CUSO Takes Cannabis Banking Higher

At a time when cannabis banking legislation hangs in limbo and the substance itself remains federally illegal, some credit unions have carved their niche in providing financial services to cannabis businesses while others are still hesitating to enter the market or have written it off altogether. But one CUSO is betting on credit unions becoming more deeply entrenched in the world of cannabis cultivators, dispensaries and related businesses, and has carved a niche of its own offloading two of the biggest pain points for credit unions in the space – compliance and technology.

The $96.5 million, Santa Rosa, Calif.-based North Bay Credit Union, which began serving cannabis businesses in 2017 and was recently named the preferred banking partner of the California Cannabis Industry Association, launched the CUSO Higher Growth LLC in 2021 along with partners Austin Capital Trust Company in Henderson, Nev., and Silicon Valley fintech MRBD. Higher Growth’s credit union clients can offer basic financial services to their cannabis business members, including checking and savings accounts, debit cards, credit cards, electronic payments, B2B transfers, remote check deposit and employee direct deposit; access an API-driven data integration and analytics platform; benefit from compliance services that help ensure the credit union is adhering to regulations such as the Bank Secrecy Act (BSA), Currency Transaction Reporting (CTR), Anti-Money Laundering (AML), Know Your Customer (KYC), Customer Identification (CIP) and FinCEN reporting; and deliver cash management services to cannabis business members including vaulting, Smart Safes and armored car transport.

Carole McCormick, who is president of Higher Growth and has served as North Bay’s chief compliance officer since 2018, said the CUSO’s recent focus has been on making platform improvements, as clients’ check and ACH transactions have so far been processed through North Bay’s platform. Higher Growth is now working with the Federal Reserve to process those transactions through its own platform, and all clients are expected to operate exclusively through the CUSO’s platform beginning this month.

McCormick noted one of Higher Growth’s most unique offerings is an interest-bearing investment account that pairs with each business’ checking account. But the CUSO is primarily focused on solving the key issues that most often keep credit unions from entering the cannabis business space.

“Most credit unions don’t have the infrastructure set up to take on the BSA compliance oversight that’s required,” she said. “Also, there’s a commitment up front if you’re going to get into cannabis, and that’s really the place where we think Higher Growth can add value, because our platform can be white-labeled for a financial institution, but it would still be my compliance team managing it for them. So when they’re out marketing to cannabis operators, the actual platform that their operators come into could have their name on it. We can provide all of that for them without them having to build it. And there’s a huge expectation from regulators where if you’re going to get into cannabis, you have to have some technology in place. That’s really the place where we expect Higher Growth and the platform to relieve that for them, including the ability to file SARs and CTRs in their name on their behalf, if they’re taking the deposit.”

Since joining North Bay about four years ago – when, according to McCormick, finding talent with specific expertise in cannabis banking was next to impossible – she has built a compliance team of approximately 20 people, partially crediting the strength of that team to her ability to hire remote employees from across the country as a result of COVID. Most team members brought a compliance background and learned the cannabis-specific elements on the job; possessing open-mindedness and curiosity has been equally important to a new hire’s success, McCormick said.

“Every cannabis operator that we deal with, even if their license types are the same, is unique and different. So what I’ve found is having team members who are curious about the business and want to learn have been the most successful,” she said.

She explained that because cannabis isn’t federally legal, regulatory guidance at the federal level doesn’t exist, leaving cannabis bankers to build their own compliance programs that layer BSA, CTR, AML, KYC and CIP regulations with guidance from the NCUA and FinCEN. “And then you rely on your auditors and examiners to make sure you’re not missing something, because there’s no set rule around, ‘Here’s how to bank cannabis,’” she added.

That complicated and uncertain landscape of cannabis banking regulation, along with the fact that regulations often change (not to mention that different towns, cities and counties have their own rules around how cannabis businesses are taxed) is why it can be difficult to maintain compliance in the space and identify whether a transaction should be considered suspicious or not. Within the Higher Growth platform, business intelligence tools track a business’ transactions, and if unusual activity occurs, an alert is sent out to the user for review. McCormick noted that oftentimes, data entry errors on the business’ end can trigger red flags in the platform, and that performing an accurate analysis of suspicious activity requires a full understanding of each business’ operations.

“We have to do everything we possibly can to make sure that the funds coming into the accounts are from legal sales,” she said. “That’s really what it’s about when it comes to [why some credit unions hesitate to do cannabis banking], it’s about the compliance burden, but it’s also about the number of people that it takes and the expertise, and that’s a big commitment.”

In addition to upgrading Higher Growth’s platform, the CUSO’s leaders have their eyes on expanding capabilities for credit unions to serve businesses that operate in multiple states. At this time, cannabis is legal for recreational and medical purposes in 18 states and Washington, D.C., and legal for medical purposes only in an additional 20 states.

What’s more, Higher Growth plans on introducing the ability to share data among clients anonymously in order to give them a glimpse into how they’re performing compared to their peers, entering the commercial lending space and offering wealth management services for cannabis business employees.

With just 202 credit unions and 553 banks in the U.S. serving cannabis businesses as of the end of September 2021, according to the most recent data from FinCEN, many cannabis industry professionals are advocating for legislation that could expand access to financial services, namely the Secure and Fair Enforcement (SAFE) Banking Act, which would prohibit federal regulators from taking punitive measures against depository institutions that provide banking services to legitimate cannabis-related businesses and ancillary businesses that serve them. The SAFE Act has passed the House six times, most recently as an amendment to the America COMPETES Act, but has not been taken up in the Senate.

McCormick said she believes the full passage of the SAFE Act might make more credit union leaders feel comfortable entering the cannabis space, but that there are misconceptions around what the law would accomplish.

“There are some [cannabis business] operators out there who think SAFE Banking means that every bank will start offering cannabis banking, and that it will all be free. I don’t think any of us who do this believe that will be true, because in any cash-intensive business, there’s always going to be compliance oversight, Anti-Money Laundering oversight, Bank Secrecy Act – those things won’t go away because of the SAFE Act,” she said.

She also pointed out that despite cannabis remaining federally illegal, credit unions and businesses operating in the space are not concerned about the government shutting them down, in part because the industry has gained the support of many officials, including NCUA Board Member and former Chair Rodney Hood.

“[Credit unions] are getting support at the highest level for offering cannabis banking because it makes the community safer, and credit unions are here to serve communities,” she said. “And they all want to do it right. So I don’t spend a whole lot of time worrying about that. Now, if the Fed decided to be heavy handed and shut everything down, then sure. But if you think about that, that would be billions of dollars in cash again [being exchanged], and how safe would that be for this country? So that would be pretty spectacular, and not in a good way, if they were to do something like that.”

And while the federal government removing cannabis from its list of Schedule I controlled substances would be welcomed by many, McCormick warned of one downside to federal legality.

“What people don’t think about is that when it’s federally legal, what that’s really going to mean is another whole set of regulations,” she explained. “So your compliance burden actually goes up because you will have state and federal regs, and as a financial institution banking cannabis, whether you’ve just started at that time or you’re like us and continue to grow your program, that’s just going to mean more oversight and more things that you’re required to do. Personally, I think we’re years away from federal legalization, and when that happens, there’s going to be more and more expected from everybody that’s in the space.”