FAQs: Marijuana Banking for Credit Unions

Updated November 2019

Marijuana is a growing, lucrative industry based almost entirely in cash transactions. Many states have legalized the sale and use of marijuana for medical or recreational purposes. As more states change their laws on marijuana and the industry grows, many credit unions may be interested in learning more about the potential implications of banking marijuana-related businesses (MRBs).

The questions below represent frequently asked questions that NAFCU has received from its members in recent months accompanied by answers based on current law. This list of questions and answers is by no means exhaustive. Marijuana banking is a nuanced and complicated new area of financial services, fraught with uncertainty and a variety of risks. If you are interested in learning more about marijuana banking, NAFCU offers several other resources, including a Marijuana Banking Pros and Cons document and an extensive Marijuana Banking Issue Brief, both updated periodically.

Select a question below to reveal the answer.

What are the differences for a state-chartered credit union versus a federally-chartered credit union doing business in the marijuana industry?

The main differences here are: (1) which regulatory body examines the credit union; and (2) the type of insurance that the credit union has. Federal credit unions are subject to supervision and examinations by the National Credit Union Administration (NCUA), whereas federally-insured, state-chartered credit unions are examined by both the NCUA and their state supervisory authority. The legal status of marijuana in that specific state will determine the level of regulatory oversight exercised on a credit union providing services to an MRB. For example, the California Senate recently passed a bill to allow banks and credit unions to accept deposits from MRBs. Nevada plans on being the first state to create its own banking system for MRBs.

As it stands, the Controlled Substances Act (CSA) classifies marijuana as a Schedule I drug and is thus illegal to produce, sell and consume at the federal level. Banking the cannabis industry, except for recently legalized industrial hemp, is a high risk activity that may pose a threat to a federally-insured credit union's share insurance fund account. Further, the NCUA, as the main federal regulatory body for federally-insured credit unions, has said that although it will not question the business decisions of credit unions that choose to provide services to MRBs, it will continue to examine for compliance with BSA/AML requirements. Federal credit unions that choose to do business with MRBs may face increased scrutiny during NCUA examinations due to the high-risk nature of the marijuana industry.

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Under current federal law, what is the worst case scenario for a federal credit union that actively banks MRBs or is considering banking MRBs?

Under federal law and regulations, there are a few main "worst case scenarios" that may occur. First, a credit union could face criminal liability for banking a business that engages in a federally illegal activity, i.e., the sale of marijuana. Second, the NCUA could pull the credit union's charter, thus, potentially leaving the credit union's members temporarily without services and requiring that credit union to be absorbed into a different credit union. Third, the NCUA could terminate the credit union's share insurance account, which would force that credit union to find a private insurance provider. Fourth, the credit union could lose access to its Federal Reserve master account. And finally, should a credit union's member(s) be prosecuted, their funds could be tied up in asset forfeiture proceedings, which could be labor-intensive and impact the credit union's balance sheets.

Although the NCUA and other federal banking regulators have yet to take any actions against a financial institution actively banking the marijuana industry, such scenarios could occur. Recent legal disputes demonstrate that a credit union seeking to bank MRBs cannot explicitly state this objective in its bylaws. In 2015, the NCUA denied Fourth Corner Credit Union from accessing share insurance because it was chartered under Colorado law with the purpose of servicing MRBs. Fourth Corner and the NCUA embarked on a lengthy legal battle that coincided with a lawsuit against the Federal Reserve Bank of Kansas City for approval of a master account. In February 2018, Fourth Corner was granted conditional approval of its master account, application pending approval of share deposit insurance from the NCUA, and a commitment to serve only individuals and ancillary groups that support marijuana legalization. This case highlights the continued tension between MRBs' need for financial services and the status of marijuana as a federally-illegal controlled substance. Ultimately, it is at the discretion of the credit union to determine how much risk it is willing to tolerate when considering providing services to MRBs.

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What is the liability to a federally-insured credit union having a commercial loan on property where one of the tenants is in the marijuana industry such as a medical marijuana dispensary?

A federally-insured credit union providing a commercial loan on a property where a tenant is involved with the marijuana industry may be subject to liability if there has been a lapse in or inadequate performance of its customer due diligence requirements. Such requirements may include determining whether a member receiving a commercial loan for a property has a tenant in the marijuana industry. Although this tenant may not be a member of the credit union, it is best to exercise due diligence by following up with the member's business once a credit union suspects or has reason to know that a property may be used for an MRB. To avoid potential liability upon finding that a member's tenant is an MRB or related to the marijuana industry, a credit union may consider performing a site visit to the member's business to complete its due diligence procedures. Should the member's tenant be forced to shut down and fail to pay on a loan, the NCUA may more closely examine the credit union from a safety and soundness perspective.

