Do you have an opinion on how to address a board’s concern that cannabis is not legal at the federal level?
That’s a really good question. Start by letting them know that there are banks and credit unions that are operating cannabis banking programs and letting them know that there are success stories out there. You should let them know that SAFE is getting close to passing the finish line. If it were this illegal activity then you would not have Chambers of Congress all in varying times saying it’s going to come over. I still maintain that it’s not a matter of if but when.
I think the other thing to consider is the regulators. I know of no regulator — at least of credit unions and perhaps even of banks — who have shut down an institution that is legally going through the appropriate KYC protocols, that are following FinCEN guidelines and all the other tenets of a good BSA program. I am not aware of any legitimate business that has been shut down because of the regulatory piece.
I know the Green Check team has success stories around cannabis businesses and programs, including the jobs they are providing. I know for one, when I went to my first cannabis dispensary outside of Napa Valley about two years ago, I was blown away by the quality and the professionalism. I don’t think I’ve ever seen a cleaner spa or health facility. This facility exceeded any expectations that one could have ever imagined. It was filled with wonderful professionals who realized they were fulfilling an important need while creating jobs.
I would also speak to the community benefits. What a wonderful emerging market for us to have for job creation, tax creation and things of that nature. Let them know the stories, and don’t be shy. And again, 208 credit unions are engaged in this space now.
I’ll add to that that a lot of our credit unions take the stance that they’re getting into the industry to support the community, particularly around safety issues. If you look to Washington and you see the stories of robberies and shootings, the fact credit unions can come in and help that situation and help get that cash into the financial system where it can be safe is certainly one stance that our credit unions have taken.
Absolutely. You mention Washington, and I’ve heard stories in other places such as Colorado where families have been burglarized because these folks know that there’s no offramp to bring that cash into the system. They need a secure system with a depository institution. It’s sad that some of these folks are having to take these risks.
Does the NCUA require or recommend a legal review of a cannabis banking program?
I wouldn’t call it quite a legal review. I would think that you’re going to do your appropriate due diligence as you would with any vendors and any of your programs, and you can sit down with your examiner and walk them through your risk mitigation tools, how you’re handling KYC, how you’re handling your BSA, then that’s something that an institution wants to do. If an institution wants to do a legal review out of an abundance of caution, okay, but I’m not aware of everyone going out and doing a full blown legal review. Again, you need to share your plan, and I wouldn’t implement it without letting your examiner know. It also depends on the credit union. I’m not saying don’t do the legal review, but I haven’t seen it as a prerequisite.
I would say perhaps if you are a new credit union wanting to explore that, or anything else that you can do to marshal your resources, then it should be considered. The one thing I really just want to emphasize that this is not is for the faint of heart. Make sure that you have the compliance experts for those folks. Make sure that you know the whole ecosystem of everything from the crop to the whole point where it goes to the market. Are you really following the industry? Are you doing the appropriate due diligence to the tracking and tracing and things of that nature. So provided that you’re going to dedicate those resources there, I think that’s going to be important. My main thing is to do it, but don’t just do it haphazardly thinking it’s going to be a new way of chasing yield or anything like that.
We have a follow-up question that ties into something you just mentioned about speaking with your examiners. When you are building a cannabis banking program, when is the right point to have that conversation with NCUA?
I wish I could give the response that it should be done on day one, but as with most things, it’s going to depend on the relationship the credit union already has with their examiner and where they are in terms of the maturity of the credit union.
I would say that some credit unions may be well-versed to do this immediately because they may be large or they may have more complex structures. They may already have a strong compliance team. Whereas you may have a smaller institution where it may take time for them to demonstrate their willingness and ability to take on a new product line. So, I’m going to say that’s going to vary.
The main thing that I’m going to tell examiners is that I want us to be more collaborative. I want us to have opportunities to have these discussions rather than the examiner show up to do that exam a year or two years from now and say, “wait a minute you have been in the cannabis business?” I would say the moment you have at least bandied about the idea and perhaps have gotten the buy-in from your board and senior leaders, then it’s time to start socializing this idea. Credit examiners by nature tend to be a little risk-averse, and I’m telling them to mitigate risk and not avoid risk so it has to be this happy medium. Okay, you’ve identified your risk and how you’re going to mitigate the risks in today’s environment. So, sooner the better, and I have to make sure you all know that when I’m asking you to do that cursory conversation that it’s not teeter tottering on the verge of micromanaging. We certainly don’t want to micromanage the institution. We want to leave those decisions up to you in terms of your product line and things of that nature.
