Pubdate: Thu, 07 Jan 2016
Source: Boulder Weekly (CO)
Column: Weed Between the Lines
Copyright: 2016 Boulder Weekly
Author: Sarah Haas


For a bank, analyzing the risk of onboarding a cannabis business as a 
client is complicated. The legal marijuana industry is emerging and 
comes with its share of immaturities - the lack of historical data 
makes it difficult to study the past or predict the future of the 
market. This is also what makes it so attractive. Among the fastest 
growing industries in the country, a bank that can successfully 
onboard marijuana accounts stands to prosper tomorrow from what is 
risky business today.

At the helm of the new marijuana industry are new businesses and 
business owners that, without the option to bank, operate beyond the 
traditional economic structure. They are allowed to deal in U.S. 
tender, accepting, spending and saving cash, but without a formal 
banking system many businesses struggle to document a chain of 
custody for their money, making it difficult for them to pay bills, 
taxes or attract investors and banks.

Even though the U.S. Treasury Department's Financial Crimes Network 
(FinCEN) has guidelines saying that they will no longer crack down on 
marijuana financial services, most bank boards are skeptical and wary 
of lingering liability.

Banks that do want to work with the industry are further challenged 
to find ways to onboard clients without documentation, creating a 
chicken-and-egg situation - do businesses become less risky and in so 
doing get banking services or do banking services take on marijuana 
business thus making business in cannabis less risky?

Even if banks are willing to take on traditional risks, they are not 
likely comfortable with the additional regulatory risks that come 
with an industry that is still operating illegally in the eyes of the 
federal government. While banking regulators do not prohibit banking 
with cannabis businesses, they are saying to do it cautiously.

In 2013, when then Deputy Attorney General James M. Cole issued a 
memo establishing the priorities for enforcement of marijuana as an 
illegal substance, banking emerged as a key institution to monitoring 
and preventing illegal activity.

FinCEN thus published guidelines for banking with cannabis. In order 
to guard against the perceived or actual improprieties of the 
industry, regulators added layers of diligence to the process. In 
addition to checks already in place, like Currency Transaction 
Reports for large cash deposits and Suspicious Activity Reports for 
deposits with a suspected association with illegal activity, the bank 
must issue Marijuana Limited Reports and continuously track each 
cannabis client's activity.

With or without that federal guidance, banks that do business on a 
national level are so far unwilling to take the risk of engaging in 
interstate commerce with federally illegal marijuana businesses which 
is opening the door for smaller state banks where marijuana is 
legalized to get into the space. The risks and expenses that they 
take on today could become their competitive advantage tomorrow.

To do it right, the small banks and the cannabis retailers must 
figure out how to establish a solid chain of custody for cash - to 
transparently document that the chicken and the egg, in this case 
responsible business cash management and banking, coexist.

Jane, a Denver-based company, thinks that it has found a way to 
bridge the gap that improves business for the retailer, reduces their 
risk and establishes the chain of custody that banks and regulators need.

The solution, according to Jane, lies in a full-service, self-service 
kiosk that runs like a self-checkout unit you might find in a grocery 
store, but with the sophisticated cash management of a banking ATM. 
With the technology, a customer could pre-order on an app or order 
their marijuana in store on the kiosk, pay for their order by 
inserting cash into the machine and pick up their product from a 
budtender. Meanwhile, the kiosk documents each transaction to a 
unique order number and keeps the cash secure until it undergoes its 
only change of hands from the retailer to the bank. Once at the bank, 
the deposit is accompanied with a reconciliation report, connecting 
each penny to a transaction in a way that is comprehensible to the bank.

Federal banking regulations, the banking industry and the marijuana 
industry are stuck between the immaturities of a nascent industry and 
confronting similarly feeble legal and regulatory environments. By 
putting processes in place that a banker can embrace, entrepreneurial 
companies like Jane hope to mitigate the risk for both sides and help 
steward in a less risky era of business in cannabis.
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MAP posted-by: Jay Bergstrom