With the legalization of medical and adult-use, i.e., recreational marijuana spreading across the country, you may be considering how your credit union can begin providing services to cannabis-related businesses. Perhaps you don’t know where to start or if you even should. With more research demonstrating the positive benefits of medical marijuana, many credit unions view the industry as an asset to the community and its members. Additionally, it can offer an opportunity for excess liquidity and increased lending. Still, it may be a more difficult decision for others.
Fortunately, our “C.U. On the Show” guest offers some insight into the first steps to take and factors to consider during your preliminary planning discussions. Gary Lax is a partner at Luse Gorman, specializing in regulatory and enforcement law for financial institutions. Gary and Doug discuss the nuances of the rapidly growing cannabis industry, what credit unions should know before entering the space, and factors that may prevent your credit union’s participation. Gary walks Doug and listeners through various scenarios that may determine your strategy.
Is It Legal in Your State?
Perhaps the most critical question to consider is if cannabis is legal in the state or states where your credit union operates. States are relatively inconsistent in their cannabis, hemp, and CBD laws, so it’s imperative to review your state’s laws, licensing regime, requirements, and restrictions. Gary explains that while the industry is highly regulated and monitored where cannabis is legal, compliance requirements may vary state-by-state.
If It’s Legal, What’s Next?
If cannabis is legal in your state, there are preliminary planning steps and decisions to make before serving a cannabis-related business member, such as:
- Evaluating your resources and capacity. For example, smaller credit unions may benefit from a pilot program of a small number of business members to refine their practices and comfort level to scale later.
- Conducting a thorough due diligence and risk assessment. Credit unions have access and ability to review much of the information that was submitted to approve the business at the state level. Gary explains how a detailed member profile can help you manage and evaluate these types of higher risk businesses.
- Determining how your credit union will manage the additional regulatory fees, future lending needs, and anti-money laundering compliance associated with the cash-heavy business. You may research additional information about serving cannabis businesses in your state, including anti-money laundering guidance, through the Financial Crimes Enforcement Network (FinCEN).
Listen to the entire conversation to learn more about financial services in the cannabis industry, such as:
- Serving cannabis businesses across state lines where legalization laws are mixed.
- The legal differences between marijuana, hemp, and CBD-related companies.
- The possible risks of regulatory change in the future, and why you should plan an effective exit strategy.
Listen now.
Gary Lax and Luse Gorman are not affiliated with or endorsed by ACT Advisors, LLC.
Audio Transcription
Doug (00:03):
Hello credit union executives. Welcome to “C.U. on the Show,” where we give you up-to-date information on how you can reduce risk, keep key talent, and take a strategic approach to your personal financial wellness hosted by me, Doug English, a CERTIFIED FINANCIAL PLANNER™ and former credit union insider with ACT Advisors. My guest on today’s podcast is Gary Lax. Gary is a partner at Luse Gorman, where he specializes in bank regulatory and enforcement law, as well as transactional and corporate law. In this episode, we discuss credit unions in the cannabis industry, including federal law, risk assessment, and the difference between marijuana and industrial hemp. Hi Gary, a very interesting subject that we’re talking about today, banking specifically focused on credit unions in a cannabis-related business. So tell us about that business and the involvement that you’ve seen from credit unions and what kind of credit union should even consider cannabis-related businesses as a potential area to pursue.
Gary (01:15):
Those are good questions. And thanks so much for inviting me onto your podcast. I’ll tell you, I think from our perspective, this is a space that we’ve been in since we started in 2012, 2013, and we’ve been going forward since then and our clients that are in this space, credit unions and other depository institutions, have been very successful in doing it. We’ve come up with an idea for them that allows it to be scalable, but maybe I should give you a sort of how we got into this a little bit of background. So in 2012/2013, a director of a client came to me and said, you know, I suffer from epilepsy and where I live, I’m able to take medical marijuana, and I will tell you, it’s the only thing that’s effective treatment for me. And I think that our state, where the credit union was located, is going to pass legislation soon that will legalize medical marijuana.
