Risky Business, Part 1: Banking in the marijuana industry

Jane CEO David Ellerstein, standing next to a kiosk that he hopes will bridge the gap between cannabis retailers and traditional banking.

For a bank, analyzing the risk of onboarding a cannabis business as a client is complicated. The legal marijuana industry is emerging and comes with its share of immaturities — the lack of historical data makes it difficult to study the past or predict the future of the market. This is also what makes it so attractive. Among the fastest growing industries in the country, a bank that can successfully onboard marijuana accounts stands to prosper tomorrow from what is risky business today.

At the helm of the new marijuana industry are new businesses and business owners that, without the option to bank, operate beyond the traditional economic structure. They are allowed to deal in U.S. tender, accepting, spending and saving cash, but without a formal banking system many businesses struggle to document a chain of custody for their money, making it difficult for them to pay bills, taxes or attract investors and banks.

Even though the U.S. Treasury Department’s Financial Crimes Network (FinCEN) has guidelines saying that they will no longer crack down on marijuana financial services, most bank boards are skeptical and wary of lingering liability.

Banks that do want to work with the industry are further challenged to find ways to onboard clients without documentation, creating a chicken-and-egg situation — do businesses become less risky and in so doing get banking services or do banking services take on marijuana business thus making business in cannabis less risky?

Even if banks are willing to take on traditional risks, they are not likely comfortable with the additional regulatory risks that come with an industry that is still operating illegally in the eyes of the federal government. While banking regulators do not prohibit banking with cannabis businesses, they are saying to do it cautiously.

In 2013, when then Deputy Attorney General James M. Cole issued a memo establishing the priorities for enforcement of marijuana as an illegal substance, banking emerged as a key institution to monitoring and preventing illegal activity.

FinCEN thus published guidelines for banking with cannabis. In order to guard against the perceived or actual improprieties of the industry, regulators added layers of diligence to the process. In addition to checks already in place, like Currency Transaction Reports for large cash deposits and Suspicious Activity Reports for deposits with a suspected association with illegal activity, the bank must issue Marijuana Limited Reports and continuously track each cannabis client’s activity.

With or without that federal guidance, banks that do business on a national level are so far unwilling to take the risk of engaging in interstate commerce with federally illegal marijuana businesses which is opening the door for smaller state banks where marijuana is legalized to get into the space. The risks and expenses that they take on today could become their competitive advantage tomorrow.

To do it right, the small banks and the cannabis retailers must figure out how to establish a solid chain of custody for cash — to transparently document that the chicken and the egg, in this case responsible business cash management and banking, coexist.

Jane, a Denver-based company, thinks that it has found a way to bridge the gap that improves business for the retailer, reduces their risk and establishes the chain of custody that banks and regulators need.

The solution, according to Jane, lies in a full-service, self-service kiosk that runs like a self-checkout unit you might find in a grocery store, but with the sophisticated cash management of a banking ATM. With the technology, a customer could pre-order on an app or order their marijuana in store on the kiosk, pay for their order by inserting cash into the machine and pick up their product from a budtender. Meanwhile, the kiosk documents each transaction to a unique order number and keeps the cash secure until it undergoes its only change of hands from the retailer to the bank. Once at the bank, the deposit is accompanied with a reconciliation report, connecting each penny to a transaction in a way that is comprehensible to the bank.

Federal banking regulations, the banking industry and the marijuana industry are stuck between the immaturities of a nascent industry and confronting similarly feeble legal and regulatory environments. By putting processes in place that a banker can embrace, entrepreneurial companies like Jane hope to mitigate the risk for both sides and help steward in a less risky era of business in cannabis.

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