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Many of us use software to identify suspicious activity. Should credit unions block debit card transactions from medical marijuana businesses?

Utilizing software designed to identify suspicious activity may be helpful for credit unions to detect marijuana-related transactions. However, it is difficult to preemptively block each charge from an MRB. If a credit union sees a transaction that looks suspicious or could be linked to an MRB, a credit union should ensure it is adequately performing its Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) obligations.

Moreover, major credit card providers, like Visa and MasterCard, have provisions in their user agreements that prohibit illegal transactions. Whether marijuana is legal at the state level or not, Visa and MasterCard both disallow marijuana transactions. To combat the unavailability of credit card payments from major credit card providers, many dispensaries have ATMs on site to avoid illegal transactions from credit or debit cards and, as a result, deal almost exclusively in cash.

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What costs are associated with banking MRBs?

There are several costs to consider when actively banking or considering banking MRBs. 

  1. Compliance Costs. Providing services to MRBs requires a great amount of front-end customer due diligence and back-end monitoring to ensure that a MRB is not engaging in any criminal activity. This risk manifests itself in higher compliance costs and potential litigation costs. Back-end monitoring is time consuming, labor-intensive and may require hiring additional compliance officers or temporary compliance consultants to ensure compliance with BSA/AML requirements and state laws. In addition, a credit union may consider the costs of conducting routine risk assessments of MRBs and ancillary businesses that provide services to MRBs. Because the marijuana industry is a relatively new market, it is subject to ongoing changes from regulatory and legislative bodies.
  2. Legal Costs. Not only may credit unions be exposed to potential liability, whether in the form of criminal or civil lawsuits, but those interested in banking MRBs should consider the costs associated with various legal services. Such services may include consulting an attorney when setting up and managing products and services for MRBs, hiring in-house attorneys to manage compliance with BSA/AML requirements, and retaining legal counsel should a credit union face a lawsuit related to its involvement in banking MRBs.
  3. Educational Costs. Credit unions that have little understanding of the marijuana industry may find it difficult to offer services to MRBs. The intricacies of the marijuana industry and legally providing financial services present a steep learning curve and may require investment in outside resources.
  4. Logistical Costs. Because MRBs deal almost exclusively in cash, credit unions may have to pay for an armored car or truck service to transport cash. There is also the possible cost of increased security because of the large amount of cash needing to be transported from the MRB. Additionally, some vendors that serve credit unions, such as fintech and software providers, may rescind their relationship with a credit union that chooses to bank MRBs. This may force a credit union to find other vendors that are more expensive to supplement the loss of a former vendor.
  5. Reputational Costs. Not every member of a credit union is going to approve of a credit union providing products and services to MRBs, whether or not it is legal in that specific state, so a credit union could lose business. A credit union may want to assess its members' and potential members' beliefs on marijuana before offering services to MRBs.

This list is not all-encompassing as there may be other incidental costs associated with providing services to MRBs.

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What is the difference between marijuana and hemp?

Marijuana is derived from the cannabis sativa L plant, and hemp is a cannabis plant derivative. After the passage of the Agricultural Improvement Act of 2018 (Farm Bill of 2018) and the Hemp Farming Act, Congress defined hemp as a product of the cannabis plant containing no more than 0.3 percent THC. THC is the psychoactive compound known to have an intoxicating effect and is found in non-hemp cannabis, namely marijuana. Title X, Section 10113 of the Farm Bill of 2018 legalized industrial hemp production but other non-hemp cannabis products are still illegal at the federal level.

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Why are some hemp transactions still in cash even though it is now legal?

Both the Hemp Farming Act and the Farm Bill of 2018, which legalized the production of industrial hemp, are still relatively new pieces of legislation. So part of the reason why cash is still used in hemp transactions may be due to ignorance of the new law, and part may be that the industry was waiting for clarity from implementing regulations. The USDA has implemented an interim final rule in October 2019 that provides the regulatory framework for hemp production. As a result, many credit unions, banks, and other financial institutions may have been  reticent to break into the industrial hemp marketplace because of the lack of clear guidelines and regulations. Some financial institutions may also be worried about reputational risk for being associated with hemp transactions. Because of regulatory uncertainty and perceived risk in the industry, cash is still prevalent in hemp transactions.

