marijuana.

Fact: Hemp banking involves less risk but still requires adherence to state and local laws.

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. 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 if 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 or customers. Because hemp was removed from the CSA, there is much less risk to banking it as opposed to marijuana or even CBD.

Myth #5: CBD businesses are more common and, therefore, not as high-risk for offering banking services.

Fact: Businesses tied to cannabinoid products fall into a gray area of legality and require scrutiny.

CBD is a grey legal 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 has 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.

Keep up with regulations

Stay informed and develop a plan

Financial institutions need to be aware of common myths around banking CBD, hemp, and marijuana-related businesses so they can adequately assess their risk profile. Developing a thorough CRB risk analysis as part of an AML/CFT risk assessment will enable an institution to truly understand the risk and speak to its regulators. If a bank or credit union decides to provide services to cannabis-related businesses, they should staff and price accordingly.
Until federal and state laws align, staying informed is critical to controlling the inherent risk associated with these higher-risk businesses.

Navigate cannabis banking concerns with Abrigo's AML consultants

Abrigo’s financial crime consultants, a team of former bankers, BSA Officers, and regulators, can help you with an AML/CFT risk assessment and policies and procedures tied to offering (or avoiding) banking to cannabis-related businesses. Our experts can help you get your AML program on track with customized services to meet your unique needs. 

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About the Author

Terri Luttrell, CAMS-Audit, CFCS

Compliance and Engagement Director
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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