A U.S. alcohol maker’s $191 million investment in a Canadian marijuana firm has raised the stakes for American financial institutions trying to navigate the risk and uncertainty tied to marijuana.

Constellation Brands, based in Victor, N.Y., is the producer of Corona beer and Robert Mondavi wine. Under a deal announced last month, the company agreed to acquire 9.9% of Canopy Growth Corp., an Ontario-based marijuana firm with a $2.8 billion market capitalization.

Several of the largest U.S. banks have relationships with Constellation Brands. Now that Constellation has invested heavily in the pot business, those banks face the question of whether to sever their relationship. If they do cut ties, they stand to lose a substantial source of revenue. But if they stay the course, they face potential legal and regulatory risks.

Pot banking graphic

Until quite recently, pot companies in both the U.S. and elsewhere were typically small, privately held operations. But that is changing fast. Canopy Growth Corp. trades on the Toronto Stock Exchange under the ticker symbol “WEED.”

The use of marijuana for medical purposes is currently legal throughout Canada, and recreational pot is set to be legalized next year.

Growth opportunity for CUs?
Because marijuana remains illegal under federal law in the U.S., the vast majority of this country’s banks and credit unions either refuse to do business with the nascent industry or maintain a low profile about any involvement they have. Big banks have been particularly cautious regarding the pot industry – a move that has opened up a growth opportunity for some credit unions.

Chief among them is Arvada, Col.-based Partner Colorado CU, which in the last few years has massively grown its marijuana banking business – though much of that is accomplished by using the DBA name Safe Harbor Private Banking, which helps protect the credit union from reputational risk. Safe Harbor launched in January 2015, though no Safe Harbor business is conducted in any of the credit union’s branches.

“If I was going to crash and burn, it was going to be under the Safe Harbor name,” recalled Sundie Seefried, president and CEO of $352 millin-asset Partner Colorado and Safe Harbor, speaking during the recent California and Nevada Credit Union Leagues’ annual conference.

One of the primary reasons Safe Harbor was launched, said Seefried, is because it ties closely back to the credit union philosophy.

“We were chartered to serve the unbanked,” she said, adding that banking canabusinesses helps keep drug money off the streets.

The business model had to be built from scratch, Seefried said, noting, “There is no silver bullet. It is a relationship banking program from start to finish.”

Reconsidering relationships?
It is unclear whether Constellation Brands’ recent foray into the pot business has caused any banks to reconsider their relationship with the company.

In July, the alcohol maker disclosed that it had $348 million in outstanding revolving credit loans with numerous big banks, including Bank of America, Wells Fargo, Fifth Third Bancorp, Bank of the West, SunTrust Bank banks, JPMorgan Chase and Goldman Sachs.

There are two reasons U.S. banks might consider cutting ties with anyone involved in the Canadian marijuana business.

The first reason is that some banks have internal policies not to do business with marijuana companies. Unless those policies explicitly apply only in countries where cannabis is illegal, these banks could run the risk of violating their own policies.

A Wells Fargo spokeswoman said that the San Francisco company’s policy not to bank marijuana business applies globally.

The other banks would not comment on their relationship with Constellation or its foray into the marijuana business. A spokesman for Constellation Brands did not respond to messages seeking comment.

The second reason banks might consider cutting ties with Constellation Brands is because of their potential legal and regulatory exposure. Even though marijuana is on its way to full legalization in Canada, it is far from clear if banks would be off the hook if they continued doing business with companies in the Canadian cannabis industry.

The marijuana industry remains illegal on the federal level in the United States, and it has a black market history, so cannabusiness owners are used to operating under the radar, noted Safe Harbor’s Seefried. But with cannabis now legal in 29 states – either for medical use or adult use or both – she said there is growing sophistication and increasing investments from a number of funds.

“This is a community banking opportunity because the big banks do not want to get involved until cannabis is taken off the list of Schedule I drugs,” she said. “We have rules, which is how we can handle a business that has a black market history.”

Sundie Seefried, the president and CEO of Partner Colorado Credit Union, during the California and Nevada Credit Union Leagues' 2017 annual meeting
Sundie Seefried, the president and CEO of Partner Colorado Credit Union, is shown here during the California and Nevada Credit Union Leagues' 2017 annual meeting. Her credit union, which is based in a Denver suburb, has a unit called Safe Harbor Private Banking to serve businesses in the marijuana industry.

According to industry estimates, by 2021 cannabis will be a $68 billion market in the U.S. For every dollar that is generated in a licensed cannabis dispensary, $3 is generated in impact in the community. “The states where it is not legal are excited about the potential tax revenue,” she said.

While sales have yet to legally begin in California, Seefried said the projected market size in the Golden State is $5 billion, possibly as much as $7 billion. “We only need seven credit unions willing to bank $1 billion each,” she said.

Legal opinions
Douglas Fischer, chief legal officer at the National Association of Cannabis Businesses, said that the money laundering risk for U.S. banks appears to be quite low, given that Canopy Growth Corp. operates outside of the United States.

“The money isn’t dirty, for lack of a better word, because it’s not coming from violating U.S. law,” he said.

But Rusty Payne, a spokesman for the U.S. Drug Enforcement Agency, said that U.S. investments in Canadian marijuana businesses are violations of the Controlled Substances Act.

“You’re dealing in drug trafficking. You’re dealing in money laundering,” Payne said, though he also acknowledged that the DEA has limited investigative resources and has to prioritize cases.

U.S. banking regulators have not given their blessing to the Canadian pot industry, either.

Spokespeople for the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said that they expect depositories to follow guidance on marijuana banking that was issued by the Financial Crimes Enforcement Network in 2014.

That guidance has reassured some banks that they can manage the risk associated with state-legal cannabis businesses. But the guidance does not address the topic of foreign marijuana firms.

Robert McVay, a marijuana industry lawyer in Seattle, said in a recent blog post that prosecutors would face an uphill climb if they brought charges against a U.S. resident who invested in a legal marijuana business abroad.

But he also wrote: “Most U.S. banks will still shy away from offering any services connected with marijuana businesses even in countries that have legalized completely.”

Then again, the alcohol company’s investment in Canadian pot may prompt banks that currently take a strict no-marijuana stance to consider refining those policies.

Dante Tosetti, a former examiner at the Federal Reserve Bank of San Francisco, said that policies against cannabis are becoming harder for banks to maintain as the pot industry grows both in the U.S. and overseas.

“How are they going to be able to enforce it?” asked Tosetti, who is currently a consultant to banks.

Steve Kemmerling, the CEO of MRB Monitor, which provides data about cannabis businesses to banks, said that any banks that lend to Constellation Brands and has a no-marijuana policy should either end the relationship or revise its cannabis policy.

“If banks choose to maintain their commitments to the credit agreement by loosening their marijuana-related policy for this situation, it could be a good sign for the marijuana industry as a whole,” he said.

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