Former Financial Crime Enforcement Network (FinCEN) Director Kenneth Blanco once said, “Banks must be thinking about their crypto exposure. If banks are not thinking about these issues, it will be apparent when examiners visit.”¹ This advice from the former FinCEN director can also be applied to marijuana banking; financial institutions (FIs) cannot ignore the marijuana industry and expect not to be exposed to the risk associated with the industry. In addition, if FIs ignore the marijuana industry, they will also be losing out on future customers as well as potentially losing current customers, which translates to the FI missing out on a new revenue source. Global cannabis sales are expected to increase from $13.4 billion in 2020 to $148.9 billion by 2031.² With these projected figures, FIs cannot ignore the risk and opportunities the marijuana industry has to offer. By embracing a marijuana banking program, FIs can better manage anti-money laundering (AML) and regulatory risk, as well as establish a new revenue stream with new and existing customers.

From a Risk-based Perspective

FIs need to be aware of current and future activity in the marijuana industry to properly develop policies and procedures regarding marijuana banking. Many FIs that ignore marijuana dispensaries or create policies stating they will not bank marijuana dispensaries may be unintentionally limiting their level of AML risk monitoring with current customers, which is required by FinCEN.³ An FI with a properly developed marijuana program will have the tools to detect marijuana activity that an FI with a nonspecialized monitoring system would have otherwise missed. For example, has your existing customer with a convenience store started selling marijuana products? Has your loan customer who rents commercial real estate started renting to a marijuana dispensary, and now your loan payments are derived from marijuana sales? Without a properly developed marijuana program, situations like the examples mentioned will be more difficult to detect. FIs that embrace a marijuana banking program will not only have the tools to detect unexpected marijuana activity but will also have the banking products needed to continue a banking relationship with their customers as opposed to having to exit the banking relationship due to a policy that states the FI will not bank a marijuana dispensary.

From an AML Perspective

By banking marijuana dispensaries, FIs can help reduce the amount of financial crime in the industry. People start businesses, regardless of the industry, to make money and that money is usually deposited and used through the banking system. By refusing to bank marijuana dispensaries that are legally licensed by the state, FIs may be inadvertently driving owners of marijuana dispensaries to resort to money laundering and other financial crime tactics to get the income generated by their business, which is legal under state law, into the banking system. This will result in an increase in the number of suspicious activity reports (SARs) issued by FIs, which also means FIs will have to increase monitoring measures per FinCEN guidance,4 and possibly staffing to cope with the increased activity from refusing to bank marijuana dispensaries. While filing marijuana SARs and the continuation SARs may seem tedious, filing SARs on an existing customer who turns out to have marijuana dispensaries and started committing financial crimes will be costly when the FI must exit the relationship. This will also bring more scrutiny from examiners and increase the liability of fines. FIs that do adopt marijuana programs and bank marijuana dispensaries will be able to offset the cost of increased monitoring from the income generated by the banking fees from marijuana dispensary customers.

There is also a financial benefit for FIs to bank marijuana dispensaries. As mentioned throughout this article, FIs that choose to bank marijuana dispensaries will not only be able to keep existing customers who choose to start marijuana dispensaries but also bank new and upcoming marijuana dispensaries. Choosing to bank marijuana dispensaries early will allow FIs access to a customer base with little competition. FIs that bank marijuana dispensaries will also be able to charge fees for servicing and monitoring marijuana dispensary accounts, increasing the FI’s total profit generated from fee income. As more states legalize marijuana and more FIs begin to accept the banking of marijuana dispensaries, there will only be a brief period for FIs to take advantage of a potentially lucrative market with few competitors.

Conclusion

While marijuana has traditionally been avoided by the banking industry due to its illegal classification, the changes in state laws and evolving economic markets present new opportunities for FIs. Just as cryptocurrency started as a novelty and has become a new industry in the financial and compliance fields, marijuana and marijuana dispensaries are also gaining momentum with no signs of slowing down. As time goes on, more states will pass laws legalizing marijuana and FinCEN has and continues to provide guidance to FIs that choose to bank marijuana dispensaries. As the marijuana industry continues to grow, FIs are able to take advantage of the opportunity to increase their revenue streams and bolster their risk-monitoring processes as well.

Julius Bosco, CAMS, BSA specialist, The Citizens Bank of Philadelphia, Mississippi, MS, jsbosco3@gmail.com, LinkedIn

1. Russell Sommers, “Cryptocurrency: The Risk Banks Already Have,” BankDirector.com, October 8, 2021, https://www.bankdirector.com/committees/risk-committees/cryptocurrency-the-risk-banks-already-have/
2. “Global Cannabis Market to Reach $148.9 Billion by 2031,” Allied Market Research, https://www.alliedmarketresearch.com/press-release/cannabis-market.html
3. “BSA Expectations Regarding Marijuana-Related Businesses,” Financial Crime Enforcement Network, February 14, 2014, https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses
4. Ibid.