California’s Department of Business Oversight (DBO) recently issued guidance pertaining to cannabis banking. The guidance, published on October 2, 2019, is specifically designed to help California state-chartered banks and credit unions build and maintain compliant cannabis banking programs.
This guidance is encouraging because it shows the CA DBO’s willingness to work with financial institutions that are currently, or want to begin, banking cannabis. As with any new line of business, uncertainty around potential risks and regulatory overhead associated with new initiatives can be some of the most difficult obstacles to overcome. Not only does this recent guidance offer a tacit endorsement of compliant cannabis banking, it also provides a helpful tool in the form of a detailed questionnaire institutions can use to build or evaluate their cannabis program.
While specific to California state chartered institutions, the questionnaire issued by the DBO pulls directly from FinCEN’s guidance on cannabis banking, as well as the recently issued cannabis job aid put out by the Conference of State Bank Supervisors (CSBS). Given this national perspective, the DBO cannabis banking questionnaire can prove to be a helpful resource for institutions nationwide.
As your institution reviews these helpful resources, we wanted to point out a few key items in the questionnaire that caught our attention:
Has management confirmed with each impacted third‐party provider that they will service this program? The DBO provides examples such as your fiduciary bond provider, armored car company, ATM servicer, correspondent banks, and Visa. While having conversations with all key service providers is important in establishing a successful cannabis program, it’s critical to evaluate which providers will be specifically impacted, and therefore which providers you’ll need to explicitly communicate with. The best way to accomplish this is by analyzing your current or intended cannabis service offering and determining which third party providers are needed to deliver each service. This will help you hone in on the specific conversations you need to have (and document!). For example, if you are not offering on premise ATMs, then there would be no impact to your ATM servicer.
Does the [board-approved cannabis banking] policy identify how management will handle accounts that do not meet policy requirements? This question stood out because it highlights the importance of having standardized processes and evaluation criteria to enforce the institution’s policy statements. The enhanced due diligence required on an initial and ongoing basis will help the institution mitigate account-related risk, only when done properly and consistently. We recommend identifying the key risk indicators the institution will use to determine changes in account-related risk, as well as the systems and processes that will be used to monitor them. When applicable, the institution should have clear escalation procedures so that issues can be dealt with swiftly, with the hope that corrective action is all that is needed to maintain the account relationship. To that end, having a clear and readily accessible audit trail of any issues and corrective actions will provide the institution with the evidence it needs come audit or exam time.
Does any licensed marijuana related business…Fail to or is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law..? This question can be overwhelming for compliance and risk teams to consider. Given the rapid growth and evolving regulatory landscape of the legal cannabis industry, “in compliance with state law” can be a difficult criteria to prove. Each state’s cannabis program is different, however there is a common theme: cannabis businesses are mandated to track and report their sales and inventory information already. This means your institution can verify compliance with state law by leveraging business data that’s already being captured. Of course, the tricky part is staying up to date with your state’s cannabis laws, but tools like Green Check make this easier.
Whether you’re already banking cannabis, or still in the process of developing your program, it’s important to make sure you’re aligned with the industry best practices for mitigating risk. At Green Check, we’ve developed a Readiness Assessment to help institutions gauge how effective their program currently is in mitigating the risks inherent to cannabis banking. Click here to schedule your personalized Readiness Assessment with us today.