Top 5 Myths Around Banking Cannabis-Related Businesses (CRBs)

Jill Cacic
July 7, 2021
Read Time: min

Key points in this article include:

  1. Risks exist in states where canabis is illegal > LEARN MORE
  2. Ensuring compliance when not servicing CRBs > LEARN MORE
  3. Determine your tier of acceptance > LEARN MORE
  4. Banking hemp vs. marijuana vs. CBD > LEARN MORE
  5. The gray area of banking CBD > LEARN MORE

 

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Financial Institutions and CRBs
Understand the Misconceptions
around Banking CRBs
With every state election, it seems there is at least one bill related to the legalization of cannabis on the ballot. Often, those bills are getting passed into laws expanding the legalization of cannabis and cannabis-related products. Forty-five states currently have some sort of cannabis legalization or decriminalization, yet one of the biggest issues cannabis-related businesses (CRBs) still face is access to traditional banking services.   Financial institutions need to determine their risk tolerance for banking CRBs, including marijuana, hemp, and CBD. Every bank and credit union in the United States either operates in a state that has legalized or decriminalized some form of cannabis or borders one that has.

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.

Know Your Risk
The 5 Myths About Banking Cannabis

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 diligenceNo 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.  

Just because cannabis is illegal in the state a financial institution operates in, 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 even 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 in another state.  

 

The Gray Area of Banking CBD

Myth #5: Banking businesses that sell CBD has little risk since everyone is doing it.  

Just because cannabis is illegal in the state a financial institution operates in, 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 even 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 in another state. 

Keep up with Ever-Changing Regulation
Stay Informed and Develop a Plan
As laws around legalized cannabis continue to change at the state, and possibly federal levels, financial institutions need to be aware of common myths around banking CBD, hemp, and marijuana-related businesses so they can properly assess their risk profile.  Developing a thorough CRB risk analysis as part of an institution’s enterprise-wide risk assessment will enable an institution to truly understand the risk and speak to their regulators. If they decide to provide banking services, they should staff and price accordingly. Until federal and state laws align, staying informed and ready is key to controlling inherent risk associated with these higher risk businesses. 
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About the Author

Jill Cacic

Senior Public Relations Specialist
Jill Cacic handles the company’s media relations and corporate communications. Her articles have appeared in ABA Bank Compliance magazine, BankingExchange, and multiple state banking association publications.

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