We’re going to make sure that whatever your actions are is not only keeping the overall credit union system safe and sound, but also that is protecting our insurance fund. We at NCUA serve as both the regulator and also the insurer. We insure deposits for up to $250,000 per account. When you look at our safety and soundness mission as regulators, a lot of that is contingent on making sure we’re protecting our Insurance Fund. So again, talk to your examiner and don’t perceive what I’m saying as micromanagement as that couldn’t be further from the truth.
Can you tell us the inside scoop on the SAFE Banking Act?
I wish I had an inside scoop. Your information is probably just as au courant as mine. Just as we get to the finishing line, it just doesn’t pass both Chambers. But again, I think there is a modicum of hope that it will get passed sooner rather than later. I think that if there’s ever been anything that could garner bipartisan support it is certainly the SAFE Banking Act. I thought when it was attached to the National Defense Authorization Bill that it would have carried it across the finish line, but unfortunately, it didn’t. But let’s all continue to tell the story. Let your congressional delegations know your thoughts, and give them your voice. Please let them know that we need this over the finish line. When I hear stories of people not getting loans because they work in this business that is legal in many states — for them not to get loans closed because that particular institution had a prohibition-era mindset— I think that’s not the way to go if we want to rebuild our economy.
Does NCUA believe that SAFE Banking or other changes in Washington would obviate the need for ongoing SARs?
It is NCUA’s understanding that FinCEN would issue clarifying guidance to banks and credit unions between the time the SAFE Banking Act is passed and implemented. Such guidance may eliminate the need for banks and credit unions to file ongoing marijuana-related SARs as described in FinCEN Guidance 2014-G001; however, all other suspicious activity monitoring and reporting would likely continue.
Do NCUA examiners have a standard guide for reviewing cannabis programs?
There’s not a standard guide, other than adhering to the tenets and best practices of the Bank Secrecy Act and again looking at the appropriate time to file the SARs and CTRs. That’s something I’m hoping the cannabis working group can provide, but for now we’re treating this as we would with any product and tool. Making it as mainstream as we can but recognizing that it does run into impediments just given the fact that at the federal level it hasn’t been given its approval yet. There’s not a separate guideline, but we do have subject matter experts within the cannabis working group and they can field questions as they arise. That is a great idea going forward.
We could probably help you with that (chuckle).
Yes, I think you can.
Are there any differences to consider between State Chartered and Federally Chartered Credit Unions around cannabis banking?
That’s a really good question. I would say the State Chartered are the ones that I would say are doing most of the work in the Cannabis space, because they’re state-chartered, it’s legal there in the respective states where they’re operating. And it tends to give them a little bit more empowerment. I think they feel a little bit more at ease about banking this product. At federal credit unions that have engaged, they have followed the letter of the law. And again it’s all riding on the fact we are not going to shut you down if you’re following all the BSA requirements that we’re asking of you. The state charters I think we’re among the first to pursue this. At the end of the day where there’s a state or federal chartered credit union, I just want these tools to be available so folks can have access to affordable financial services. I talked about the hoards of cash, but I didn’t mention the fact that many folks are unable to get loans for their businesses serving cannabis, so they’re having to go to what would be the equivalent of payday lenders. So that’s one thing we want to address.
Do you have any position at the NCUA about whether or not Credit Unions should lend to the cannabis industry?
Again, that is something where when doing it they are following their risk tolerance and all the other protocols, and doing the due diligence and things of that nature. So, if they’re going to lend in that space, what are the mitigating factors that they’re going to need to implement?
If we are banking a cannabis business already and they open an additional location outside our field of membership (FOM), are we still able to bank them?
Once a member has qualified for membership, they can remain a member regardless if they move outside of the FOM; the same stipulation applies to a business member.
Can you speak to what you’re seeing with banking for Indigenous or Native American cannabis?