Gary (02:07):
And I want to make sure that we’re able to provide banking services to that industry. And at first I’ll be frank with you. I told him you got the wrong guy; I grew up at a time when marijuana was a gateway drug. And I really didn’t think that I was the guy to help them. And he said, no, you’re the guy to help us. And I want you to research it and we’re going to pay you to research it. Now, how often does that happen right now? That never happens. So I said, okay, I’ll go with it for a little while. And let’s see what happens. And what I found was that there’s no real data coming out of the United States because marijuana is a schedule one substance. And so it’s very difficult for them to get licensed, to do testing, but there’s a lot of research coming out of other places, in particular Israel, this company called Tikun Olam.
Gary (02:58):
And what I found is that it is a very effective treatment for epilepsy, for pain management, even for autism. And so I got converted and I said, gee, you know what? This is more than just antidotal. This is for real. And so I guess I really was his guy, and lucky for me and lucky for him, 2013 came, the Cole Memo from the Department of Justice was issued on how prosecutors can allocate their resources to prosecute marijuana cases and leave the licensed marijuana companies alone and the entities that support them. So for example, credit unions and other financial institutions. That was 2013. In 2014, Insen comes out with guidance on how to provide services to the marijuana-related businesses. Now we call it cannabis-related businesses. And in 2014, federal legislation was passed that the money that’s provided to the Department of Justice cannot be used to prevent any state from implementing medical marijuana laws.
Gary (04:00):
Which a lot of people don’t know.
Doug:
I didn’t know.
Gary:
You didn’t know. Okay. A lot of people don’t know and a lot of people don’t understand what that means. So what that means is you cannot be prosecuted. And I say you meaning a credit union cannot be prosecuted for providing services to the medical marijuana industry. Now federal law is only limited to medical marijuana, but if you read some of the statements that federal prosecutors/U.S. attorneys in various states have said, some of them actually come out and said, listen, we have no interest in pursuing an entity or entities that support entities that are properly licensed and are in compliance with the state regime related to marijuana, whether it be medical or recreational or what they call adult use marijuana. And by the way, the FinCEN guidance from 2024 is agnostic as to whether or not the marijuana-related business, like I said, what we now call cannabis-related business, is for medical or adult use.
Doug (05:04):
But we see the states are pretty inconsistent about their rules around cannabis use. So how do you decide as a credit union who can get into this business?
Gary (05:18):
What we tell our clients to do, if you want to do this is you start with a risk assessment. So you need to understand the landscape of federal law. You need to understand the FinCEN guidance. You need to understand your state law requirements and the state licensing regime for the cannabis industry. And then you’d go to the next phase, which is what are the resources that you have? Do you need a subject matter expert? We always suggest people do it as a pilot program, where they take a look at the risk assessment, including an internal assessment. What kind of personnel do we have? And then let’s launch it as a pilot program with five, maybe 10 marijuana- or cannabis-related businesses as members. Take them through the application process, understand their business. And then let’s see how that goes. And our clients that have done that have done it very, very well and tremendously successfully for them and the business and the community.
Doug (06:19):
Well, do I need to be in a state where current law is allowing at least medical marijuana in order to get into that business?
Gary (06:29):
And that’s a great question. And the answer to that question is, yes. Right now there are 23 states that have legalized cannabis completely. Of those 23, obviously medical was in there, but there’s a total of 38 states that have medical. But there are some states where it is not legal, where it is completely illegal. And in those states, you won’t have a licensed entity as a cannabis-related business member because there’s no licensing, there’s no state regime. And in those states we can’t provide any service. It’s completely illegal.
Doug (07:02):
And if you operate across state lines, one is and one isn’t?
Gary (07:06):
We have clients that operate across state lines. From our perspective, what we think that you need is, you need to keep it siloed in the state, and not have anything to do with the state where it’s illegal. And so to the extent that you can silo it, you’re fine. If you can’t silo it, or you don’t feel comfortable siloing it, then your best bet is to back off.
Doug (07:26):
Interesting. So you have clients already doing this, right?
Gary (07:29):
We have about 20 clients that are actively providing services to the cannabis industry. And I will tell you that we probably have a lot more; they just don’t recognize it. We tier our cannabis customers or members, right? Tier one is the licensed entity. Tier two is an entity that’s not licensed because it doesn’t have to be, but provides a lot of support. And tier three is an entity that doesn’t have to be licensed, but provides an incidental amount of support. When you talk to the clients and say, do you take deposits from the municipality? Or do you take deposits from the utility? If marijuana is legal, whether it’s recreational or medical, odds are you’re taking marijuana money. Cause they’re all paying their taxes. They’re all paying their electric bill. You know? So it’s all there. I’ve had conversations with the regulators where they said, well, I’m not going to allow any cannabis flowing through my jurisdiction.
