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Patchwork of pot laws compounds credit union headaches

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Credit unions are poised to go green in 2019 – and they don’t mean championing the environment.

Marijuana will be legal in more than half of the states next year. In some states the drug will only be available for medicinal use while voters in other places have approved laws decriminalizing the drug for recreational use as well.

Even though there is a growing number of credit unions willing to bank marijuana companies, the drug remains illegal at the federal level. That means any financial institution attempting to serve legal pot businesses does so with the uncertainty of how the Department of Justice may choose to enforce current law.

“What you’re seeing is anticipation of the end of prohibition, so states are becoming more aggressive about issuing their own charters pursuant to providing cannabis banking services,” said Tom Zuber, an attorney with Zuber, Lawler and Del Duca, a California-based law firm working on marijuana legal issues. “Furthermore, politicians are increasingly supporting in a public way the notion of offering cannabis banking – and aggressively so. So that’s different in terms of the intensity of such pubic support by politicians.”

Part of what has driven that support, analysts say, is the fact that in many cases voters in individual states are approving ballot initiatives to legalize the drug. For instance, in November, voters approved measures in Utah and Missouri for medical marijuana while Michigan residents passed a law allowing for recreational use.

And that, many say, could force lawmakers to finally provide clarity for financial institutions intent on providing pot banking services.

“It creates additional pressure for them to stop and take a better look at what the landscape is, because the people in not just one or two states but in almost all the states are approving this,” observed Katrina Skinner, interim president and general counsel at Safe Harbor Services, a pot banking firm launched by Sundie Seefried, CEO of Partner Colorado Credit Union. “It doesn’t make a lot of sense that there continues to be a conflict at the national level, but that’s where the change needs to be made. It certainly puts more pressure on financial institutions that are trying to bank the industry, as well as law enforcement, which now has a bigger market and sales to try to monitor.”

Risk vs. reward

There were 486 depository institutions actively banking marijuana-related businesses in the U.S. at Sept. 30, up 21 percent from October 2017, according suspicious activity reports filed with the Financial Crimes Enforcement Network. Of those institutions, 111 were credit unions, according to the data.

As of Sept. 30, FinCEN received almost 50,000 SARs from depository institutions that included the phrase “marijuana limited.” That means the financial institution was banking a marijuana-related business that was complaint with state regulations.

But credit unions that aren’t directly serving marijuana companies could be impacted, cautioned Ryan Donovan, chief advocacy officer at the Credit Union National Association. The majority of institutions that file SARs reports are dealing with ancillary businesses. But even banking a company such as a landscaping firm that works with a pot business could put a credit union at risk, Donovan said.

And there are “a great number of credit unions” that may not realize they are working with a business that supports the marijuana industry, Donovan said.

“If you’re lending money to someone who is engaged in the business – maybe they’re trying to buy a truck or a car to carry around all this [cash from unbanked pot businesses] – that is a risk to the credit union, that if they’re not doing their due diligence on their borrowers, they may not realize they’re engaged in the business,” he added.

While a small percentage of the nation’s credit unions currently serve the legal weed industry, Skinner and others suggested credit unions considering entering that space do so now rather than waiting for greater clarity at the federal level.

The cannabis industry is likely to remain loyal to those who were willing to serve them early on, sources said. There’s a chance that once the drug is legalized or lawmakers provide safe harbor for banking services, the big banks will quickly flood the space and CUs will lose whatever competitive advantage they may have had as early entrants.

“Credit unions have a chance now,” said Geoff Bacino, a credit union consultant and former NCUA board member. “Frankly, I think everybody in the cannabis industry that understands banking, financial services and compliance knows that anybody serving them now is taking a bit of a risk.”

Waiting game

Among the states that voted to fully legalize in 2018, Michigan has the potential to be a major player among CUs serving the legal pot industry. The state is home to well over 100 credit unions and more than 5.3 million Michiganders – over half the state’s population – belong to a credit union. While recreational use became legal earlier this month, medicinal marijuana has been legal for years.

Despite recent legalization, the drug won’t become available at Michigan retailers until at least 2020, in part because the state’s licensing division has to set up systems for financial institutions to compliantly serve the industry. And 2020 may be an optimistic date regarding implementation – the state could still change various components of the rule, further delaying matters.

On top of that, the drug is legal statewide, but individual cities and townships can elect to ban the sale of it, meaning credit unions won’t be able to serve any marijuana-related businesses in those locales.

Credit Union 1 in Anchorage, Alaska, recently entered the fray by launching a pilot program to serve legal pot businesses. While Alaska voted in to legalize marijuana in 2014, Credit Union 1 is believed to be the first credit union in the state to publicly serve the industry.

It took nearly two years for the $1 billion-asset institution to get the pilot program running. CEO James Wileman said the decision to enter the legal weed space boiled down to public safety and serving the underserved. The calculation other financial institutions have to make, he added, whether they can handle the additional compliance burden and take the appropriate steps to mitigate the risk that comes from serving this industry.

“What are we here for as credit unions?” Wileman said. “That’s the heart of it. We don’t always do a fantastic job of telling our story, but we do a fantastic job of identifying needs in the marketplace and then filling those where others won’t.”

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