By John Vardaman
This article will focus on the compliance challenges unique to banking marijuana-related businesses (MRB), and what my company, Hypur, is doing to address them. (For these purposes, “compliance challenges” does not mean federal marijuana and associated banking laws, which I address separately here.) Hypur, a compliance and payments software company, is currently assisting banks and credit unions across the country responsibly, transparently, and profitably service MRBs. As a result, we know firsthand the challenges these institutions face, and how to overcome them.
1) Resources. There is a widely held assumption among financial institutions that serving the marijuana market requires hiring and training additional compliance personnel specifically to service MRB customers. This at a time when compliance is already consuming a significant amount of institutional resources.
What is the Hypur solution to this problem? Our technology enables banks to automate many of the manual processes associated with banking MRBs. Such automation is especially critical in this context because MRBs are far more complicated than your garden variety commercial customers. From document and license management, to transaction monitoring, enhanced due diligence, and federal reporting requirements, MRBs impose obligations on banks unlike any other industry. This means that banks serving MRBs cannot afford the error prone deficiencies associated with manual processes. Automation is the surest way to reduce, if not eliminate, those deficiencies.
Now to be clear when I talk about automating manual processes I do not mean replacing the human aspect of compliance, but enhancing it. Hypur’s technology is a tool that must be appropriately deployed and utilized to meet the specific features of each financial institution and their MRB customers. The bank and its management are still responsible for meeting all applicable state and federal regulations for marijuana banking. But by partnering with Hypur, financial institutions can perform compliance at a higher level without adding to their compliance budget. With Hypur, compliance goes from being a revenue drain into a revenue driver.
2) Transaction Monitoring. Most states that have legalized marijuana require that licensed MRBs provide inventory and point-of-sale (or POS) data to the state’s “Track and Trace” system, which tracks every marijuana-related product from inception until it is sold.
The point of this requirement is to provide the state with real-time information to ensure MRBs are operating in compliance with state law. But just as it's necessary for the state to monitor marijuana commerce in real time, so too must financial institutions have such information to satisfy their own compliance obligations. The problem is that legacy compliance technologies are not capable of obtaining real-time POS information.
What is the Hypur solution to this problem? We have Application Program Interfaces, or APIs, which enable POS systems to integrate into the Hypur platform and provide real-time transactional information to our financial institution partners. It is hard to overstate the significance of this information from a compliance perspective.
Traditional compliance technologies identify suspicious transactions only after a transaction has occurred and money has been deposited into the institution. With the Hypur technology, financial institutions can set parameters that determine what transactions its MRB customer can conduct, and thus what money does, and more importantly does not, flow into their institution.
For example, a bank could decide that it never wants its MRB customer to conduct a certain volume or dollar amount of transactions on a daily, monthly, or annual basis. Any transactions that would exceed those limitations would be prevented from occurring. From a banking compliance perspective, the best kind of suspicious transaction is the one that is never allowed to occur. Giving banks the ability to proactively prevent suspicious transactions is the Holy Grail of compliance.
3) Following Federal guidance. The 2014 Cole (DOJ) and FinCEN memos remain the starting point for all marijuana banking compliance. But certain aspects of these memos have proven to be challenging for banks, such as preventing revenue from the sale of marijuana going to criminal enterprises, gangs, and cartels.
This requirement poses the following dilemma for banks – when their MRB customer attempts to make a cash deposit, how does the bank know that that deposit does not include co-mingled funds generated by, and ultimately going to, criminal enterprises, gangs, or cartels?
What is the Hypur solution to this problem? Expected Cash Reports, which enable financial institutions to know exactly how much cash was transacted by their MRB customer on a daily basis, and thus how much cash to expect at deposit. For example, if the bank’s expected cash report is $5,000 in validated cash transactions, and their MRB customer attempts to make a cash deposit of $10,000, the bank knows something is wrong and can refuse to accept that cash.
4) Marijuana as a cash-based industry. So long as major credit card brands prohibit marijuana-related transactions on their networks, state-legalized marijuana is expected to remain primarily a cash-based industry. This poses challenges for financial institution, as cash makes it more difficult to monitor transactions and comply with relevant compliance requirements.
What is the Hypur solution to this problem? We have devised an electronic payment application for marijuana transactions that enables account-to-account transfers and do not rely upon credit and debit card networks. Known as Hypur Commerce, this application provides significant benefits to banks, merchants, and consumers.
For banks, it offers an additional level of compliance, as they now have insight into their customer’s customer. Hypur Commerce also provides an important safety benefit to MRBs, which no longer have to serve as target-rich storage facilities of cash. Finally, for consumers, Hypur Commerce offers the convenience of an electronic payment system that can be conducted with a smartphone.
These are just some of the ways in which Hypur can address the unique challenges associated with marijuana banking, and in the process, elevate compliance and transparency to new levels.
John Vardaman – EVP & General Counsel, Hypur (formerly with the Department of Justice and Cole Memo/FinCEN guideline author). If you have any questions, please email jvardaman@hypur.com.