Gary (08:27):
And the answer is, well, you’re too late. It already is. And so rather than fight it, sometimes the better thing is to say, okay, let’s embrace it. And how do we manage it? And if you do it on the right scale, if you do it with the resources that you have, and you’re able to justify how it’s done, what we found is NCUA, for example, is a phenomenal regulator. They are very supportive of credit unions getting into this space in the right way. Now, if you don’t do it in the right way, there’ll be the first ones that come after you. And they recently did with a federal credit union in Michigan and cited them for violations of the FinCEN guidance.
Doug (09:04):
So you just said with a federal credit union in Michigan. Now, I fully expect you to tell me you need to be state-chartered in order to do this. Tell me about that.
Gary (09:13):
No, actually, so the FinCEN guidance applies to all depository institutions, banks, thrifts, credit unions. And so we have a very clear line of sight as to what we have to do to develop a program, to properly provide banking services to the cannabis industry. And it’s established, it’s been in place since Valentine’s Day, February 14, 2014.
Doug (09:38):
You don’t need to be state chartered. You need to be operating within a state that has some form of legal cannabis. And what I’m imagining as uninformed as I am is that you get into the business, your deposits surge, your capital ratios blow up, and you don’t want that. These 20 customers that are in this space, why are they in it? And how is the credit union benefiting from being in that business.
Gary (10:03):
Well, I will tell you, in every case, without exception, they’re in it because it provides a benefit to the community and across the board—bank, thrift, credit union—they are in it because they believe that it supports the community. And at various levels, on the medical side for the medical benefit, for the cash side, for the safety benefit, okay. Now, are there benefits to the institution as well? Yes. You get a lot of liquidity. A lot of liquidity. We’ve had clients have to change their liquidity policy because they have so much liquidity. But you get comfortable with the business,to the point where we have clients now that are looking to lend to cannabis companies. Whereas before it was just depository services, you end up providing services, not just to the cannabis business, right? But you end up providing services to all of their own employees.
Doug (11:01):
I get what you said very much as a part of the community service. But then I imagine, I think you said that credit unions are looking into lending. Does that mean they’re not there yet? And then the second, talk to me about fee-income opportunities in this business.
Gary (11:18):
The clients that are looking into lending are at the very early stages of it. So these are clients that have been providing services to the cannabis industry, let’s say for the last three to four years. And so they’re very comfortable with the business, the flow of the business, the flow of the deposits. They’re very comfortable with how the owners and the managers run that business. It’s consistent like any high-risk business, right? From a BSA/AML perspective, you develop a profile on that high-risk business. And what they’re finding is they stay within the profile. There’ll be cyclical ups and downs, especially during holidays, even in the medical cannabis industry. You’ll see ups during Christmas, for example. So there’ll be cyclical increases and decreases, but you build your profile on the company. And what you find is they stay within that profile. And so once you’ve become comfortable with how they’re operated, then you can look at, okay, how can we provide loans to them?
Gary (12:31):
Like I said, our clients that are doing it, it’s in the very early stages of exploration. There are issues that come up. Like, for example, if they default on their loan, we just can’t take over their business because you’re not licensed. It’s sort of like if you were making a loan to a bank and the bank defaulted on that loan, you couldn’t just take over the bank, right? Because you’re not a bank-holding company, you’re not licensed to run a bank. It’s the same thing with the cannabis industry. And so you have to think about, what would I do if there was a default? How do I seize the collateral? How do I get rid of the collateral? There’s a lot of issues related to lending. A lot of issues related to lending.
Doug (13:09):
Fascinating. So in the cannabis business, you have the growers, the manufacturers, and the dispensaries. Can Credit Unions participate in all of those spaces?
