Payment processing problems persist in the cannabis industry, and despite the legalization of recreational cannabis in several states, it hasn’t gotten any better. Since cannabis is still federally illegal, many financial institutions shy away from providing banking services to cannabis businesses. Hypur supplies payment technology and compliance solutions for markets like cannabis that are finding financial solutions challenging.
While cannabis may be legal in specific states, banks are opened up to the possibility of the Federal Deposit Insurance Corporation seizing funds if they take money earned from drug trafficking. It’s called money laundering. With the cannabis industry bringing in approximately $7 billion in 2016, this is clearly a crippling problem for the marketplace.
The Cole Memo and BSA Expectation documents released in 2013-14 set specific guidelines that made serving the cannabis industry perfectly legal, but the stringent regulations have acted only to scare banks further away. Banking solutions for these challenging industries haven’t gotten any better.
The Cole Memo
The Cole Memo discussed how Congress determined that cannabis was a dangerous drug and that it was a severe crime to sell and distribute it. It also noted that it was a primary financial source for cartels and gangs enhancing the seriousness of illegal cannabis trafficking. Federal authorities deem certain enforcement measures critical like the prevention of the following: selling cannabis to minors, violence and the use of firearms, criminal enterprise financial revenue, trafficking of the drug across state lines, using legal activity to cover illegal drug activity, driving while intoxicated, and the use or possession of cannabis on federal property.
The memo was created as a guide for law enforcement and attorneys with The Department of Justice to help them focus their limited resources on actual criminal activity instead of legal sales and cultivation. Lower level criminal violations like minor possession have primarily been left to state and local law enforcement to prosecute. This discretion is especially crucial since some states have legalized cannabis for recreational, medical, or both uses.
While the federal government doesn’t have the time to track down and enforce all levels of possession and sales, especially in legalized states, it can still criminally charge any violation of federal laws. This means that technically since cannabis is illegal, without guaranteed protection from enacted legislation like The States Act, it’s possible to charge all federally unlawful cannabis violations.
The report on BSA Expectations strives to clarify the expectations of the Bank Secrecy Act as it applies to the cannabis industry. As more and more states entered the legal arena, Deputy Attorney General James Cole put it out to provide guidance on how federal prosecutors handled cannabis enforcement under the Controlled Substances Act (CSA).
The Controlled Substances Act of the Comprehensive Drug Abuse and Control Act of 1970 was signed into law on October 27, 1970, by the 37th president, Richard Nixon. A very controversial president anyway, he added to his legacy by bringing the Act into law and angering many by assigning cannabis its schedule I listing.
Cannabis as a Cash Business
There are many reasons why operating cannabis businesses with cash are inefficient and problematic. First of all, it’s just inviting security problems when your business runs on cash. Storing and transporting the money makes you vulnerable to theft and robbery. Paying employees in cash, especially in large-scale companies is difficult.
Using digital wallets and credit cards to pay for cannabis goods hasn’t been readily available on many of the networks because of the drug’s federal status. An Obama Administration memo provided some measure of legal protection until Attorney General Jeff Sessions issued a memo repealing the policy. The discretion is now up to the U.S. attorneys themselves. This means the possibility of criminal prosecution has increased in the banking industry.
Hypur enables banks and credit unions to enter and scale within the highly-regulated, cash intensive sectors. It was created as a solution for all highly regulated industries that had banking challenges even before cannabis like money transmitters, payday lenders, check cashers, and pawn shops. At this time, Hypur serves financial institutions throughout the country banking the state-legal cannabis industry.
Hypers in-house team consists of experts that have faced the same challenges the cannabis industry currently faces, and members that played vital roles in the banking sector. For example, Executive Vice President & General Counsel John Vardaman helped co-author The Cole Memo. Executive Vice President of Banking and Compliance, Andre Herrera, was Chief Information Officer for 19 years in a California bank. While there he banked many highly regulated industries. Hypur’s CEO, Christopher Galvin, began his career in investment banking and has experience in corporate finance. Tyler Beuerlein, the Vice President of Business Development, has an extensive brand-building background and has managed strategic partnerships and critical relationships.
