Federal laws advancing via Congress this session might result in extra banks serving marijuana-related companies within the U.S. and Michigan.
The Secure and Fair Enforcement (SAFE) Banking Act handed the U.S. House in April on a bipartisan 321-101 vote. The invoice sits in an evenly divided Senate now underneath the slim management of Democrats who have to resolve whether or not to push ahead with the invoice, pursue outright marijuana legalization or couple the difficulty with broader prison justice reform.
Mike Tierney, president and CEO of the Community Bankers of Michigan, stays “very optimistic” the SAFE Banking Act can acquire sufficient assist to go the Senate with the 60 votes wanted to forestall a filibuster.
However, he’s involved concerning the potential for Democrats to pursue full legalization whereas there’s broad assist for the SAFE Banking Act among the many banking trade and monetary establishments that wish to serve what has grow to be a virtually $1 billion trade in Michigan.
“Chances are good, except if they decide they want to go for the more aggressive legislation,” Tierney mentioned. “We’d all like to just see the SAFE (Banking) Act. It would be fine if we could provide services to the cannabis industry without any federal repercussions. We don’t need to have marijuana legalized on the federal level.”
Reintroduced in March after failing to realize sufficient assist within the prior congressional time period, the SAFE Banking Act would prohibit federal businesses from penalizing monetary establishments that serve marijuana-related companies in states the place it’s authorized.
Since marijuana stays unlawful on the federal stage — regardless of legalization in some kind in 38 states, together with Michigan for medical and leisure use — banks and credit score unions concerned with the trade should adjust to rigorous necessities. The regulatory burden, together with considerations about their fame, preserve most banks and credit unions from getting concerned within the trade.
“There are a lot of banks that don’t want to regardless of whether it’s legal,” Tierney mentioned. “That may change once it’s legal, but there are bankers that just don’t feel it’s an industry they want to serve right now. Some just don’t feel it’s a benefit to their community.”
In Michigan final 12 months, medical and leisure marijuana generated $984.7 million in gross sales, based on the state Marijuana Regulatory Agency. Through the primary quarter of 2021, gross sales totaled greater than $360 million, together with $97.5 million in March alone for leisure marijuana.
Tierney estimates that about 10 banks in Michigan now serve the cannabis trade. The Michigan Credit Union League estimates an identical variety of its members do it as nicely.
More credit score unions wish to serve marijuana-related companies if the SAFE Banking Act passes, Michigan Credit Union League CEO Patty Corkery mentioned. Passage of the legislation is “a drum we’ve been beating for a while,” Corkery added.
“The appetite is definitely there because it’s what their communities are demanding and what their businesses are demanding. Even those that might not necessarily have a strong desire to get their feet wet in cannabis, that’s what they’re hearing from their communities and their businesses, and they’re going to roll up their sleeves and look into it,” Corkery mentioned. “The bottom line is it is legal in our state and we need to support the businesses that are engaged in legal activities.”
The monetary establishments that serve the marijuana trade accomplish that underneath 2013 steerage from the Financial Crimes Enforcement Network, or FinCEN, a corporation within the U.S. Department of the Treasury. The steerage presents monetary establishments a pathway to serve a marijuana-related enterprise with out violating the federal Bank Secrecy Act and anti-money laundering rules.
The steerage consists of necessities for a a lot greater stage of due diligence when taking over a buyer within the cannabis trade and ongoing monitoring of the enterprise to make sure its legitimacy and adherence to state legal guidelines. A financial institution additionally should monitor the corporate’s gross sales for any sudden spikes and decide why that occurred.
Among the banks serving the marijuana trade is Mason-based Dart Bank, which has 4 branches in Eaton and Ingham counties plus seven mortgage manufacturing places of work that embody Ada, with $622.1 million in complete belongings.
When Michigan voters accredited leisure marijuana in 2018 after medical use had been allowed for a decade, Dart Bank “looked at the landscape out there and were seeing businesses that couldn’t even be served,” CEO Bill Hufnagel mentioned.
The financial institution additionally heard from state regulators and native elected officers who nervous concerning the public security facets of purely money companies. Executives determined to work with regulators to study what was required to offer marijuana-related companies a full array of banking companies, from deposits to wire transfers to industrial loans.
“We’re a community bank, so we’re here to serve the communities that we work within,” Hufnagel mentioned.
Dart Bank has invested closely to construct up the inner programs and workers wanted to watch marijuana purchasers and deal with the excessive federal regulatory and reporting necessities, he mentioned.
Building relationships, ‘lot of caution’
Serving the marijuana trade differentiates Dart Bank from rivals “of all sizes, shapes and forms,” and drives development and deposits, Hufnagel mentioned.
“We took this as an opportunity to build relationships with people who weren’t being served and to do something different for them,” Hufnagel mentioned. “This is not a quick, flash-in-the-pan type of business for Dart Bank. This is something we’re hoping to continue to grow, not only in the state of Michigan, but with our partners that are going to grow into other areas, and we want to continue to grow with them and to offer them the service. This is a business line that we’re dedicated to.”
Nationwide, there have been 515 banks and 169 credit score unions offering service to marijuana-related companies on the finish of 2020, based on an April quarterly report by FinCEN.
In a current survey by the trade commerce publication Bank Director, simply 7 p.c of responding CEOs, administrators and chief danger officers mentioned their financial institution presently serves marijuana companies. Another one-third had been not sure if their financial institution was prepared to do it, and 34 p.c mentioned that they had at the least mentioned it however don’t but work with these companies.
The survey outcomes point out “there is a lot of caution around” banking marijuana-related companies, mentioned Emily McCormick, Bank Director’s director of analysis.
That warning might stem from current U.S. Department of Justice steerage that leaves enforcement of the federal prohibition on marijuana as much as the discretion of native federal prosecutors. If a U.S. legal professional decides to prosecute a neighborhood marijuana enterprise, a financial institution might lose all the collateral that backs the corporate’s mortgage, Tierney mentioned.
“Banks have not been wanting to lend to the industry because you didn’t want your collateral confiscated,” he mentioned. “So, financing then becomes very difficult.”
Bob Hendricks, an legal professional at Warner Norcross + Judd LLP who chairs the Grand Rapids legislation agency’s Cannabis Industry Group, senses “that there is a fair amount of pent-up interest, not only in the small banks but in the larger banks, to providing banking services to what clearly seems to be an emerging industry with some serious legs and some serious growth potential.”
However, that doesn’t imply that banks and credit score unions will flock to the trade, Hendricks mentioned.
While passage of the SAFE Banking Act within the Senate — and President Biden’s signature — might deliver extra and bigger establishments into the fray, the excessive stage of due diligence, report necessities scrutiny, compliance prices and danger would stay. That will preserve some monetary establishments away, he mentioned.
The continuation of a black market will even act as a deterrent for some banks and require nice warning when taking over a marijuana shopper, he mentioned.
“It’s not going to be like banking a donut shop,” Hendricks mentioned. “This still is an industry coming out of the black market.”
To any financial institution that’s contemplating serving marijuana-related companies, Hufnagel at Dart Bank advises them to verify they totally perceive the federal necessities and have the programs and workers wanted to conform.
“Be prepared for what you’re going to be faced with,” Hufnagel mentioned. “It’s an extremely difficult business and you have to be willing to put the effort in both the infrastructure and technical side.”
However, Hufnagel opposes the SAFE Banking Act. Dart Bank has made the investments and took on a big danger to serve the trade. The legislation might deliver not solely competitors, however gamers that may not “operate in a way that’s going to be in the best interests of everything that we’re doing” and trigger issues for all the trade, he mentioned.