I would say the same trend holds true with our Indigenous communities as for our other communities. I think there is a need there. I have not seen more requests come from tribal lands. In fact, I’m very delighted that you asked the question. I just spoke to a group of Indigenous Credit Unions the other day where I was encouraging them to still create more credit unions, to create more opportunities to serve tribal and rural communities. In my remarks, I did talk about embracing cannabis and making sure that they could really understand what it involves.
I tell them don’t do it because you’re chasing a fad, and I tell all of you, do it because you have the compliance expertise in place and you’re willing to marshal resources to make sure it’s done right. It’s not something you just add on as a new line of business without really being strategic and pragmatic about how you’re going to bring it to fruition. You must be willing to make that necessary investment and be willing to get the support of the board.
The tribal communities understand that this industry is important and recognize that this could be another income stream in states where it is legal.
Question for Peter Su — what are your opinions on the validation of the Virginia cannabis banking program and the market potentials in the coming year?
The data supports that whenever you see a medical program go recreational, it’s gotta be like a 4x or 5x increase. For the credit unions on the call today, now is the perfect opportunity to start a program, get some sort of a market share of clients that will go from medical to recreational and the business has the potential to grow rapidly.
I’ve heard that card services providers are trying to close the cashless ATM loophole. How do you think that will impact the recreational space, and do you think that FedNow or RTP will be the solution to accessible payment options?
I’ll let Peter take the bulk of this one. I just want to say that this is on my radar. I do know that both Visa and Mastercard are looking at this, but I’ve not seen anything really emphatic about it. If I had to speculate, and again I don’t speak for Mastercard or Visa, but I will say that as with most of the people wanting to deal with the issue, the roadblock probably not wanting to get ahead of the SAFE Banking Act or anything that may be emanating from Congress. I think once we get that accomplished, and again I think it’s not an if but a when, but that’s when you’ll probably see probably a little bit more demonstrable action from where I’m sitting.
I agree with Rodney. I actually think that this is a widely misunderstood topic and maybe over talked about. So, first of all, what the card services providers are really discussing is miscoding. Keep in mind, the memo in question didn’t actually mention cannabis or anything like that. It just so happens it is a widely used method within the cannabis industry. What they are really talking about is miscoding transactions, which I think we all know you shouldn’t do. My understanding of the memos and following discussions is really that the issue is around miscoding and not the fact there is a cashless ATM there.
Can you offer any advice on offering debit cards to cannabis businesses? When we looked into it the answer we got was a definite “no-go”.
NCUA does not have additional guidance on the issuance or use of debit cards.
I can tell you it depends on the provider, at least what we’ve come across. VISA has an operating rule that states you cannot use their networks for the purchase of illegal products, which marijuana is at the Federal level. However, MasterCard’s rules are very particular that cannabis businesses cannot have a card at all, even if that cannabis business is using it for legitimate office expenses or that sort of thing. Depends on your provider.
My experience was that we were able to provide cards to a business. And we took the extra step and asked them to provide a statement saying that this card will only be used for XYZ such as office/travel expenses. In both my cases, we took the extra step of opening a separate account. So this account is exclusively for this card and for these expenses. And it should be obvious if they’ve done something outside of this limitation.
Can you speak to recommendations for financial institutions that are dealing with the Federal Reserve and maybe some resistance there to bringing in cannabis cash?
I spoke with a group from the credit union cannabis ecosystem, and there’s been some discussion around my doing some kind of round table with the Federal Reserve Bank of San Francisco as the potential host. Years ago, there was a letter that they sent out regarding cannabis, and it was pretty generic but it shows that there was at least some willingness to broach the subject. So that’s something on the horizon. But in a lot of recent discussions with the Federal Reserve, I’m afraid that cannabis did not really make its way on the agenda. It was more cybersecurity, what are we seeing with geopolitical tensions, use of a faster expedited payment system and things of that nature.
Back to the question, something that is on my radar is perhaps seeing how we can meld that with the Federal Reserve Bank in San Francisco since they are the ones that did take an approach with this many years ago.
Back when I started a program, I had the unique distinction of being a federally chartered and converting to a state charter. So, I actually had to sit down with both sets of regulators, the New York DFS and the Feds. Whereas DFS was very open (gave us comments, read our program, gave us feedback), the Feds won’t say no…but they won’t say yes. The unfortunate thing, that it seems like Rodney is touching on, is that if you are looking for a very specific set guidelines, then you aren’t going to get that.
