Top 5 Myths Around Banking Cannabis-Related Businesses (CRBs)
Key points in this article include:
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around Banking CRBs
For this reason, it is important to address the myths around banking CRBs so these institutions can make a better-informed decision to offer banking services to them or not.
Stay up to date on CRBs.
Risks Exist in States where Cannabis is Illegal
Myth #1: Cannabis is illegal in my state, so I do not have to deal with it.
Just because cannabis is illegal in the state within a financial institution’s footprint doesn’t mean they can ignore it. The state laws are changing at a rapid pace and talks of legalization at the federal level are heating up. Banks and credit unions need to be prepared should legalization or decriminalization happen in their state. Additionally, as previously stated, every state where cannabis is currently fully illegal borders at least two other states where it is legalized to some extent. 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. It is critical for financial institutions to stay up to date with all state legislation that may affect their customers.
Ensuring Compliance when not Servicing CRBs
Myth #2: Stating that institutions do not service cannabis-related businesses is enough.
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 things they need to do to ensure compliance and do the proper due diligence. No matter their decision, banks and credit unions will have to update their policies and procedures to reflect that.
questions to consider should institutions not offer banking services are:
- 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
Myth #3: Banking a cannabis provider or dispensary carries the same risk as banking the payroll company who processes the dispensary’s paychecks.
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 off 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 to 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.
Banking Hemp vs. Marijuana vs. CBD
Myth #4: Banking hemp is the same as banking cannabis.
The term cannabis covers hemp, marijuana, and CBD. 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. CBD can fall into either category depending on its THC content. The low levels of THC found in hemp led to the passing of the 2018 Farm Bill which removed hemp from the Controlled Substances Act (CSA) and made it federally legal when certain requirements are met. States may still regulate hemp production, so it is important for BSA professionals 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: Banking businesses that sell CBD has little risk since everyone is doing it.
CBD is a grey area in the cannabis world. If it has less than 0.3% THC, it falls under hemp CBD but with more than 0.3% THC it is still considered marijuana. Testing CBD for its THC levels has not been well regulated, so it leaves it in this in-between 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.