Assessing the fallout from one credit union's pot-banking exit
In the wake of an Alaska credit union's high-profile exit from the pot banking space, some observers believe it’s time for the federal government to take a page from the National Credit Union Administration and help resolve the conflict between federal law and the growing number of states that have legalized marijuana.
“NCUA recently issued its guidance [saying credit unions in states where marijuana is legal will not be sanctioned], but something needs to get financial institutions over the fear that cannabis is illegal, because it is causing some to say, ‘We don’t want to go there,’ ” said Shelly Edgerton, senior counsel for the Detroit-based firm of Dykema Gossett. She added that because the drug is still federally illegal there is “still a lot of hesitation” from banks and credit unions about serving cannabis-related businesses.
Edgerton’s words came on the heels of a decision by Anchorage-based Credit Union 1 to exit the pot banking space less than a year after it entered the arena. The program had launched with much fanfare in December 2018, with the credit union saying it needed to address a public safety issue of cash-only businesses as marijuana sales skyrocketed. Yet just seven months later, CU1 shuttered its program.
James Wileman, president and CEO of the $1 billion-asset institution, told Credit Union Journal there were two reasons behind the move. For starters, “critical” liability insurance coverage no longer was available to the credit union, and without this coverage, its MRB program could not continue beyond a pilot phase.
“Additionally, during the past several months of pilot testing activity, our evaluation showed the program was not performing as expected within our organizational model,” Wileman said.
The credit union was serving four cannabusinesses at the time the program was closed down.
Asked if the insurance issue was something CU1 had looked into before launch, Wileman replied, “Our insurance coverage was thoroughly researched prior to the start of our pilot program. However, when this particular policy came up for renewal, we learned that it could no longer be bid due to our involvement with MRBs.”
‘There are insurance options out there’
Two attorneys who spoke to Credit Union Journal were skeptical of Wileman’s claims regarding insurance.
Edgerton said no financial institutions in Michigan have had problems getting the insurance coverage necessary to serve MRBs, and Vince Sliwosky, attorney with the Seattle-based firm of Harris Bricken, said he did not know why insurance coverage would not be available.
“We have had clients in this space for several years and they have not had problems,” Sliwosky said. “I am wondering if that stated reason is not correct. Perhaps the program simply was not profitable. I do not think it is indicative of any new trend that credit unions won’t be able to serve the industry due to insurance problems.”
CU1’s Wileman said the issue was “specific to the insurance options available” to Credit Union 1 through its carrier.
Katrina Skinner, president of Safe Harbor Services, a credit union service organization wholly owned by the $417 million-asset Partner Colorado Credit Union, Arvada, Colo., likewise questioned the insurance angle, noting Safe Harbor has worked with CUNA Mutual Group, which has helped the CUSO obtain insurance solutions for the credit unions it works with.
“I know there are insurance options out there,” Skinner said. “I only know what I have read, so I do not know exactly which liability insurance was the issue – there are many types.”
Skinner suggested CU1 may have ended the program simply because of the costs involved.
“If they only had four pilot clients, the compliance burden indeed would be a lot of work for that few clients,” she said. “You have increased exams, you have to meet FinCEN guidelines, BSA, and all of these compliance steps are difficult to automate.”
On top of the compliance issues, Alaska has geographical challenges, Skinner continued. She noted getting an armored car to the credit union can be difficult, and then getting the cash to the Fed is a challenge.
“Everything costs more in Alaska,” Skinner said.
Planning a comeback?
Michael Bell, an attorney with Howard & Howard, noted that along with CU1’s exit, “I’m also seeing many more credit unions choose to get into the space,” Bell said. “I don’t expect this to change in the near future. I believe there is a legitimate and legal pathway to bank this industry but each credit union must make an individual choice – just as in all other areas of their business.”
Edgerton said that while the amount of due diligence necessary for pot banking “is almost overkill,” CU1’s decision isn’t likely to have wider implications or spell the start of a trend.
“I don’t think it is a big deal for the rest of credit unions, because other people have gotten in and gotten out of cannabis banking and that just has to do with costs,” she said.
And Wileman isn’t ruling out restarting the program at a later date. He said Credit Union 1 would consider getting back into marijuana banking “should the federal perspective on MRBs change in the future and allow us to reduce our insurance risk.”
“Meanwhile, we always look forward to serving MRB employees with their personal financial needs,” he said.