Right. We don’t do that at all, and it’s not just cannabis. You can name almost any business and people are going to say, “are you going to tell me yes or no?” and we say, “please put your best effort forward to show you understand the product, mitigate the risks that may be inherent in that new product, and then we will work with you to ensure it doesn’t prove injurious to the health and safety of our system or our insurance fund.” I know that’s not definitive enough, but again, it’s a fine line between guiding you and micromanaging you.
California has created a situation where the legacy markets have been able to continue to flourish because of the high taxation. Are we starting to see other states realizing their missteps in taxation?
I would say yes. As an example in New York state, we have the benefit of coming in later — ten plus years after California. We’ve seen that market play out. Our regulators, whom I’ve had discussions with, said exactly that. We have already seen the mistakes so we can avoid them. We might make some new ones, but we won’t make the same old ones.
Understand though, no one has done it right per se just yet. Even in New York where we are saying let’s try this strategy, we are just trying it. We don’t know if it’s going to work yet.
Can you offer some insight on how the credit union can compare rates with other institutions in their state to make sure that they’re competitive”?
Yeah that’s tough. Mainly because a lot of programs are under the radar. I would say your best bet is to go through the local centers of influence, the accountants, attorneys, etc. Especially if you know that they have a cannabis practice. They’ll have the types of clients that are banking somewhere, and they’ll know the honest truth. Because if you ask the cannabis business, of course they will low ball you.
This question is topical. We just heard that OCC is going to start collecting information from institutions around cannabis banking. Does NCUA have any plans to start collecting information from the credit union?”
Not at this juncture, but I did hear about the OCC doing that. It has not been something that I’m planning to do at this stage. I will of course touch base with my fellow board members, as you know we are governed by a 3 member board and we have a senior staff. But that is not on my list now. We are getting a lot of information that we have gotten about the cannabis businesses from the call reports and things like that, but have not seen a need for that as of yet. So not to say that it’s not going to be done, but it’s not something I’m planning now. Do we know what exactly they are collecting Stacy?
If you look at the forms, they’re collecting the same information that they collect on businesses like money service bureaus, casinos. But they’ve added marijuana related businesses as a specific class of information.
You know what, it’s not on the radar as of yet and again, my regulatory philosophy I want things to be effective but not excessive. And I need to know what effect that is going to have on credit unions. I know it may sound like a simple thing to add to a report, but it’s still another data entry point that someone is going to have to pay careful attention to, in addition to a lot of the other things that we charge them with around consumer protection. And a number of other things I need to see if we are able to do that. How does the data help us keep the credit union safe? What does it do to really move the ball forward when it comes to these issues? So I would need to consider it to see what would be the efficacy of it at this juncture. Also, I don’t want it to have a chilling effect.
Closing Remarks from Chairman Rodney Hood
I want to just thank Stacy and Peter once again for giving me the opportunity to let our credit unions and all the other folks in the cannabis ecosystem know that there is a regulator that wants to pave the way for you all to serve this emerging market. I want you to know that we may not have all the answers today, but we are rolling up our sleeves doing the appropriate research and trying to do all that it’s going to take to help these individuals – the businesses, the credit unions and all the folks to work together to really provide broad financial inclusion. That means having an opportunity to bring cash into our economy legally. It means providing affordable financing opportunities where folks can get affordable loans, and all the tools and other things that it takes to operate cannabis businesses. This is so that they would not have to rely on predatory types of lenders. I think it also means continuing just to do events similar to what I’ll be doing next week, where I’ll be meeting with the state regulators. I think they’re going to be almost the same number of folks from the state regulatory regime, about 100 folks. We’re going to roll up our sleeves next week and really take a deeper dive. In fact, some of the questions that have been raised today, I will raise them again, as I am at the podium next week. I think it should generate a lot of robust discussion. Do know that I want to be a part of this activity and want to empower you all for success.
Thank you and Green Check for being the thought leaders. You’re doing it very responsibly, you’re doing it very pragmatically, and you are using data to tell your story which is very compelling. I just applaud you for the expertise and professionalism and decorum that you bring to this very timely topic.