As marijuana becomes increasingly legalized for recreational and medicinal purposes, one credit union executive hopes her CU's experience can help guide other institutions in crafting their own policies for how to serve this budding industry.
In November 2012, Colorado voters approved the adult use of recreational marijuana, having previously approved medical marijuana in 2000. In July 2014 — with business booming and oceans of cash flooding the streets — management at Partner Colorado CU, Arvada, Colo., was approached by a group of attorneys representing a number of cannabis-related businesses (sometimes referred to as "cannabusinesses"). The goal: to craft a legal banking solution for an industry that desperately needs access to banking services.
Sundie Seefried, president and CEO of $311 million Partner Colorado, noted the problem is not just customers paying cash for products at dispensaries — and certainly there is quite a bit of money involved, as legal marijuana sales totaled $1 billion in the first year in a state with just 5 million residents — it is the trickle-down effect of an all-cash business.
"[Cannabis businesses] can't wire funds or access lines of credit," Seefried wrote in her book, "
"As a result, the owners of marijuana businesses operate in a Wild West landscape," Seefried wrote. "Unable to gain access to basic financial tools, marijuana entrepreneurs pay the rent in cash, compensate their employees in cash, and cart bags and bags of cash to various state and federal revenue agencies to settle their taxes. No significant business transaction can be completed in this industry without factoring in the prospect of a robbery. For even the most intrepid among the cannabis entrepreneurs, this is not a sustainable way of running a legal business. Nor is it sustainable for Colorado as a whole, because the dangers resulting from this situation are not limited to the businesses alone."
As an example, Seefried cites reports of cannabusiness owners walking into grocery stores wearing backpacks filled with large amounts of cash — in some cases $10,000 or even $20,000 — which creates a safety hazard for anyone nearby if someone were to try to rob the carrier of a money-filled backpack.
Seefried notes credit unions — with their local focus and knowledge — are in a unique position to help cannabusinesses obtain much-needed banking relationships. She acknowledges not everyone agrees with marijuana legalization, but asserts the public safety aspects must be considered.
"We are going to bank $60 million this month from the cannabis industry," she wrote. "If we were not banking that money, where would it go? It would be right back out on the streets."
With that background, Seefried personally designed and implemented what she termed the "Safe Harbor Private Banking Program" as a turn-key solution for banks and credit unions looking to enter the market and not re-invent the wheel.
Challenges Galore
Over and over in the book, Seefried stresses the need for education, continuing education and ongoing due diligence. One of the biggest red flags for regulators, she explains, is the potential for money laundering — leading to the need for certification from plant to final product.
"Start with records of sales," Seefried told CU Journal when asked how credit unions should handle certification. "All businesses, dispensaries or growers or others, have to report sales to the state every month. I compare those reports to their internal reports, looking for it to be the same amount. It is impossible for them to put an extra $20,000 or $50,000 in their account as that would be a clear indication that something is wrong."
Criminals have been laundering money for decades, Seefried noted, so vigilance is a must.
"If they wanted to launder money and you were not watching the sales, the money could be laundered," she said. "If someone came in with $3 million and wanted to open an account and I did not know where that money came from, I very well might be laundering the money. I have to go back to the source of funds. If they cannot prove where the money came from, and it is connected to a marijuana business, then I won't open the account."
As the marijuana industry quickly matures, it is becoming a target for investment funds. Seefried told CUJ it is such an emerging market, investors are "dying" to put money into it.
"Hedge funds and private investors are looking to invest in the cannabis industry," she explained. "It is potentially millions of dollars."
In Year One of the Safe Harbor Private Banking Program, Seefried said she did not want to take investment money because she was so busy studying the performance of the sales dollars. "In Year Two, with businesses expanding, we started taking that money on a limited basis," she recalled. "You have to validate the investment money to ensure it is not from criminal activity. When the money goes out the door, you have to validate that it is for legitimate business reasons. I am looking for it to go to a business that is licensed or being licensed."
FinCEN Guidelines, 'Business Accounts on Steroids'
The Financial Crimes Enforcement Network (FinCEN) has issued some limited guidelines regarding FIs banking the marijuana industry. As Seefried quotes in her book, "financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity."
"Most guidelines have to do with money laundering, criminal activity and know-your-customer," she told CUJ. "It is not permission, it is guidelines. They knew the money was flowing and knew it needed to be banked because all the money would not be proven."
The due diligence process is "much more thorough" and includes working with a given state's marijuana enforcement division, Seefried continued. For example, Partner Colorado CU is required to check licenses on a monthly basis. "Which you would not do with a lawyer or a CPA. We have to know their cash flow and sales monthly. We have to know this to be able to spot red flags from unusual activity. We have to compare one client to another. The only way we could build that is to create Bank Secrecy Act experts. I describe these as 'business accounts on steroids.'"
Seefried advised CUs looking to enter the space to be prepared to have multiple and ongoing conversations with regulators and attorneys. She said it is difficult to find one lawyer who is fully versed on banking regulations, marijuana laws and general business practices, so Partner Colorado CU has hired experts in each field. "Needless to say, this can be costly, so prepare to spend money on counsel," she wrote.
'A Healthy Dose of Fear Is Essential'
Further, Seefried says if the people tasked with creating and implementing a cannabis banking program have no fear, "they are not the right people for the job."
"A healthy dose of fear is essential," she writes. "It will keep your program safe and your institution out of harm's way."
Despite months of preparation, Seefried said nothing prepared Partner Colorado CU for the "complexity" of offering banking services to the marijuana industry. As such, she recommends other credit unions prepare a trial program with a limited number of clients.
"You may think you know commercial accounts, but put that aside to learn," she wrote. "Remember, this emerging market has had an unconventional banking experience, not to mention an array of unusual legal situations."
Examinations by state and local regulators are yet another hurdle. Seefried said regulators will never "endorse or approve" a cannabis banking program; at best, they will simply allow the CU to continue to serve the industry.
'Safer' Colorado, Strained CEO
By the end of the first year of the Safe Harbor Private Banking Program, Partner Colorado CU had more than 50 clients, 140 accounts and was banking more than 50% of a $1 billion market on an annualized basis.
"Colorado was safer because of our efforts, and the volume was sufficient to sustain a long-term market presence," Seefried wrote. "We filed more than 1,900 reports that allowed for industry transparency."
More recently, Seefried told CUJ, "In hindsight I would not have done it again. At $300 million we did not have the resources to do this. I worked 20 hours a day because I had to do this on top of my regular job. Now I don't have to do that because we have people trained, but we didn't have the experience then. This program was never meant to be born in a $300 million credit union.
"With that said, it was one of the most interesting things I have ever done in my life," she continued. "I don't regret it. It has been very interesting learning about an emerging market that I don't think is going away."
