Banks 'Loosen Up' on Pot Business as FDIC Adopts Fincen Guidance

The Federal Deposit Insurance Corp. has quietly aligned itself with guidelines from the Financial Crimes Enforcement Network that are meant to assuage bankers' fears about the burgeoning marijuana industry, American Banker has learned.

The FDIC's movement on the state-level pot business adds to a slow but steady sense of momentum for an industry whose efforts to enter the financial mainstream have long been hampered by the fact that marijuana remains illegal under federal law.

One way to gauge the pot industry's recent progress is by tracking the number of marijuana-related suspicious activity reports that banks and credit unions file with Fincen. Because financial institutions are expected to file the reports whenever they do business with pot merchants, the number of reports serves as an indicator of banks' involvement.

The number of suspicious activity reports that included the word "marijuana" in their narrative section rose from 530 in January 2013 to 1,109 in June of this year, according to data obtained from Fincen under the Freedom of Information Act.

The biggest one-month climb came immediately after Fincen released its guidance. Banks and credit unions filed 834 marijuana-related suspicious activity reports in February 2014. That number promptly jumped to 1,105 in March.

"It certainly seems like more banking entities are willing to dip their toe into the water," said Mike Elliott, executive director of the Marijuana Industry Group, a trade association. "And as they do so, I think they're seeing more and more that even though it seems risky, we haven't really seen any enforcement actions on this."

Back in February, when Fincen released its guidance, the FDIC declined to comment on the document. But on Monday, FDIC spokesman Greg Hernandez confirmed that the agency is currently using the Fincen guidance.

The FDIC's decision to use the guidance is significant because federal banking agencies had previously refused to say whether they'd align themselves with the document, which is part of a broader Obama administration push to foster state-level experiments with marijuana legalization.

The FDIC's move on marijuana comes at a time when then FDIC is facing sharp criticism from financial industry representatives and congressional Republicans over what they see as the agency's hostility to payday lending and certain other legal businesses.

During one recent bank examination, an FDIC official told the bank's directors that the agency is in alignment with Fincen's marijuana guidance, according to Lance Ott, a consultant to the bank who heard the discussion. At the same time, the FDIC employee made clear that the agency is neither encouraging nor discouraging banks from serving pot merchants, Ott said.

The FDIC official told the bank that marijuana is a higher-risk business because of its dependence on cash and the increased chance of robbery, but that pot businesses do not hold a reputational risk for banks in states such as Colorado and Washington that have legalized the drug, Ott recalled.

Ott, whose firm helps marijuana dispensaries with their financial management, said that bankers are starting to show a greater willingness to serve the cannabis industry.

"There are several banks that are boarding businesses," said Ott, a principal in Guardian Data Systems. "They're doing a hell of a lot of due diligence."

The Fincen guidance lays out various steps — such as determining whether a pot business is licensed, and conducting ongoing monitoring of the business for suspicious activity — that banks are expected to take. It applies in the 20 states and the District of Columbia where marijuana is legal for either medicinal or recreational purposes.

Bruce Nassau, who co-owns four pot dispensaries in Colorado, including Mile High Medical and Recreational Cannabis in Denver, agreed that certain bankers have recently become more comfortable with the pot business.

"What I've seen is that some of the much smaller community-type banks are beginning to loosen up," he explained.

Despite the loosening, banking industry representatives noted that the number of banks willing to serve the marijuana industry is still quite small. Jenifer Waller, senior vice president at the Colorado Bankers Association, said she knows of fewer than 10 banks that have gone through a regulatory exam and gotten the OK.

"It's still a serve-at-your-own-risk industry. Because any time there's a change in administrations, any time there's a change in the law, you could be prosecuted," she added.

James Pishue, president of the Washington Bankers Association, said that the vast majority of banks are still staying away from marijuana because the drug remains illegal under federal law. "There really needs to be a federal solution to this," he said.

Marijuana businesses are pushing hard for a change in federal law to attract the interest of more banks, arguing that cash-only dispensaries need accounts for security because they are obvious targets for robbery.

In Colorado, the cannabis industry's drive to enter the financial mainstream hit a pothole recently when ATMs connected to a network operated by South Dakota-based MetaBank were shut down. MetaBank did not respond to a request for comment.

Still, representatives of the pot business say the wind is behind their backs. And in an August speech, Fincen Director Jennifer Shasky Calvery said that the agency's guidance was having its intended effect.

"It is facilitating access to financial services, while ensuring that this activity is transparent and the funds are going into regulated financial institutions," she said.

As of the Aug. 12 speech, 105 U.S. financial institutions were providing banking services to marijuana dispensaries and other pot businesses, according to Fincen. That's less than 1% of all banks and credit unions nationwide.