Currently there is at least one transparent banking option in nearly every state with a legal cannabis program. Beuerlein stated each new medical or recreational market creates a new dynamic in that state from a banking perspective.
When the idea of blockchain and cryptocurrency comes up, which Beuerlein has said they have heard a lot about, he cautions that while there are many applications for blockchain, cryptocurrency provides less transparency and additional compliance burden for banks and credit unions. In an industry facing more scrutiny than most, less transparency is definitely a problem for financial institutions. Also, if the value of cryptocurrency changes, that initiates a possible taxable event and further compounds the tax problems with 280E. Lastly, most financial institutions transparently banking the cannabis industry will simply end their banking relationship with operators attempting to use products like cryptocurrency.
If you don’t run your business the correct way with both banking and taxes, then you’re setting the business up for failure. Beuerlein says that you must understand the industry. The better you understand that you need to bring your business out of the shadows, the better your chances for success are. You’ll run into some serious issues that you won’t recover from if you don’t understand the repercussions that can occur due to lack of transparency.
One of the most significant challenges that Beuerlein says plagues the industry is simply misinformation. People need to understand what is really happening and what is currently going on in the industry. Knowing what is permissible and what is not is vital. Education is critical and a big hurdle that cannabis businesses keep scaling.
On the banking side, one of the biggest problems is educating financial institutions on the fact that banking solutions for the cannabis industry are available and they are currently being used throughout the country. The industry can and is being banked profitably and compliantly throughout the US.
The Hypur Solution
Hypur has grown robust technology that’s unique, and they have the team of in-house experts mentioned above to back it up. Beuerlein said that the group saw a distinct void in the market and began analyzing the pain-points of marijuana related businesses. The group felt that the problem was not being approached correctly.
What’s differentiated Hypur is that they work to solve the problem from the financial institution out. Hypur’s software is a combination of a RegTech and FinTech which enables financial institutions the ability to eliminate “blind spots” through the entire life cycle of a prospective merchant. The technology puts banks and credit unions in a continuously proactive, not reactive environment through access to real-time data sets and automation. If financial institutions can’t solve the regulatory and banking issues they will most likely not be able to successfully bank these industries.
Hypur will gladly send operators to institutions that are openly banking within these respective markets, such as cannabis. They’re also happy to help educate them on the things that they need to stop doing and why. Many of these problems can potentially affect their banking relationship when and if they get one.
Branded Card Networks
Branded credit card networks are opposed to the cannabis industry until its federally legal. This goes for debit products and credit card processing. Any cannabis companies running these products in their United States operations, regardless of what they’ve been told, is doing so against the network’s rules and regulations. If this is happening, somewhere along the line an application to a banking institution has been fraudulently submitted. The operator would have to misrepresent the true nature of their business to gain access to these forms of payment processing.
Beuerlein advised that in his estimation there are truly less than 30 banks and credit unions in the U.S. openly banking this space and in many cases, they’re taking the approach that if they find out an operator is using those forms of payment, they’ll simply end their relationship with that operator by closing their accounts.
What’s worse is that many times this financial institution may be the only transparent option in the state that you can work with, so you’ve ruined that relationship by violating the rules of their program you may be without Banking altogether.
This is one problem that de-scheduling cannabis may help, but there will still be limited financial institutions willing to serve the cannabis industry. The money services businesses industries have provided a similar example as there are still a small number of institutions willing to Bank those industries throughout the US. Banking operators like the cannabis industry impose a serious burden as a regulatory compliance risk for financial institutions.
Hypur as a Resource
Hypur positions itself as a resource to these industries and one that is welcomed by the newer cannabis industry. They want to prevent businesses from making mistakes with long-term effects on banking relationships. Quick, thoughtless decisions will hurt your business in the long run, and it’s not sound business practice.
The banking climate is also different state-to-state so one state may have six financial solutions and one may not have any. For each operator, this presents a different dynamic.
Do things by the book and if a bank or credit union asks your business to do something from an operational standpoint, then do it. They typically are asking operators to follow a certain process and set of rules to make sure they are meeting the demands of their regulators. You can’t afford to burn any bridges at this rate!
This article originally appeared on Cannabis Compliance and Packaging Magazine.