Erica Torres
As more states have legalized and decriminalized marijuana use, medical marijuana dispensaries and related entities have displayed a growing need for financial services. This sector may hold high growth potential, but what makes this issue particularly complicated is that marijuana is still illegal at the federal level, and therefore, financial institutions have conflicting state and federal laws to consider. Financial institutions could leverage significant opportunities by working with entities in this sector, but only after assessing their own appetite for risk and what they need to comply with Federal guidance.
Opportunity Outlook
Given the changing sentiment in legislation and the sheer number of states with laws on the books legalizing medical use of marijuana, it is believed that there is great growth potential in this industry. A 2013 research report produced by ArcView Market Research valued the nationwide market at $1.53billion, predicting that in the next five years the industry will be worth $10.2 billion. Currently, there is low competition among financial institutions to provide financial services to the medical marijuana dispensaries and related entities. Additionally, an even smaller fraction of financial institutions are open to doing business with the growers, suppliers, physicians, real estate businesses and the transportation and logistics entities that work within the industry. As a result, some financial institutions maybe considering the potential to derive great benefit without encountering much competition.
Regulatory Environment And Industry Guidance
When determining whether to provide services to entities in the medical marijuana industry, financial institutions should be aware of the complex framework of rules and regulations that currently exists. Legislation at both the federal and state level, as well as guidance provided by government agencies and key officials, has contributed to this complexity. Financial institutions can become better-informed and address any legal liability concerns by researching the Controlled Substances Act, U.S. Department of Justice Cole Memo, additional guidance from FinCEN and review the official position of the American Bankers Association.
Expanded Steps For Due Diligence
The Departments of Justice and Transportation emphasized how important it is for financial institutions to conduct the proper due diligence on entities involved with this substance before working with them. The guidance advised that financial institutions keep their particular business objectives in mind. Not only do financial institutions need to do greater due diligence for direct relationships with medical marijuana dispensaries, the requirement around affiliated entities adds to the processes.
In an effort to discern connections with medical marijuana dispensaries and related entities, enhanced due diligence must be performed.
Step 1: Perform a risk assessment.Financial institutions should perform a comprehensive assessment of the risks associated with allowing a medical marijuana dispensary or related entity to establish or maintain a business relationship with the institution. For customers who are involved with medical marijuana, this would involve potential legal implications and the need to file SARs on all activity, including cash.
Step 2: Document customer acceptance policy.Institutions should be documenting their decision to engage (or not to engage) in business with medical marijuana dispensaries or related entities in their policies/procedures and BSA/AML risk assessment. These guidelines should be clearly written and provide specific criteria. If the financial institution decides not to engage with the business entity, the process for formally denying the relationship should be documented as well. As a matter of business best practices, the financial institution should conduct a reference check using independent, third-party resources to ensure that the individual or entity is not misrepresenting itself.
Step 3: Establish new relationships. When starting a business relationship, financial institutions should be able to determine whether they are extending a loan or opening an account for a dispensary or related entity. Lenders must establish a new questionnaire for business banking customers – or expand on one that already exists – to determine if they are opening an account for these types of entities. Then, they must be able to properly evaluate the associated risks and assign appropriate customer risk rate.
Step 4: Continued monitoring.After the establishment of the relationship, financial institutions need to document processes to continue to evaluate the relationships with these entities. Institutions should conduct ongoing scans of their customer databases to detect certain words and known/registered entities. Additionally, they should periodically update the customer profile to allow for identification of any anomalies or red flags evidenced in the accounts, risk ratings and ongoing SAR filings.
Working with medical marijuana and related entities could present significant opportunities for financial institutions, but great consideration should be given to the institution’s risk appetite and the additional resources required to comply with recent federal guidance. The financial institution increases its risk exposure and could strain already stretched resources to comply with guidance. To properly determine whether your institution will work with medical marijuana entities, you must understand the existing regulations, when this framework obligates you to take action, and when federal law enforcement is likely to become involved.
