A small credit union in Michigan was recently penalized in what’s thought to be the first example of U.S. regulators publicly calling out a financial institution for compliance failures involving the cannabis industry.
Under the enforcement action, Live Life Federal Credit Union must stop opening new marijuana-related accounts, and it has to file missing suspicious activity reports. The National Credit Union Administration is also requiring the Fraser, Mich., institution to implement an automated transaction monitoring system by April 30.
Karla Haglund, the $69 million-asset credit union’s CEO, said in an interview that Live Life was one of the first financial institutions in Michigan to serve the cannabis industry. Voters in the state legalized adult use of cannabis in 2018.
“I’m going to win the war and not this battle,” Haglund said. “Somebody has to go through this. I guess it’s me.”
For banks and credit unions, the enforcement action highlights the importance of adhering to long-standing nationwide guidance on how to mitigate the risks associated with a drug that remains illegal under federal law, according to industry experts.
“I think all regulators like to signal their priorities through enforcement actions,” said John Geiringer, a lawyer at Barack Ferrazzano who specializes in anti-money-laundering issues.
“So from time to time, you will get an enforcement action that is different from the others. It gets everyone’s attention, and it focuses the mind of everyone in the industry who is thinking about engaging those types of customers to go back to the regulatory road map for how it should be done.”
In 2014, the Financial Crimes Enforcement Network issued guidance to banks and credit unions that laid out their obligations when they elect to serve the cannabis industry. The guidance states that financial institutions should verify where a marijuana business is licensed, get an understanding of the firm’s normal activity and conduct ongoing monitoring for suspicious activity.
The guidance also advises financial institutions to be on the lookout for cannabis firms that appear to be a front for money laundering, as well as for bank customers who try to disguise their involvement in the pot industry. If a bank discovers certain red flags, it is supposed to file more detailed reports with Fincen.
Haglund acknowledged that Live Life, which has 150 pot-banking clients and up until now has relied on manual compliance processes, has missed filing some suspicious activity reports and submitted others late. She said that the credit union saw growth from the cannabis industry last year despite intentionally slowing the process of accepting new marijuana clients in the spring.
“The cannabis atmosphere is very fast-paced. You have to be on your toes all the time,” she said. “It can be very draining for staff. You have to work a lot of hours, so we had slowed the program down anyway.”
It is important for financial institutions that enter the cannabis banking market to allocate sufficient resources to compliance, said Sundie Siefried, the CEO of Partner Colorado Credit Union and a pioneer in bringing cannabis businesses into the mainstream financial system.
“Even at $300 million in asset size when we started, I was first to say we were not large enough” to shoulder all the compliance costs, Siefried said in an email. “But we didn’t know what we didn’t know about the industry at that time.”
Some 684 banks and credit unions were actively banking marijuana-related businesses in December 2020, according to U.S. government data. But industry observers say that a substantially smaller number of financial institutions actually have programs for serving the pot sector, and for complying with the detailed federal guidelines.
Those banks and credit unions tend to be relatively small, though they are often significantly larger than Live Life Federal Credit Union.
The publicly available facts about Live Life suggest that its compliance problems made it an outlier among banks and credit unions that serve the pot industry, said Amanda Ostrowitz, a former bank examiner who is now a senior vice president at the software vendor Fyllo Compliance Cloud.
“The fact that this is only the first one is probably a good sign,” she said.
While the February enforcement action against Live Life is thought to be the first order to explicitly mention marijuana, at least two other financial institutions that served the industry have previously gotten in trouble in connection with their anti-money-laundering efforts.
In 2016, Millennium Bank in Des Plaines, Ill., entered into a consent order with its regulators in connection with alleged violations of the Bank Secrecy Act. American Banker
And last October, Parke Bank in Sewell, N.J., which has publicly disclosed its involvement in serving cannabis businesses, reached an agreement with regulators over alleged weaknesses in its program for combating money laundering.
“These banks aren’t getting in trouble solely for banking marijuana,” said Steve Kemmerling, chief executive of the cannabis data provider CRB Monitor. “They’re getting in trouble for doing so poorly.”
