The Green Check Cannabis Banking Dictionary: Translating Financial Lingo For Cannabis Pros
Cannabis banking is challenging enough as it is. Add all the new terminology and unfamiliar acronyms into the mix, and applying for an account can feel more like ordering a bowl of alphabet soup.
If you’re doing your best to navigate the cannabis banking landscape but find yourself unsure of all the moving pieces, this guide is for you. At Green Check, we’re all about cannabis banking, financing, and operations, so we’re here to translate the suit lingo with this handy glossary.
21 Cannabis Banking Terms To Know Before You Apply For An Account
These cannabis banking terms are ones you’re likely to hear thrown around when searching for a banking partner. Here’s what each means and why they’re important for you to understand as you look for a banking partner.
1. Automated Clearing House (ACH)
This is a system of electronic funds transfer where payments are made between financial institutions, like banks or credit unions. Common examples of ACH payments are direct deposit paychecks you send to your employees and recurring payments to vendors.
How does this apply to cannabis businesses? You may face restrictions regarding how your money moves due to the federal prohibition against cannabis. ACH payments have been the most reliable form of payment in the cannabis industry, especially because the major credit card networks refuse to support cannabis-related transactions so long as the plant remains federally illegal.
2. Anti-Money Laundering (AML) or BSA/AML Rules
AML refers to obligations banks must follow that are intended to prevent illegally-obtained money from entering the banking system disguised as legitimate income. These obligations largely come from two places: the Bank Secrecy Act of 1970 and the USA PATRIOT Act of 2001. These regulations are sometimes referred to as BSA/AML rules.
How does this apply to cannabis businesses? Because cannabis remains federally illegal, banks have to take extra steps when working with cannabis businesses to comply with AML regulations. This applies even if your business operates legally on the state level.
3. Bank Secrecy Act (BSA)
Adopted as law in 1970, the BSA empowers the U.S. Treasury Department to require banks to file reports to help identify and prevent money laundering. Under this law, banks must file reports of cash transactions exceeding $10,000 and provide suspicious activity reports (SARs) of any activity that might raise suspicions of money laundering or tax evasion.
How does this apply to cannabis businesses? Dispensaries, cultivators, and other plant-touching businesses are under heavy scrutiny due to cannabis’s illegal status under federal law and subject to considerable reporting under the Bank Secrecy Act.
4. Card Network (also known as “Payment Rails”)
Credit card networks manage the infrastructure necessary to process transactions between issuing banks and businesses. Use of these networks is required to support credit card transactions, both at the point of sale and for ecommerce transactions. Major card networks include Visa, Mastercard, and American Express.
How does this apply to cannabis businesses? Major credit card networks including Visa and Mastercard have refused to support cannabis-related transactions while the federal prohibition on cannabis remains in place. Even state-legal cannabis businesses cannot access these credit card networks as a result, limiting customer payment options in dispensaries.
5. Cashless ATMs
A cashless automated teller machine (ATM) is a method of accepting debit card payments used by a significant number of cannabis dispensaries. In a cashless ATM system, customers swipe their debit card at checkout, but the transaction registers as a “withdrawal” for a round dollar amount that covers their purchase. The customer then receives any change in cash from the dispensary. For example, if a customer’s purchase totals $76.10, the dispensary charges $80 and the customer receives $3.90 in change.
How does this apply to cannabis businesses? Cashless ATMs have been used as a workaround for cannabis dispensaries to accept debit card payments despite the restrictions posed by the card network and federal prohibition. Cashless ATMs remain a gray area for cannabis businesses, and their use may be risky if the solution in place runs afoul of Visa and Mastercard’s rules against using their networks to process cannabis transactions.
6. Cost of Goods Sold (COGS)
Cost of goods sold refers to expenses directly related to the acquisition and sale of products.
How does this apply to cannabis businesses? Under federal law, cannabis businesses are only permitted to file tax deductions for COGS, not other business expenses. (This falls under 280E — you may have heard of this tax law.)
7. Direct Cannabis-related Business
A direct cannabis-related business (CRB) is a plant-touching company, such as a cultivator, dispensary, or manufacturer. This may also be called a direct marijuana-related business, or an MRB.
Why is this important? Direct CRBs are considered higher risk than indirect CRBs — more on that later in this guide. As a result, it costs more for financial institutions to serve them.
8. Enhanced Due Diligence (EDD)
Enhanced Due Diligence is a component of Know Your Customer (KYC) and AML compliance. It involves banks subjecting certain clients — AKA cannabis clients — to a greater level of scrutiny to ensure their transactions are verifiably legitimate.
How does this apply to cannabis businesses? Financial institutions must subject cannabis businesses to additional oversight to comply with regulatory requirements. Banks must verify the transactions of cannabis businesses and report suspicious or anomalous activity to FinCEN in Suspicious Activity Reports (SARs).
9. Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA)
These two agencies act as a safety net for depositors, protecting your funds in the event your bank or financial institution fails. The Federal Deposit Insurance Corporation (FDIC) covers banks, while the National Credit Union Administration (NCUA) covers credit unions.
How does this apply to cannabis businesses? Some financial institutions are hesitant to bank cannabis clients due to federal prohibition and for fear they may lose their status with the FDIC or the NCUA. However, there are plenty of insured banks that do work with cannabis businesses — you just need to know where to find them. Green Check can help.
10. FinCEN
The Financial Crimes Enforcement Network (FinCEN) is a federal agency which acts to prevent money laundering and other illicit uses of the banking system. FinCEN carries out enforcement actions related to violations of FINRA regulations and FinCEN guidance.
How does this apply to cannabis businesses? FinCEN is an important source of information regarding the interpretation of federal law as it relates to the cannabis industry. Banks use FinCEN guidance to shape their cannabis banking programs.
