When the federal government
issued policy guidance in 2014 as to how financial institutions (FIs) could
permissibly service marijuana-related businesses (MRBs), industry reaction was
swift and decisive – most FIs wanted nothing to do with the reputational risks
associated with marijuana. Fast-forward three years and we are beginning
to see a noticeable change in the perception of banking MRBs. With ever growing
acceptance of legalized marijuana, MRBs are increasingly viewed by FIs as
opportunities to be pursued, not risks to be avoided. Moreover, federal
and state officials see FIs as the key to getting marijuana proceeds off the
streets and into the financial system where they can be tracked and taxed.
In short, the image of marijuana banking is changing.
Let us begin by separating reputational risk into two
categories: Reputational risk caused by
the action (or inactions) of FI’s themselves, and the reputational risk
associated with servicing clients considered
to be controversial, such as MRB’s.
Reputational risk is commonly defined as the following: “The potential that
negative publicity regarding an institution's business practices, whether true
or not, will cause a decline in the customer base, costly litigation or revenue
reductions.” Certain byproducts of an institution’s direct actions or
inactions can be defined. This can be
demonstrated by the $185 million dollars levied against a large institution last
year for fraudulently opening accounts without their customer’s consent. Another example would be civil money
penalties for an institution’s failure to comply with various regulations. Other examples would be negative publicity
from data security breaches in an FI’s computer system, formal enforcement
actions, and accounting irregularities. Matters
such as these are typically public
information, with media exposure at various levels.
The airlines have been in the news recently for demonstrating
less than exemplary customer service. Despite
largescale press and social media calls for boycotts, I have yet to see the
public threatening to locate and boycott the financial institutions servicing
those airlines. Or consider individuals
that have conducted violent crimes, or crimes against children. Are financial institutions obtaining lists to
screen their clients so as not to be providing services to those individuals
due to potential reputational risks? If
you like or dislike a particular political party, does where they bank
influence your personal banking decisions?
Let us now discuss banking MRB’s. I recently conducted a Google search of the six
known FIs servicing MRB’s in the state of Washington for any negative stories
based on their association with marijuana.
The research results primarily consisted of articles containing
profitable earnings and various employee promotions; there was not a single
negative story about serving MRBs.
Twenty-nine states have legalized
marijuana in some form. Recent surveys
have indicated that 80% of Americans think marijuana should be legal for
medical use, and 49% approve of its use for recreational purposes. It is not only public opinion that has been
changing, but that of financial institutions as well. While the reputation of the financial
services industry continues to suffer from the financial crisis, the fact is
that most banks and credit unions take seriously their role in their
communities. And what they understand is
the potential harm that could befall those communities if the marijuana
industry remains unbanked. Many
financial institutions believe it is their civic duty to bring this money in
house where it can be accounted for, monitored, and taxed, and not left in the
streets wreaking havoc on communities.
Bringing financial services to MRB’s brings a number of
desirable benefits, such as strict scrutiny and compliance to federal policy
and state laws, BSA / AML oversight, and the ability to fully collect taxes on
MRB’s. Banks that are responsibly
banking MRB’s are removing cash from the streets and bringing legitimacy and
transparency to an industry previously relegated to the financial shadows. Perhaps the time has come to recognize that it
is the FI’s serving MRB’s that are providing a valuable community service, as
opposed to those that do not.
If you have any questions, please email Hypur executives directly aherrera@hypur.com and jvardaman@hypur.com.
Authored by:
Andre Herrera – EVP of Banking & Compliance, Hypur
John Vardaman – EVP & General Counsel, Hypur (formerly
with the Department of Justice and Cole Memo/FinCEN guideline author)