Welcome to Watch This Space, a new way for me to deliver K2 Integrity’s high-level expertise and share meaningful perspectives in the marketplace with you. Twice a month, I will highlight a few recent assignments which, I believe, will help reveal emerging risks, trends, technologies and anything our team thinks is important for you to know.

ICYMI: Watch This Space Vol. II, "Crypto...Is It the Wild, Wild West?"

ICYMI: Watch This Space Vol. I, "Cryptocurrency"

Can I Bank Cannabis? 

We’ve all seen cognitive dissonance in action. The doctor in scrubs on a cigarette break. Or the vegan with leather bucket seats. In our work here at K2 Integrity, it’s banking the cannabis businesses. 

Medical cannabis is legal in 37 states and, at last count, adult-use cannabis is legal in 17, with more on the horizon. Compliance officers at financial institutions, whose jobs are based on managing and remediating risk, are actively looking into how to safely onboard entities in the thriving—and still federally illegal—cannabis market.

CLIENT EXAMPLE

Chief Compliance Officer at Bank Leumi USA, Nisan Blum—who counts K2 Integrity’s Tom Bock as a trusted advisor on financial crime-related issues—reveals that he took a proactive approach after the bank was unable to onboard several potential cannabis clients. Without the proper policies in place, even second-tier cannabis-related businesses, like those in commercial real estate or irrigation, were considered too high-risk. Saying he “didn’t want to miss another opportunity,” Nisan crafted an internal policy in accordance with the current regulations stipulated by FinCEN and other governing bodies. His policy is being circulated and, if approved, Nisan is confident that certain cannabis businesses can be onboarded safely. Nisan also points to new tools such as licensing databases that can help manage the risk. 

Simply put, the cannabis industry is growing like a (ok, I won’t finish . . .). Earlier this week, Trulieve, a multistate cannabis operator based in Florida, acquired Harvest Health and Recreation for $2.1 billion—the largest U.S. transaction of its kind—providing Trulieve with entry into Arizona and other key states that have already legalized cannabis use. The country overall is inching its way on a state-by-state basis to full legalization.

New compliance guidelines are being actively written and rewritten, adding layers to the already strict practices for high-risk businesses. Certain adjustments, such as marijuana-specific suspicious activity reports (SARs), have been introduced to try and minimize risk and encourage involvement in the sector. But without a firm federal commitment not to prosecute marijuana-based business transactions, banks remain extremely reluctant to proceed. Last year, the Secure And Fair Enforcement (SAFE) Banking Act, which calls for federal protections for financial institutions that bank cannabis clients, overwhelmingly passed (with major bipartisan support) in the House of Representatives, and was reapproved by the new House in 2021. It is now awaiting Senate approval. 

Even with growing acceptance and attention, the current cannabis market is unconventional at best. Given the inability to bank its profits—except for possibly at a local bank—or to process credit card transactions, the industry is based solely on cash. This applies not just to the buying and selling of products, but the payment of business expenses such as rent, payroll, and even taxes. Many institutions have heavily guarded vaults on their premises.

And it’s a LOT of cash. Already a multibillion-dollar industry, the sale of cannabis has skyrocketed during the pandemic, providing a welcome influx of monies to state governments hurting from a lack of tax revenue. With millions of Americans unemployed and businesses shuttered, the states that have legalized marijuana (medical, recreational, or both) have been able to recoup some of these losses. But now a massive industry is operating OUTSIDE the financial system, without a clear path to entry. 

The roadblock to complete engagement for Nisan and likely other C-level compliance professionals in the financial industry is a familiar one: government. The timeline is unclear, but as the states fall like dominos, pressure continues to mount. And, aside from the record-scratch moment when you tell your grandma that you “deal in pot,” any lingering stigma will most certainly fade with legal acceptance. 

For now, it’s critical to keep an open mind, do the research, and make sure to design and implement compliance systems that are comprehensive, scalable, and address the proposed federal guidelines. You want to be ready the minute banking cannabis gets the green light from federal legislators. Who knows how big this could . . . grow.

You can learn more about how we advise the cannabis banking industry hereI welcome the opportunity to discuss this fascinating topic or any other. Email me at jeremy.kroll@k2integrity.com. I hope you do. Or reach out via LinkedIn. I look forward to your feedback and to exploring ways we can work together.

Next up: Asset searching and recovery trends.

Best, 

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