11. Federal Financial Institutions Examination Council
FFIEC, which stands for the Federal Financial Institutions Examination Council, is the interagency body tasked with developing uniform banking compliance guidelines for the federal banking regulatory agencies. Their exam guides are used by financial institutions and regulators alike to evaluate the strength of bank and credit union compliance programs.
How does this apply to cannabis businesses? Thanks to federal prohibition, regulations regarding banking cannabis customers are critically important for banks to avoid running afoul of the law.
12. Indirect CRB
An indirect CRB is an ancillary cannabis business, such as a packaging and labeling company, marketing agency, or accounting firm. To be considered an indirect cannabis business, a company must bring in some portion, but not all, of its revenue from direct cannabis businesses.
Why is this important? Indirect CRBs are considered lower risk than direct CRBs, but they’re still cannabis businesses. They’re subject to higher levels of scrutiny too, but generally are considered lower risk. Each financial institution has its own rules for how much revenue an indirect CRB can bring in from a direct CRB.
13. IRS Code Section 280E
Section 280E of the federal tax code disallows businesses selling Schedule I or II substances under the Controlled Substances Act from deducting most business expenses.
How does this apply to cannabis businesses? Since cannabis remains a Schedule I substance, which means the federal government considers it a drug with no medical benefits and a high potential for abuse, legal cannabis businesses can only deduct the cost of goods sold (COGS) from their taxes. Other business expenses like payroll or accounting help cannot be deducted.
14. Know Your Customer (KYC)
KYC standards are designed to verify banks’ customers and protect against fraud and money laundering. It involves confirming your identity, determining your operations and how you earn money. This process determines if there are any red flags in your business that suggest a risk of money laundering.
How does this apply to cannabis businesses? Banks working with cannabis businesses must collect detailed KYC information to comply with AML regulatory standards.
15. Merchant Account
A merchant account is a type of bank account required to accept debit and credit card payments from customers. Merchant accounts also enable businesses to accept electronic transfers, such as a PIN debit transaction. A merchant account is not the same thing as a business checking account.
How does this apply to cannabis businesses? Historically, many cannabis businesses have struggled to open merchant accounts and the major card networks have refused to support cannabis transactions. The result has been dealing in cash or workarounds like cashless ATMs, though today there are plenty of cannabis-friendly banks willing to open merchant accounts for cannabis businesses — and you can work with Green Check to find them.
16. Money Services Business (MSB)
A money services business (MSB) is an organization that acts as a money transmitter and conducts other similar transactions. These organizations must register with the U.S. Department of the Treasury. Importantly, MSBs are not banks. They are considered non-bank financial institutions.
How does this apply to cannabis businesses? MSBs can serve essential functions for your business if you do not have access to traditional banking.
17. Office of the Comptroller of the Currency (OCC)
The OCC is the federal regulator charged with overseeing banks chartered under the National Bank Act and saving associates established under the Home Owners Loan Act of 1933.
How does this apply to cannabis businesses? The OCC is among the primary enforcers of regulations that influence how banks work with high-scrutiny industries like cannabis. The OCC’s interpretation of regulations and the guidelines it issues have major implications for cannabis businesses and their access to the banking system.
18. PIN Debit
A PIN debit transaction is a way to transfer funds from a customer’s bank account to a merchant’s bank account electronically using a debit card. A PIN debit transaction is conducted at the point of sale, making it a familiar way for customers to pay. All they need to do is use their debit card and enter their PIN to initiate the transaction.
How does this apply to cannabis businesses? Unlike cashless ATMs, PIN debit transactions allow budtenders to charge customers exact amounts. PIN debit does away with the issue of round number “withdrawals” and the need to give dispensary customers change in cash.
19. Secure and Fair Enforcement (SAFE) Banking Act
The Secure and Fair Enforcement (SAFE) Banking Act, or H.R. 1595, and its successor, Secure And Fair Enforcement Regulation Banking Act, (“SAFER Banking Act) is a recurring proposal in the U.S. Congress to provide legal protections to banks and financial institutions for working with state-licensed legal cannabis businesses. It has passed (and failed, and passed, and failed, and passed) in the House of Representatives multiple times. It’s never made it through the U.S. Senate.
How does this apply to cannabis businesses? If adopted, the SAFE Banking Act would likely give more banks the confidence to work with state-licensed cannabis businesses. It could improve access to basic banking and financing services by opening more options that are more likely to be advertised to cannabis companies.
20. Suspicious Activity Report (SAR)
SARs must be filed by banks and other financial institutions to alert FinCENwhenever they see suspicious transactions that could be connected to money laundering or terrorism.
How does this apply to cannabis businesses? Banks are required to submit SARs to FinCEN when working with state-licensed cannabis businesses because their operations are still considered illegal under federal law.
21. Track and Trace or Seed to Sale (S2S) Systems
To demonstrate their income is legitimate, cannabis businesses provide track and trace data that provides detailed information on product sources from seed to sale. This allows banks to confirm a cannabis business is operating fully within the legal framework established by the states in which they operate.
How does this apply to cannabis businesses? Many state licensed cannabis businesses are already required to use track and trace or seed to sale systems to monitor the flow of their supply chain. Providing cannabis banks with this data can support AML efforts and increase confidence in the legitimacy of the operation.
Cannabis Banking Doesn’t Have To Be Dense
Hopefully, this glossary of terms helped to shed some light on the often murky world of cannabis banking. Our goal at Green Check is to make cannabis banking sensible and easy, so you can get back to running your business.
If you’re in need of banking, let us connect you to our network of more than 140 trusted financial institutions that are looking to work with legal cannabis businesses like yours. See how else we can help your business thrive by getting started with Green Check now.
