Cannabis sales are now legal in the majority of U.S. states, with several states expecting to usher in regulated dispensaries in 2022, but the provision of financial services for the industry still occupies a gray area.
The largest U.S. banks have stayed well away from the cannabis sector, as federal law still “prevents banks from banking cannabis businesses,” the American Bankers Association, a trade group, said in a letter sent this month to leading U.S. senators. Banks could be branded as money launderers should they handle proceeds from the sale of cannabis, the ABA has warned.
Other banking institutions maintain a more optimistic outlook. Regulatory guidance published in 2014 by the U.S. Treasury Department’s Financial Crimes Enforcement Network on how to bank for cannabis businesses without running afoul of FinCEN’s rules gave a green light for some financial services entrepreneurs.
One such financial technology company, North Little Rock, Ark.-based Abaca, partners with established banks to offer banking services, including accounts and payment systems, to cannabis sellers.
Risk & Compliance Journal spoke with Abaca Chief Executive Dan Roda, who began his career as a corporate lawyer, about the risks of operating a financial services business on a legal frontier. Edited excerpts follow.
WSJ: Many still think it’s impossible for cannabis sellers to obtain banking services. What would you say to them?
Mr. Roda: The cannabis industry isn’t unbanked per se. It is better described as underbanked. More likely than not, the level of service that you’re able to receive is pretty limited with respect to your business needs. [Abaca] is a financial technology company that connects chartered banks with the cannabis businesses that need their services. We do this in a digital way through a digital platform, which enables us to reach cannabis businesses where they are all across the country, from major cities to very small, very rural communities. We’re simply utilizing some recent innovations in how money can be moved and how financial products services can be delivered to deliver these services to cannabis businesses, while also solving fairly unique compliance problems that are specific to the industry.
WSJ: What compliance tools and processes do you use?
Mr. Roda: One interesting thing about the cannabis industry is [in] the vast majority of states that have a legal cannabis program, operators are required to submit a large amount of data into a state system known as seed-to-sale tracking. This system that’s been implemented and operators are required to participate in provides us really just a world of data that we’re able to tap in to monitor and analyze so that we can achieve compliance objectives through data analysis, rather than through cumbersome document and due diligence requests that some of the banks or credit unions that first started serving this space were known for imposing on their customers.
WSJ: What are the biggest risks you face?
Mr. Roda: The largest compliance risk in cannabis right now really comes from a product that is produced in an environment that looks and feels like a lawful regulated cannabis production environment, but that is really perhaps run by a criminal enterprise that is funneling product to places where it is not supposed to go. The largest risk for the financial system is to be able to identify and differentiate [that] from a legitimate cannabis business that is producing legitimate income.
WSJ: How are you meeting the compliance challenges as your business grows?
Mr. Roda: The total solution to this problem involves, in varying ratios, the three components of people, process and technology. As we grow, and as the number of states we’re servicing grows, certainly we need to add to our head count as a company. In order to keep pace, however, by utilizing technology, we’re able to ensure that our people get more and more efficient as we grow, and are able to effectively monitor and manage larger portfolios. It’s unlikely that you’re going to find somebody who has a deep understanding of cannabis and banking, and financial technology. But we found that if we can locate a passionate person who has some background in one of those, the others can be learned. We do add to the team as we grow, but we also lean on the technology to continue augmenting their productivity. [Abaca] is roughly doubling on a year-over-year basis. We’re coming up on the $2 billion mark [in] cannabis dollars that we’ve been able to bank compliantly. With the two new bank partners that we’re working with, we have the ability and the capacity now to service the entire country.
WSJ: What’s your outlook for the future?
Mr. Roda: The big unknown is when the federal government will take some sort of action. It’s been our purview to make sure we were able to offer our customers solutions now, without waiting for the federal government to pass some sort of reform. We believe the most significant potential impact will be in opening up the major credit card networks to the cannabis business. We don’t know exactly when this federal reform will occur.
WSJ: Are you ready for new competition if the legal landscape changes?
Mr. Roda: We don’t believe that the largest national banks will get into cannabis immediately after a change in federal law, because it will still be a high compliance, high-risk industry. And we’ve known since our early days as a company that, certainly we would, at some point, be facing a much more competitive playing field. It’s been our objective to put financial tools in the hands of our customers that don’t just solve problems today, but that make us an important part of their financial lives so that they’re motivated to continue working with us, even when they do have more options.
Write to Richard Vanderford at richard.vanderford@wsj.com
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