Gary (13:17):
Absolutely. And depending on state law, some of it is all mashed together. So when you get a license, you get a license to cultivate, to process an extract, and to sell. Other states know that they’ll license growers and extractors, and then they’ll license dispensaries. . And then some states are very granular; they’ll license transporters. Again, it depends on the state law. You have to understand how your state law licenses, what’s the state licensing regime. The nice thing about it uniformly across the board is that all the states do background checks on all the owners. They’re highly regulated—the systems that they use track seed to sale from the time that the plant is a seedling to the time that it’s processed and sold as a finished product. There’s a lot of things that are beneficial because we’re probably the highest regulated industry in the country. And so when you look at how they’re regulated, it’s not as granular as we are, but it’s granular enough to get very comfortable to match up production to sales, right? And to make sure there are no gaps in there.
Doug (14:29):
Very interesting. So I know that this business has an additional level of compliance and cost around the anti-money laundering activities. Talk to us about what sort of activity and costs you’ve seen for your clients in this space.
Gary (14:44):
So what our clients do again, uniformly across the board, is they pass the cost of the enhanced monitoring and the enhanced due diligence, on to the member or customer. This is an industry that understands that and is used to paying that. What we do is we suggest that to clients in the application process, right? So when you’re going to the cannabis company and you’re saying, yeah, we’ll provide services to you, but there’s an application process that you have to go through. It really is a due diligence process to determine whether or not we would even consider taking them on as a member and providing them with services. We charge an application fee for that because it’s a very detailed, granular review, including boots on the ground visit to their facility. We want to look at their business plan. We want to see their entire application that they provided to the state regulator to get that license, okay?
Gary (15:42):
And state regulators, depending, again, on the state, are very granular as to what that application looks like, including what the profit margin is going to be between your cost of goods and what you’re going to sell to the consumer.
Doug:
Really?
Gary:
Oh yeah. And every state is different, but the thing is you can get the entire application, which includes your business plan, the background checks, you can get that from the potential member as part of your due diligence process. It is a detailed due diligence process. And so we say, okay, look, will you pay an application fee? They have no problem paying the application. And then when you look at the services that you’re providing and the enhanced due diligence and enhanced monitoring that you’re going to have to provide, can you pass that cost on? Yes, you can pass that cost on.
Gary (16:33):
I have to preface this by saying, I intentionally never asked clients about the fees that they charge, because one client will always say, well, what are your other clients doing? And I would love to say, I have no idea. I recently put one credit union client in touch with another credit union client to talk about what were the things that they took into consideration when they were developing their pricing model. Because I told them I intentionally don’t want to know. But I will tell you this. My sense is that our credit union clients are passing the cost on to the business member at their cost. There’s no markup. Non-credit union clients I think are marked up. So they’re making a profit on that. Plus the money that comes in, it stays there. And like we talked before, the pun is very sticky money. And so you then have the ability to relend those funds. And that’s part of the benefit of having that excess liquidity.
Doug (17:36):
Yeah. So let’s switch hats for a second. Let’s go to the related, but legal side of things for CBD and other things that I might not know the names to even ask you. Talk to me about the banking relationships with those sorts of businesses.
Gary (17:49):
Great. That’s an excellent question. A lot of people get that confused. They think that CBD is marijuana and CBD is not marijuana. CBD is industrial hemp. And the Farm Act of 2018 made that legal. And so they took industrial hemp, which they now define as a matter of federal law as a plant that has a THC content of 0.3% or less from a dry weight basis as not being marijuana. So it’s not a schedule one controlled substance. Some people once said that it’s as legal as soybean, which is true, right? But it requires more monitoring because nobody needs to be licensed to be a soybean grower, right? But there are state regimes for licensing hemp growers, processors, and sellers, and there’s different ways to grow it. Like you can grow for the flower, which is where the CBD is.
Gary (18:48):
You can grow it for industrial products. There’s about 25,000 products that hemp is used in. As a matter of fact, I had a shirt that I got from Orvis that I stained. My wife bought me this Orvis shirt and I was like, gee, I got to try and get the stain out. What’s this thing made out of? A hundred percent hemp. They’ve come up with these hemp bricks where they take the fibers from hemp, they grind them up, chop them up. And they form these bricks. These bricks supposedly absorb CO2 out of the air and actually strengthen the product. They’ve taken hemp plants and put them in the ground and they will absorb toxic ground waste. So they cleaned the soil, right? They turned it into flooring. They use the oil for industrial purposes. It’s in cosmetics, it’s in other hair products.
