On one side is a new industry desperately needing local banking services. On the other side are bankers salivating at potential deposits and fee revenue.
Between them is a federal government that outlaws marijuana.
Bank regulators have hammered home so thoroughly the problems a federally insured institution faces when participating in an industry that is against federal law that no bank in Arkansas has made a commitment to banking the medical marijuana business.
At least not publicly.
“It’s not me,” State Bank Commissioner Candace Franks said. “The issue is how the [federal] Department of Justice is going to treat it. I think the state certainly needs the marijuana business to have institutions to do their banking with, but the challenge for the banks is the regulatory costs and the risks associated with it.”
While more financial institutions around the country are taking the plunge, the total is still tiny — about 300 banks and a few dozen credit unions out of nearly 12,000 institutions as of March 31, according to a report from the U.S. Treasury Department’s Financial Crimes Enforcement Network.
Franks said she wishes she had better news for the state-chartered banks she regulates.
“It would be nice if Congress would assist the states as far as some kind of relief — particularly since I think there are 29 states that have some kind of marijuana industry. … But I don’t see that happening in the near future,” she said.
No other industry presents banks with such a confounding conflict of state and federal law. Credit and debt card companies won’t even issue merchant accounts to marijuana businesses, creating security issues that accompany an all-cash industry.
“The big merchants like MasterCard and Visa are not willing to risk their international business model,” said Chris Myklebust, state bank commissioner for Colorado, which in 2013 became the first state to legalize pot for recreational use.
Franks said she knew of no state-chartered bank in Arkansas that has signaled a willingness to do business with what the feds calls MRBs — marijuana-related businesses — nor did David Couch, the Little Rock lawyer who wrote the medical marijuana amendment.
Bill Holmes, CEO of the Arkansas Bankers Association, said much casual conversation with his members eventually boiled down to two banks that are seriously interested. He wouldn’t name them.
State Rep. Doug House, R-North Little Rock, is practically begging Arkansas banks to come and get the money. An all-cash industry is unthinkable, and letting the money flow to out-of-state institutions would be almost as bad.
“This is an entrepreneurial opportunity for some banks,” said House, who shepherded enabling legislation for the medical marijuana amendment through this spring’s legislative session. “I know people who have a million bucks, and they are ready to stick it in the bank.”
When Arkansans approved in November, by a 53 percent vote, a state constitutional amendment legalizing the cultivation and sale of marijuana for medicinal use, 26 other states had already legalized the plant to some extent. Florida and North Dakota are also working out the details for newly legalized medical marijuana.
While the District of Columbia has legalized recreational marijuana, the Congress that meets there has shown no appetite for changing federal law to reflect the growing tide of acceptance.
And the forbearance displayed by the Obama administration, formalized in DOJ guidance known as the “Cole memorandums,” is not guaranteed to continue under the Trump administration. Attorney General Jeff Sessions has asked Congress to unshackle restrictions that have kept the DOJ from prosecuting marijuana businesses that are legal under their home states’ laws.
No, No, No
If a bank does decide to do business with MRBs, it may never announce it publicly. Of the dozen or so banks and credit unions that bank MRBs in Colorado, only one advertises its specialty, Myklebust said.
“There’s a reputational risk to it,” Holmes acknowledged. But on the flip side, “There’s stress on some of our banks from some of their very best, largest customers who want in the (marijuana) business.”
The large publicly traded banks headquartered in Arkansas say they have decided not to take the risk.
“We are staying out of the business until regulations change,” John Allison, chairman of Home BancShares Inc., the holding company for Centennial Bank of Conway, said in an email.
Of Centennial’s 156 offices, 149 are in states that have legalized medical marijuana — 81 in Arkansas, 67 in Florida and one in New York. (The seven remaining branches are in Sessions’ home state of Alabama, which has not joined the trend.)
Even a sea of new money isn’t enough to tempt Allison. “Regulators are tough enough without waving a red flag in front of them,” he wrote.
Ditto for Bank of the Ozarks, which has branches in marijuana-legal New York, California and Florida.
“Due to conflicts with Federal law it is Bank of the Ozarks’ policy to not establish accounts or conduct business with marijuana dispensaries and any entities engaged in the direct or indirect sale of marijuana,” spokeswoman Susan Blair wrote in an email.
George Makris, chairman and CEO of Simmons First National Corp., said he’s too concerned that “stubbing our toe from a compliance standpoint” could slow down Simmons Bank’s acquisition ambitions to take a chance.
“Currently, we don’t believe we’re going to open ourselves up to do business with the marijuana industry,” he said in an interview earlier this month.
Simmons doesn’t currently do business in any marijuana-legal states, but the pending acquisition of Bank SNB of Stillwater, Oklahoma, includes three Colorado branches. Bank SNB does not bank MRBs, Makris said.
Makris, who ran his family’s beer distributorship before being promoted from director to C-suite four years ago, seems comfortable with regulated substances and would like to see the federal government turn marijuana regulation over to the states. “States regulate alcohol … so that model is already out there,” he said.
Attorney Couch agreed. “I think that’s eventually what they’re going to do with marijuana: It’s a states’ rights issue.”
