The Partnering of Two Highly Regulated Industries

At first blush you might think that a financial institution and a cannabis business would be on opposite ends of any spectrum.  On one side a risk adverse, fiscally conservative and traditional business model and on the other an industry with a reputation of being rule breakers and party goers, in a newly emerging and still technically (federally) illegal industry.

But let’s look at this perception from a different angle.

Both of these industries are highly regulated.  Both must comply with the rules placed upon them by regulators, and they are both scrutinized and audited regularly.  Both deal with the security and dual control of their inventory, and making sure their customers are properly identified and of legal capacity to conduct business.  And, in most cases, both are small businesses within their communities.

Moreover, both industries are forced to navigate a near-constant trend of regulatory change, making the act of complying with applicable regulations a moving target. Like financial institutions, many cannabis businesses cite regulatory compliance as one of the largest (and most expensive) challenges they face in their day-to-day operations.

Lots of common ground.

Now let’s walk through some of the things that need to happen when these two sides meet and begin to work together.

When a cannabis business is created they have a tremendous amount of work to do with the state entity that regulates their industry.  Applications, hundreds of pages thick, need to be completed, financials prepared, background checks done, lawyers involved.. it’s quite the process and not unlike the approval a deNovo bank would need to go through.

At the beginning of the process, a cannabis business may need a place to park investor funds.  At this point there is no cannabis product involved, just the formation of a business, so a simple account, likely an interest bearing money market or share account would do the trick.

Once the cannabis business is approved and ready to move forward, their needs shift a bit and so does the process at the financial institution.

An active cannabis business will need an operating account.  One that has the same features and services that any other small business would need.  In particular, online banking with ACH and wire functionality, EFTPS, possibly a sweep account, and even positive pay.  There is payroll to be completed, vendors to pay, taxes to pay and even capital needs.  Yes, a cannabis business needs financing too.  The image of them rolling in cash is just that, an image.  Think about it, if the local hardware store could only accept cash, they’d look like that too, but that doesn’t mean they wouldn’t need a line of credit to get them through the ebbs and flows of running a small business, or a larger capital loan to expand the store.

That relationship takes a bit more work at the financial institution.  At this point in order to comply with banking regulations, the financial institution has enhanced due diligence to do, to make sure that the cannabis business they are about to bring on the books is a legitimate, state legal business.  That means sharing licensing information, financial information, host agreements, and other internal documents from the cannabis business to the financial institution.  If they’re going to take the risk of banking a federally illegal operation, the financial institution needs to make sure everyone is playing by the rules put in place by the state, and under the FinCEN guidance.  Once the account is established the financial institution needs to continue monitoring activity to make sure that ongoing activity can be traced back to a verified and legitimate sale.  This can create a feeling of invasiveness for the cannabis business as the financial institution will need to have an eye on account activity, sales data, invoices, and other documentation in the seed-to-sale process.  The upside to this is that the cannabis business will have a second set of eyes on their activity to help find issues that would put them at risk for losing money through fraud or in a worse case scenario, their license to do business.

The bottom line here is that the value of the banking relationship is worth the effort for both the cannabis business and the financial institution.  If the two have a transparent partnership where information is exchanged, it can keep both businesses out of trouble with their respective regulators and auditors, and the cannabis business has a trusted partner who will help them with access to the financial system.

Having Green Check in this process will provide a high level of automation and convenience, as our software sits between the financial institution and the cannabis business to facilitate that transparent relationship through transaction validation and monitoring, and secure document exchange.  Our whole existence is based on connecting these two industries for the benefit of both.

Learn more about our software here.