Where There's Smoke, There's Fire: Timing Your MRB Policy With SAFE Act Legislation
The Secure and Fair Enforcement (“SAFE”) Banking Act was approved today, March 28, 2019, at Congressional Committee and will proceed to a floor vote in the House of Representatives, though a date has not yet been scheduled.
If you’re not currently discussing the future of banking marijuana related businesses (“MRB”s) for your banking institution within your risk and compliance committees, then now may be a good time to start those discussions. Citi expressed just this month that they have begun internally. Meanwhile, as of last March 2018, FinCen reported 411 credit unions and 100 banks currently providing banking services to MRBs.
The SAFE Act legislative abstract provides:
“This bill prohibits a federal banking regulator from: (1) terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate marijuana-related business; (2) prohibiting or otherwise discouraging a depository institution from offering financial services to such a business; (3) recommending, incentivizing, or encouraging a depository institution not to offer financial services to an account holder solely because the account holder is affiliated with such a business; or (4) taking any adverse or corrective supervisory action on a loan made to a person solely because the person either owns such a business or owns real estate or equipment leased or sold to such a business.”
This bill would clearly seek to instill some clarity in the current conflict between federal and state laws relating to the treatment of marijuana as a controlled substance at the federal level under the Controlled Substances Act. This would come after then Attorney General Jeff Sessions in his early action in office recalled the Obama Administration policy on prioritizing enforcement.
As states continue to legalize recreational use, and the SAFE Act makes its way through Congress, or perhaps with a change in White House administration in 2020, banking MRBs will become an inevitable reality in business banking. Those banks which are unprepared when the conflict is resolved, will be at an insurmountable disadvantage. Meanwhile, those with established business units or at least infrastructure in place will enjoy a first mover advantage. One particular bank, Partner Colorado Credit Union, has pioneered the practice of modern marijuana banking in the United States.
Some steps you can take now are:
(1) Prepare a draft policy for committee discussion detailing the means and methods by which you would accept MRB deposits and which authority you would look to for guidance. Differentiate between different participants in the industry between recreational growers, medical growers, cannabis retailers, CBD and other derivative product retailers, or those deriving income directly or indirectly from the cannabis industry.
(2) Consider sharing this draft policy with your prudential regulator and ask their opinions about the position of the regulatory authority on the issue. Ensure the policy details any exceptions you might permit as well as any exception tracking;
(3) Contemplate line of business partners who can assist in conceptualizing a new commercial customer due diligence process.
(4) Ensure due diligence sets standards for requirements relating to: officers and director identity, and any beneficial owners, required state licensure and regulatory filings, federal EIN, audited financial statements, background checks including OFAC, permissible corporate forms to which you will lend;
(5) Discuss expectations for supporting financial documents and sourcing of deposits, and/or capital requirements for use in underwriting, and/or whether existing commercial product sets will be utilized. If not, then anticipate the structure and design of new loan products;
(6) Set prohibitions, if you like, relating to access of retail products by individuals for use in capitalizing MRBs, perhaps by updating terms of consumer credit agreements or disclosures;
(7) Contemplate disbursement methodologies for any loan proceed disbursements and/or whether you might impose any hold periods or clawbacks;
(8) Examine your SARs process for any inefficiencies or irregularities as banks are current required to file SARs at least quarterly for their MRB clients;
(9) Update your SARs processes now consistent with FinCen’s 2014 guidance, clarified in 2018, and assess your BSA/AML team capacity to manage an increase in SARs filings associated with MRBs in the event the legislation does not reduce this burden.
(10) If you have no capacity, envision your ability to scale up either through new FTEs or process automation while also appreciating that the SARs filing requirements would likely be relaxed with any final legislation. Your SARs process could indicate that if you’re providing service to an MRB which, after due diligence, does not otherwise trigger the 2014 Cole Memo priorities or violate state law, you should file a “Marijuana Limited” SAR containing the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified. Financial institutions should use the term “MARIJUANA LIMITED” in the narrative section.
(11) Ensure your process accounts for SARs filings for continuing activity reports for the same activity initially reported on a “Marijuana Limited” SAR. This continuing activity report may contain the same limited content as the initial SAR, plus details about the amount of deposits, withdrawals, and transfers in the account since the last SAR. If the Cole Memo priorities are later triggered in the course of continuing activity reporting, then you would file a “Marijuana Priority” SAR. See the footnote in FinCen’s 2018 guidance for additional clarification of the 2014 guidance.
(12) Identify and budget for tools to aid in exhaustive reconciliation processes as well as dedicated teams of individuals who can assist in site reviews of clients;
(13) Prepare early compliance monitoring checklists to incorporate into your compliance management program;
(14) Familiarize yourself by way of process with state and local licensing and maintenance regulations for MRBs in your footprint ; and/or
(15) Prepare job descriptions for the roles you might anticipate being involved in this specialized business banking function.
Though you may not consider yourself ready to bank MRBs, it is never too early to prepare.