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Can credit unions provide financial services to hemp farmers or hemp-related businesses?

The 2018 Farm Bill legalized hemp at the federal level by removing it from a Schedule I substance under the CSA. However, credit unions must remain diligent because hemp remains regulated at the state level. Prior to the USDA publishing their regulatory framework, the NCUA published interim guidance regarding hemp-related businesses. The NCUA's guidance states that credit unions may provide financial services for business accounts, including lending, to lawfully operating hemp businesses. The operative word here being "lawfully." Now that the USDA has set forth their regulatory framework, states must apply to get the USDA's approval for their respective production plans. Credit unions will need to do their due diligence in ensuring that any hemp-related account they service is lawfully operating according to the 2018 Farm Bill.

It is important to note the 2018 Farm Bill allows states to have more stringent requirements than the USDA's regulations; therefore, credit unions should also look at applicable state law before providing financial services to hemp-related businesses. The NCUA's interim guidance also notes that hemp may be illegal under some state or Tribal laws. Credit unions will still need to comply with all BSA/AML regulations and will likely be subject to the same liabilities for any compliance deficiencies.

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Although the federal government said it would not prosecute marijuana businesses at this point, should a credit union be concerned about a Racketeer Influenced and Corrupt Organizations Act (RICO) action for money laundering or some other action?

RICO was passed by Congress to eradicate organized crime in the United States. A violation of RICO typically occurs when the conduct of an enterprise displays a pattern of racketeering activity. For example, there was a RICO claim filed by a landlord against a bank that offered ordinary banking services to a licensed medical marijuana dispensary in 2017. The bank had followed the guidance on risk assessment, filed Suspicious Activity Reports (SARs), and performed customer due diligence as required by the Financial Crimes Enforcement Network (FinCEN), and the Second Circuit dismissed the case against the bank. There is, however, a threat that a credit union may be subjected to RICO lawsuits. To combat that risk, compliance with BSA/AML obligations is the first line of defense against these potential claims.

Complying with the FinCEN guidance and requirements under the BSA/AML framework is a primary concern for credit unions considering entering into the marijuana industry. When fulfilling BSA obligations, credit unions should assess the risks of providing services to a MRB by conducting adequate customer due diligence. To do so, a credit union must verify information through the seven inquiries provided by FinCEN including: (1) verifying state licensure and registration; (2) reviewing license applications; (3) requesting applicable licensing information and enforcement from the state; (4) understanding the normal and expected activity of the MRB; (5) continual monitoring for adverse information about the MRB; (6) continual monitoring for any suspicious activity by the MRB; and (7) continually refreshing any information as it pertains to the aforementioned inquiries.

A credit union should also file SARs on MRBs it is doing business with if it has reason to suspect that a transaction or attempted transaction involves illegal activity, is designed to evade BSA regulations, or lacks a business or apparent lawful purpose. Additionally, AML rules require that credit unions review their own AML programs to ensure that the necessary customer monitoring and due diligence initiatives are in place to identify and report any risky trends or patterns in a MRB's activities. Credit unions should consider implementing certain AML safeguards to ensure an MRB's financial activity is transparent, such as: adequate customer due diligence, continual monitoring, enhanced customer due diligence, and proper SAR filing.
In addition to a civil RICO lawsuit, credit unions may be subject to other legal claims and criminal prosecution by the Department of Justice or their state attorney general.

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How are credit unions dealing with current members that oppose marijuana banking? Has membership decreased because of it?

Those credit unions that currently provide financial products and services to MRBs have not necessarily seen a membership decrease because of involvement with MRBs. Typically, credit unions that provide services for MRBs do not advertise or broadcast these services to members. As such, most credit union members may be unaware that their credit union offers financial services for MRBs. Taking credit union members' feelings about marijuana legalization into consideration when deciding whether or not to do business with MRBs is a factor to consider if a credit union is worried about a drop in current membership.

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If a credit union chooses not to bank the industry, is there anything they need to do?

Although a credit union may choose not to directly bank the marijuana industry, they should still be mindful of the potential risks of indirectly banking an MRB or an individual involved with or related to an MRB. Therefore, it is imperative that credit union's conduct their due diligence when providing services to new members and customers that could potentially be involved with or related to an MRB (i.e. landlord, commercial property owners). So long as a credit union adheres to the FinCEN guidance and the 2014 Cole Memo guidance from the Department of Justice on performing customer due diligence and making adequate risk assessments, there likely will be a reduced threat of prosecution.

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