Gary (19:42):
So industrial hemp has been around for a long, long time. It is a sister of the marijuana plant. It just doesn’t have a psychoactive THC level. We tell our clients that if you’re interested in providing services to the hemp industry, it’s really a no-brainer. In a sense of, you wanting to get the licensing, we basically will give you a form. If you’re going to onboard the business member, have them sign the form, get the documentation. They have the test under state law. It’s a great product. I don’t know about the CBD oil much. Some people are saying, oh, well it helps with inflammation. It does this. It has that. I don’t know if that’s real or not. I have no idea, right? I’m not commenting on that. But in terms of the growing and the industry itself, it’s a great industry.
Gary (20:33):
Now there’s crop insurance that the USDA offers for hemp growers. The states were very interested in getting hemp as a product in their states; they were giving grant money to farmers to grow hemp. Again, depending on how you grow it very little irrigation, very little pesticides. But if you’re going for the flowers, then people have likened it to you’re in North Carolina, right? In Virginia, they have likened it to tobacco, where it does need irrigation. It is susceptible to pests and it needs to be hand harvested and dried in order to make it a viable product.
Doug (21:09):
So is CBD legal in all states?
Gary (21:11):
Even though federal legislation made it legal, it said states are free to regulate it otherwise. And so there are states where CBD is illegal, but it’s not at 0.3%. It’s like at 0.1%. Where there are still states where even industrial hemp is completely illegal. So again,if you want to do it, you got to start with, what does my state allow?
Doug (21:35):
If your state does allow it, then you’ve got a cash-heavy business that you need to watch out for the anti-money laundering activities and prove that, right?
Gary (21:45):
That’s actually a great point. Because marijuana, which is an illegal, psychoactive, THC levels, you can’t use any credit card sales. No card brands will allow you to process their sales. Industrial hemp, however, is legal as a matter of federal law. And so you can process credit card transactions. So you go online and you want to buy CBD oil, CBD oil by definition is industrial hemp. I can go online, put my order in and put my credit card information in and they’ll send it to me. I can’t do that for marijuana.
Doug:
So it’s not nearly as cash heavy because of that?
Gary: Correct.
Doug (22:18):
If you’re taking on cannabis-related businesses or even CBD businesses, I guess there’s always the risk of regulatory change, right? This area seems more exposed to that sort of risk. How do you deal with that as an institution?
Gary (22:36):
So interesting. That’s excellent. Really excellent question. Because when you do your risk assessment, you always have to have an exit strategy, right? Where’s my exit ramp if the law changes? And then keep in mind, there’s 38 states now where marijuana, I’m talking psychoactive marijuana, not about industrial hemp, where marijuana is legal, either recreational and medical or just medical, right? So it’s most of the country. So the likelihood of a change is probably slim, I’d say slim to none. But you still have to build an exit ramp in your risk assessment. And so what our exit ramp has always been is if the product is declared illegal, and so in other words, they shut down that exemption for medical marijuana, that the board consider exiting the business. And again, it’s just a consideration, right? And so a lot of it is facts and circumstances. You know, the old joke here in Washington, DC, right? What does AG stand for? It’s not attorney general, it’s aspiring governor. We always find that the US attorney for the state and state attorney general, if state law has already established the state regime for the licensing of cannabis, whether it’s medical or recreational odds, it’s gonna stay that way.
Doug (23:57):
Outstanding content, Gary, thanks so much. Any final thoughts for our listeners that might be interested in this area?
Gary (24:04):
Final thoughts: it’s a deliberative and thoughtful process that you want to go through before you do it and do it within your ability, right? So if you’re a smaller credit union, take a look at your resources. And if it’s, let’s do a pilot program with just two or three marijuana- or cannabis-related businesses, let’s just do it with those two or three, but let’s do it really well. Not get sideways with the regulators, stay in our lane, stay in compliance. And that’s really I think what the takeaway is, if you do it as a pilot program, it’s scalable and anybody can do it regardless of their size.
Doug (24:42):
Awesome. Great. Thanks so much, Gary.
Gary (24:44):
Oh my pleasure. Good talking to you.
Doug (24:47):
That’s all the insider credit union knowledge we have for this episode. Are you enjoying the conversation? Be sure to subscribe and share your thoughts with other credit union leaders by leaving us a review. See you next time on “C.U. on the Show.”
Speaker 3 (25:06):
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investments may be appropriate for you consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted. All performance references are historical and are no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
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