This is the fifth in a five-part series of articles on Banking Marijuana Related Businesses (MRBs). This installment focuses on operating procedures of MRB banking.
After researching regulatory guidance, becoming an expert on your state’s marijuana laws and marijuana businesses and creating an MRB banking policy the hard begins – actually banking MRBs.
MRB Banking Software
Traditional banking technology platforms weren’t designed for the unique needs of MRBs – leaving gaps between the needs of marijuana banking and the capabilities of traditional banking systems.
You wouldn’t bank traditional customer accounts without using technology so don’t bank MRBs without the proper technology. Banking MRBs compliantly and profitably requires specialized marijuana banking software.
Our technology, which works alongside traditional banking systems, was designed to help financial institutions meet the needs of cash-intensive and highly-regulated industries.
Many of our products include features designed specifically for marijuana banking which are referenced below as applicable.
Opening Your First MRB Accounts
We can’t stress enough to be selective in which MRBs you provide services to. The cannabis industry is very new and faces capital constraints so there are a lot of inexperienced and undercapitalized operators who may cut corners to save time or money.
If possible, start with accounts you have an existing banking relationship with. The logical next accounts are any MRBs you developed a relationship with during your research and due diligence about banking MRBs.
We caution against publicly advertising that you are banking MRBs. You will almost certainly receive unwanted publicity and a flood of inquiries that need to be vetted.
In most states little sales and marketing is required to find MRB accounts – word travels quickly. Networking with well-respected local attorneys and consultants focused on the cannabis industry is an effective way to identify well run MRBs.
Even if other banking options exist in your state the growth of the industry means many financial institutions may be at, or will soon be at, their cannabis industry limits. Additionally, new MRBs enter the market every month and financial institutions frequently discover they have been unknowingly banking an MRB and drop them and they will be looking for a new financial institution.
New Account Due Diligence
New MRB customer documentation can be overwhelming. Enhanced due diligence for MRB accounts is significant – requiring a lot of information and a lot of documents from a variety of sources.
Most financial institutions require additional levels of review and approval of MRB accounts. The entire new account onboarding process can be incredibly time consuming and fraught with risk – especially if it’s done manually.
Hypur Diligence, our enhanced due diligence software automates the collection of information and documents during the initial due diligence process, ensures files are complete, required reviews and approvals are performed and maintains an audit trail of all activities.
Ongoing Due Diligence
Many of the documents collected during initial due diligence need to be tracked, updated and reviewed regularly.
An example is state marijuana business licenses (city or county licenses are also required in some locations) which financial institutions should be hyper-focused on to ensure their marijuana business clients remain licensed.
Hypur Comply helps financial institutions manage license expirations by sending automated document requests to clients asking them to upload updated documents.
In part-four of this article series we discussed the importance of establishing estimated activity and anticipated activity levels at the deposit and transaction levels and establishing triggers around these.
The challenging part is monitoring actual activity (especially at transaction level) and comparing it to estimated and anticipated activity to detect activity outside your triggers.
Transaction level triggers
The need to monitor account activity at the transaction level (not just the deposit level) is a primary area where MRB banking differs from traditional accounts.
Examples of transaction level triggers include:
- Maximum transaction amount
- Maximum aggregate sales volume over various periods of time (volume limits)
- Maximum number of sales transactions over various periods of time (velocity limits)
- Zero-dollar sales transactions
- Sales with no sales/excise tax
- Looping activity (repeated similar transactions at the same merchant to avoid maximum individual sale limits)
- Smurfing activity (similar transactions at different merchants to avoid maximum individual sale limits)
Core systems and BSA/AML software can’t help you ensure MRB transactions comply with state-mandated marijuana sales at the transaction level.
You could try to do it using spreadsheets and sales data provided by your clients, but this would be a time consuming and error prone manual process that no regulator would approve of.
Hypur Comply enables financial institutions to analyze MRB transactions at the invoice level (a step deeper than transaction level data) against volume and velocity triggers and to detect zero-dollar and tax-free transactions. Depending on the point-of-sale system or accounting system used by a merchant, invoice data is analyzed in real-time or on a daily basis.
Hypur Commerce, our electronic marijuana payments solution verifies the age of the consumer, validates their identity to prevent fraud, restricts transactions to a specified geo-location and helps detect looping and smurfing.
Client Reputation Monitoring
Your new account due diligence should include researching the reputation of each prospective client for red flags about their character and any potential reputational damage to your institution for associating with them.
You should also continually monitor your MRB clients’ reputation. Looking for things like violations of federal, state or local laws, losing their license for selling product to a minor, etc.
We recommend using several services, including Google Alerts to constantly monitor clients’ reputation. A log should be maintained of items discovered and their resolution.
Hypur Comply includes 24/7 online reputation monitoring and notifies a financial institution when news items are found involving a client. It also includes case management tools to document each item’s resolution and maintain an audit trail.
Physical Site Visits
Physical site visits should be performed periodically and can be performed by financial institution staff or an independent third-party free of conflicts. Site inspections should be performed by someone knowledgeable with marijuana businesses, so they can detect unusual activities or activities not consistent with a client’s stated business.
Proof of each site inspection should be maintained. Site visit reports should include proof of the date, time and location the audit was performed. This is especially critical if a third-party inspector is used to ensure they actually visited the location on the day they say they did.
Hypur Sight is a web-based physical site visit app that utilizes time, date and geo-location stamping to ensure site visits are performed as requested and are performed consistently across various inspectors (in-house or third-party). Hypur Sight also includes third-party inspector management tools.
Even with the lack of regulatory clarity and the challenges created by the unique requirements of banking cannabis businesses, it is absolutely possible for financial institutions to sustainably and compliantly provide banking services to marijuana related businesses.
Banking MRBs is not a fit for most financial institutions but sophisticated financial institutions that dedicate the proper resources to an MRB banking program can do so profitably and with great success.
The other articles in this 5-part series on banking MRBs are:
Part 2 – Banking MRBs – Regulatory Guidance