Banks operating in the legal marijuana business entered 2018 full of hope.
California became the country’s largest market, bringing the number of states with legal recreational marijuana to eight with projected revenue to be in the billions. Twelve more states have initiatives this year to determine whether they too will offer legal marijuana sales.
Investors are lining up, and financial institutions are entering this lucrative market. Sure, there is risk, and to help manage that risk, the banking industry looked to the Cole memorandum issued by the Department of Justice under President Obama, along with Financial Crimes Enforcement Network regulations, as a framework to help stay compliant with state laws and to avoid running afoul of federal bank-reporting guidelines.
Attorney General Jeff Sessions’ decision to rescind the Cole memo is now creating a period of greater uncertainty for marijuana-related industries, and it threatens to hurt states that legalized marijuana in anticipation of billions of dollars in tax revenues. Lawmakers are trying to make sense of the situation, and bankers in the marijuana banking business are feeling even more vulnerable in the current political climate.
While the business still looks promising, it is now a little more uncertain.
Media headlines following the Sessions announcement highlighted concern, frustration and more than a little confusion. Will this emerging industry suddenly disappear?
I can confidently report that no, the sky isn’t falling and I don’t see the cannabis business slowing down anytime soon. But that shouldn’t mean business as usual. Now more than ever, banks need to step up and take better control of their financial reporting and have strong monitoring systems in place.
Financial institutions that provide banking services to marijuana-related businesses, known in the industry as MRBs, or those planning to enter the market should not overreact because the Cole memo was rescinded. The regulatory framework remains in place, and politicians from both sides of the aisle still support the status quo. Legal MRBs in California, Washington, Oregon, Colorado and many other states are up and running, business is brisk, and no one is talking about closing shop.
There are concrete steps banks can take to manage risk and ensure best practices for current compliance and future growth. First, banks should make sure they have a robust technology platform in place to automate tracking and monitoring required across the entire transaction process — including real-time reconciliation of the MRB point-of-sale, state-mandated inventory and MRB accounting systems.
As with every new industry, there are players doing things by the book, and those doing as little as possible just to get by. In today’s ambiguous and uncertain market, it is better to be safe than sorry.
Banks that have taken calculated steps to enter a new, highly regulated market need to do everything they can to protect themselves and their customers. Most of what I have seen is a mix of manual and automated reporting processes — just enough to pass an audit. If banks truly want to reduce risk, which is needed now more than ever, there are several key capabilities to consider implementing in monitoring and reporting processes: end-to-end, near-real-time cash transaction tracking; cross-referencing data to multiple data sources; and 100% transparency and visibility.
Financial institutions should also manage day-to-day risk and educate their customers about why best practices are so important. Further, they can conduct a risk assessment for their institution in order to examine not only existing risk, but what lies ahead.
While the current environment remains uncertain for bankers operating in the legal marijuana trade, there is cause for hope and optimism. There are real opportunities for those willing to assume a degree of risk but also invest in appropriate monitoring.
When the risk inherent in providing banking services to MRBs is adequately understood and minimized, the financial returns can be well worth the effort.