Businesses that serve the cannabis market are often excluded from the mainstream financial system.
Numerica began offering deposit services to these businesses in 2014. Today, its portfolio has reached nearly $20 million as the cooperative remains diligent in assessing risk.
Recent estimates by Barclays suggest the U.S. cannabis market — were it legal nationwide today — would be worth nearly $30 billion in annual sales and primed to grow by an additional $10 billion in the next decade.
CU QUICK FACTS
Numerica Credit Union
HQ: Spokane Valley, WA
Data as of 03.31.19
12-MO SHARE GROWTH: 10.3%
12-MO LOAN GROWTH: 7.8%
As of July 2019, 11 states have legalized the recreational use of cannabis, 12 allow medical use and have decriminalized recreational use (though this designation bans its sale), and 10 only allow medical use; however, cannabis remains illegal on the federal level. As such, businesses that serve this market — often referred to as “cannabusinesses” — are often excluded from the mainstream financial system.
According to FinCEN’s Marijuana Banking Update, 140 credit unions provided services to marijuana-related businesses as of March 2019. That’s an increase of 111 cooperatives year-over-year.
Washington state legalized the recreational use of cannabis in 2012, and state-based credit unions, including Numerica ($2.3B, Spokane Valley, WA), saw the need to provide safe and secure services to these businesses.
Since first accepting deposits from cannabusinesses in May 2014, the credit union has built a portfolio of approximately 300 cannabis accountholders with a total balance of approximately $18 million, a small percent of the institution’s $2 billion total deposit portfolio. The credit union also has built a four-person team dedicated to managing cannabusiness deposit accounts.
Lynn Ciani, Chief Risk Officer, Numerica Credit Union
Not surprisingly, risk assessment, and reassessment, plays a large role in cannabusiness account management at Numerica. In this Q&A, chief risk officer Lynn Ciani discusses why the credit union accepts cannabusiness deposits, how it assesses risk, and the role its regulators play.
Why do you accept deposits from cannabusinesses?
Lynn Ciani: Numerica is committed to building our communities. As it relates to cannabusinesses, we felt that protecting our communities from the crime associated with a cash-heavy industry was a part of this mission.
What risks do these businesses present?
LC: The regulatory and legal risks are most clear, and we reviewed the FinCEN guidance and the Cole Memo — which was in place at the time — to create procedures to mitigate those risks. [Editor’s note: the Cole Memo was rescinded by Attorney General Jeff Sessions in January 2018].
Another risk was reputational. So, we created additional procedures to ensure we didn’t take on businesses that would create adverse press for the credit union. We look for cannabusinesses that have established a culture of compliance.
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How do you ascertain which businesses have that culture?
LC: We make on-site visits and fully vet their criminal background.
We review the application, we review their funding, and we request public records from the Liquor and Cannabis Board of Washington state.
How does this compare to the vetting of other business loans and accounts?
LC: It’s more robust and can take days of review before we approve. I call it knowing your member on steroids.
You have a four-person cannabis business account team. What role do they play in the handling of cannabusiness accounts?
LC: We run the cannabusiness account due diligence and onboarding through this sub team. There are three employees as well as a manager who do that work. We separate the BSA work, which remains in legal compliance, from account opening.
In addition, each account application is reviewed by our Canna-Committee, a group of folks who are not a part of the business account team, to make sure all our procedures have been met and there is no concern about opening the account. Members of the committee include me, our BSA officer, corporate counsel, a member of our legal compliance team, a branch representative, and our senior vice president of enterprise risk management.
We look for cannabusinesses that have established a culture of compliance.
How many risk assessments do you run to assess these deposits?
LC: We have one that we continuously update as regulations and our procedures change.
When we first started accepting these deposits, we created this out of whole cloth and changed our risk assessments monthly — sometimes daily — as we constantly reviewed what we were doing and how it was working.
What is the scope of this assessment?
LC: When we created it, we started by looking at the eight enforcement priorities outlined in the Cole Memo and determined how we could mitigate the risks of non-compliance. We then reviewed the FinCEN guidance and all the statewide cannabis laws and regulations as well as the enforcement work by the Liquor and Cannabis Board. We relied on this work to create procedures to mitigate risks that weren’t already mitigated by the Liquor and Cannabis Board or statewide rules and regulations.
Then we looked at our liquidity risk. We didn’t want these deposits to account for too much in our portfolio on the chance that the government changed its mind and revoked the FinCEN guidance. We wanted to ensure that we could return those deposits on a moment’s notice, so we created a maximum amount that we’d have on deposit at any one time.
What are your regulators most curious about regarding these accounts?
LC: First off, the Washington State Department of Financial Institutions was open to the concept and helpful to us as we worked with the NCUA. Both entities want to make sure we are safe and sound in the event we have to give back those deposits and that we are meeting BSA requirements and filing all the necessary Suspicious Activity Reports.
Do you use these deposits to fund new loan activity? What is the size of your portfolio?
LC: We do. There are institutions that don’t, but we have a robust enough liquidity policy that we feel confident enough to do so.
How has that portfolio grown? Where do you want it to go?
LC: When we started in 2014, we were slow to bring in new cannabusinesses because we wanted to make sure our process worked. We didn’t want to attract 300 businesses all at once. We wanted just a few, and we went county by county in our initial expansion.
As a credit union, our field of membership is limited to Washington state and parts of northern Idaho. However, we chose to limit our acceptance of depoits to where we have branches, which is central and eastern Washington.
Any last words on the lessons you’ve learned or best practices to share?
LC: State and industry regulators are your best partners when establishing a program like this. Make sure you have an open dialog with them. The last thing you want is to create a program, get into it, and then have it shut down after the fact. Have those conversations up front.
This interview has been edited and condensed.
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