Ancillary Businesses & the Cannabis Industry: What CUs Need to Know

There are many players in the cannabis-industry supply chain. However, there is one that every credit union should be on the lookout for at all times: The “ancillary” business.

An ancillary business is an organization that supplies products or services to the cannabis industry, but does not work directly with the plant or plant by-products. Ancillary businesses would not typically hold a license for cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing or purchasing cannabis or cannabis products, yet they handle funds that originate from the sale of cannabis.

There are three primary reasons why credit unions need to understand and recognize ancillary businesses:

• Ancillary businesses are a segment of the industry that is exploding alongside the legalization of cannabis. From 2019 to 2020, the legal cannabis industry grew nearly 40%. In 2020, the cannabis industry generated $17 billion in revenue, and it is expected to reach $30 billion by 2025. There are an estimated eight to 10 ancillary businesses supporting every one licensed cannabis-related company. These range from accountants, landlords, staffing firms, nutrient suppliers and equipment companies. If your state has any level of cannabis legalization, there is a high probability the number of ancillary businesses in your designated field of membership have grown as well.
• Ancillary businesses can be an opportunity for credit unions to grow their business membership and support their communities, as large banks have demonstrated zero appetite for cannabis-related accounts and close these accounts when identified. “Each month, I meet with businesses serving cannabis companies that have recently been closed out of traditional banking. Some companies reported banks closing their accounts once they started depositing new cannabis revenue, which can be an operational nightmare for these businesses,” Lily Kerrigan, sales executive for PayQwick, shared.
• Ancillary businesses are likely already in your business account portfolio if your state has a level of legal cannabis, and may be receiving payment for goods and services with cannabis-generated funds. Recognizing ancillary businesses should be a top priority. While it is not necessary to close these accounts, it is time to develop a plan to mitigate the additional risk and aide the management of ancillary cannabis businesses. Supporting the communities you serve, and the ancillary cannabis businesses within those communities, will lead to the addition of internal resources or the exploration of partnerships to meet the regulatory scrutiny that comes with supporting these legal businesses.

To date, 36 states have legalized medical marijuana usage and 17 states and territories have legalized recreational marijuana. The licensed cannabis industry is growing at breakneck speed. FinCEN has set strict standards to allow financial institutions to administer accounts for cannabis-related businesses. To meet FinCEN’s standards, financial institutions must update their BSA/AML policies and practices to include the development of an enhanced due diligence program to review account owners and businesses more thoroughly prior to opening accounts. This includes ensuring businesses are appropriately licensed, with periodic check-ins throughout the life of the relationship. Ongoing requirements include the evaluation of every transaction and reporting of every cannabis-related transaction.

Financial institutions must have systems in place to monitor the origination of all funds to mitigate the risk implicit in cannabis banking. It is imperative these systems are combined with experienced compliance officers, cannabis industry experts, and advanced technology to meet strict and evolving regulatory guidance. Is your organization reviewing business accounts on a routine basis to gain awareness of changes in circumstances, like providing services to high-risk industries? When executed with caution and precision, cannabis banking can provide credit unions with a new source of low-cost deposits, new members with lending needs and non-interest income sources. Is it time for your credit union to begin a cautious conversation about cannabis this year?

Dean Odle is Head of Financial Institutions for the Calabasas, Calif.-based PayQwick Inc., a compliance-based financial services provider supporting the cannabis industry.