U.S. Rep. French Hill, the Republican who represents central Arkansas in Congress, is certainly aware of the problem. He used to run Delta Trust & Bank, which Simmons acquired in 2014.
As a member of the House Finance Committee, Hill made an appearance earlier this month in Little Rock with the committee’s vice chairman, Rep. Patrick McHenry, R-N.C., at which a question about banking MRBs was asked.
McHenry predicted that settling the legal conflicts would be “court-driven rather than legislatively driven.” Hill agreed, saying “everyone understands the frustration” of states that are “trying to deal with the banking laws and make sense of it.”
Holmes’ frustration with Congress on behalf of his association members is palpable.
“Our legislators have a deaf ear,” he said. “They do not want this problem.”
How Close Is Too Close?
Current DOJ guidance does not turn a blind eye to marijuana. Instead, 2013 and 2014 memorandums from James M. Cole, then deputy attorney general, instructed federal prosecutors to concentrate their resources on marijuana crimes in certain categories — distribution to minors, financing criminal enterprises, the use of firearms in cultivation and distribution, and a few others.
If a bank decides to get in on the action, it can’t be a secret to its state and federal regulators. Banks are responsible for making sure that MRBs customers are properly licensed and operating legally. And even if they are, banks must report their contacts with MRBs to the Financial Crimes Enforcement Network by filing “suspicious activity reports” just the way the federal Bank Secrecy Act requires when they suspect a transaction might be illegal.
The regulatory burden is heavy and continuous and sometimes confusing as to what constitutes an MRB that triggers reporting requirements. Licensed dispensaries and cultivators certainly require reporting, but so do some vendors to the licensees.
Both Makris and Franks used the example of a bank customer who rents retail space to a legal marijuana dispensary. “We’re not real clear today how far that goes,” Makris said.
Franks was more certain. “If marijuana touches that business at all … you still have to follow this FinCEN guidance.”
State-level legalization has created a tsunami of suspicious activity reports for FinCEN — 28,651 SARs between the first Cole memorandum in August 2013 and March 31 of this year. Most use keywords indicating routine transactions with legal MRBs, but more than 7,300 indicated that the bank was no longer comfortable doing business with the customer.
“At the end of the day, it’s still a federal crime and they can still take everything you’ve got,” Holmes warned.
On the Other Hand
Creating processes and staffing up with the necessary expertise to comply with what is called the federal “Know Your Customer Doctrine” is costly.
“I’m too small,” groaned a south Arkansas banker who spoke on the condition of anonymity. “That’s a very high cash volume business, extremely high cash volume business.”
But if a bank can afford the upfront costs and line up several MRB customers, the return can be stunning. The Los Angeles Times reported this month on strategies MRBs are using to get banking services. One was using an account in the name of an LLC that the bank didn’t know was marijuana-related — laundering that is risky for both the dispensary and the bank.
Meanwhile, a legal cultivator interviewed for the same article banked with a credit union, which was not identified. The credit union, according to the Times, charges up to $10,000 for audits and criminal background checks before accepting an MRB customer, then charges growers $5,000 a month and dispensaries $7,500 a month to cover the ongoing regulatory costs.
Doug House, the state representative from North Little Rock, said banks also charge MRBs as much as 2 percent just to count cash deposits.
The banker from south Arkansas said he had heard a suggestion that some dispensary licensees — to be selected by the Arkansas Medical Marijuana Commission sometime after the Sept. 18 application deadline — could band together to buy a bank. “And then get ready to be regulated like you’ve never been regulated in your life,” he said.
Bank Commissioner Franks said she hadn’t heard that talk.
“That’s news to me. But you have potential [bank] purchase groups all the time,” she said.
House said he had been told by “a friend in Memphis” that a credit union might try to buy a small bank in order to get into the business of banking MRBs.
Arkansas Federal Credit Union of Jacksonville, the largest credit union in the state, recently confirmed to the Arkansas Democrat-Gazette that it is shopping for banks to buy. But CEO Rodney Showmar told Arkansas Business that marijuana is not in AFCU’s plan.
“We aren’t looking to be trendsetters in that way,” Showmar said.
The few credit unions that have blazed that trail tend to be state-chartered rather than federal, although both types are federally insured and subject to the DOJ guidelines. Arkansas hasn’t had a state-chartered credit union since 2001.
The Colorado lender that actively advertises MRB services, state-chartered Partner Colorado Credit Union, announced last week that it had formed a separate company to sell its existing cannabis banking system to banks and credit unions across the country.
“We want to expand the cannabis banking program nationally and help other financial institutions solve the safety issue of the unbanked cannabis industry,” CEO Sundie Seefried said in the announcement.
Partner Colorado, a small lender with assets of $340 million, claims to bank “$80 million monthly from Colorado’s cannabis businesses, taking that cash off the streets and keeping communities safer.”
Arkansas’ marijuana industry will also be searching for bank services — “it’s going to be a huge unmet need,” Showmar said — and banks are hungry for answers. The Arkansas Bankers Association has scheduled a workshop on marijuana banking for Oct. 24 in Little Rock.
“I’m thoroughly expecting to sell out the Marriott’s ballroom that afternoon,” Holmes said.