Assessing Emerging Risks in the Cannabis Industry

  • February 3, 2023
  • Quantivate

The cannabis industry continues to be a gray area for financial institutions seeking to enter this underbanked and potentially lucrative market. State laws legalizing cannabis for both medical and non-medical use have proliferated in recent years, yet institutions must consider the risks associated with providing services to marijuana-related businesses (MRBs).

With continued growth in the industry, projections estimate that legal cannabis sales in the U.S. could surpass $70 billion by 2030. As more financial services organizations consider entering the market, compliance and risk management teams will have to weigh the risks and rewards of cannabis banking.

Evaluating Cannabis Banking Risks

What Are You Financing?

Financial institutions may service loans to individuals or businesses that are repaid using proceeds from cannabis sales—such as property owners or transportation companies—even if the borrower is not directly associated with an MRB. This can unknowingly expose the institution to numerous compliance risks and thus requires a high level of customer due diligence, which should also extend to customers’ clients and vendors.

“Many in the banking industry are worried about forging into a stigmatized stream of revenue like cannabis, but with the right compliance solutions in place, they can have peace of mind,” the Cannabis Industry Journal notes in its piece on compliance as a revenue center. “Having visibility into cannabis-related business accounts that do the enhanced due diligence is the only way to operate.”

“By implementing purpose-built compliance management solutions, financial institutions are able to unlock new revenue streams and scale cannabis banking operations. Meaning that as cannabis continues to gain mainstream momentum, and becomes less scrutinized locally and federally, these FIs that take part will be ahead of the curve.”

Distinguishing Between Hemp and Cannabis

Since the introduction of the 2018 Farm Bill, hemp is no longer considered a controlled substance under federal law. However, hemp remains regulated at the state level.

“It is important to note the 2018 Farm Bill allows states to have more stringent requirements than the USDA’s regulations,” NAFCU explains in its FAQs on marijuana banking. “Therefore, credit unions [and other financial institutions] 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.”

With this in mind, it’s critical that financial institutions have identifying procedures to determine and monitor whether a potential or current customer is dealing in hemp or marijuana.

Current Risk Environment

Before considering taking on customers in or adjacent to the cannabis industry, it’s important to evaluate the current risk environment for your organization.

“The risk of federal prosecution, combined with the heightened compliance burden and reputational concerns related to cannabis, has been the main hurdle to cannabis banking,” Sahar Ayinehsazian, a partner at cannabis law firm Vicente Sederberg, told BankingDive.

Financial institutions need to conduct customer due diligence and a full risk analysis to determine potential exposure to legal and compliance risks, particularly those surrounding Bank Secrecy Act and anti-money laundering (BSA/AML) expectations.

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