No clear path forward for credit unions and pot banking

Sen. Mike Crapo (R-Idaho) may have thrown some credit unions 2020 plans in disarray following his announcement in December opposing House-backed legislation that would help clear the way for financial institutions to bank the legal marijuana industry.

Pot banking has been a growth area and differentiator for credit unions in recent years. While some in the for-profit banking world have been hesitant to move into that space while the drug is still illegal at the federal level, credit unions in states that have legalized it for medical or recreational purposes have seen it as an opportunity to stay competitive and corner a particular market before additional competition moves in.

Last month, Crapo – who chairs the Senate Banking Committee – announced his opposition to the SAFE Banking Act, citing concerns around public safety and money laundering. His opposition and the lack of a clear path forward on the matter could slow down the number of credit unions entering the space. Credit union and bank trade groups have both spoken out in favor of moving the SAFE Act forward.

"For those who have been actively considering getting into the traditional cannabis space, I think it puts a chilling effect on those banks and credit unions,” said Joshua Horn, co-chair of cannabis law practice at Fox Rothschild.

The SAFE Banking Act would have enabled protections to financial institutions working with state-licensed cannabis businesses while providing guidance on how to serve the cannabis industry. Such protections include prohibiting federal regulators from penalizing a financial institution that accepts deposits from a licensed cannabis business.

Legal marijuana sales in the U.S. are expected to soon reach $23 billion, according to data from New Frontier, while Grand View Research forecasts that the global pot market could hit nearly $145 billion by the end of 2025. Not surprisingly, credit unions want a piece of that.

One reason credit unions have been interested in banking cannabis businesses is the possibility for a boost to membership as the cannabis market continues to grow. Not only are there opportunities for new business members – for basic banking services as well as lending relationships – but also the possibility of new individual members.

GFA Federal Credit Union was the first financial institution in Massachusetts to get into pot banking, entering the field in part due to public safety concerns surrounding what was at the time a cash-based marijuana industry in the commonwealth.

President and CEO Tina Sbrega said GFA isn’t changing its plans but suggested Crapo has muddied the waters at a time when most in the industry were expecting the matter to be cleared up soon.

“Obviously the passage of the SAFE Banking Act was something that we were looking forward to because it takes the gray away, but nonetheless it’s not going to change our course of action because we do believe that they’re licensed, legitimate businesses that need access to banking systems and solutions,” said Sbrega.

Banks and credit unions that do open their doors to cannabusinesses face additional oversight from state and federal regulators, along with potential reputational risks. And while many credit unions have found success serving the marijuana industry, it’s not for everyone.

Last fall, Alaska-based Credit Union 1 shuttered its pot banking program just seven months after a high-profile launch, citing concerns about liability insurance and poor performance. While few have suggested Crapo’s stance on the matter will deter anyone from launching a pot banking program, it could further slow the pace of new entrants.

For those that do proceed, thorough due diligence is a must, advised consultants. CUs serving pot shops must ensure they’re banking a legal business, which means asking for state licensure and tax returns, along with conducting on-site visits, noted Alma Angotti, managing director of Navigant Consulting's global investigations and compliance practice.

“This isn’t for the faint of heart,” Rachel Pross, chief risk officer for Salem, Ore.-based Maps Credit Union, said in an email. “The compliance burden is real and shortcuts aren’t an option.” Maps has filed roughly 13,500 suspicious activity reports in the past two years for its 500 cannabis clients, Pross said in congressional testimony last year, one of multiple visits to the Hill in 2019 on this topic.

Maps, GFA and other credit unions have built their pot banking programs around the current legal and regulatory structures, but leaders of both are aware that any landmark changes could have a sizable impact on how they conduct that business. Both Pross and Sbrega suggested they aren’t shifting gears yet.

And Fox Rothschild’s Horn suggested there could be a light at the end of the tunnel. It’s not unlikely, he said, that there’s another attempt to pass federal marijuana legislation in the near future.

“I think there will be another try in 2020 and I think you're going to see a bigger try if there's some recomposition of the Senate because the House certainly supports that law,” Horn said. “If you see changes in the composition of the Senate, there may be greater traction."