Medical marijuana, video gaming, virtual currency, and privately owned ATMs. The list may read like a rap sheet or the storyboard of an upcoming Netflix series, but in fact, these types of businesses are bringing their funds to community banks every day. Inevitably more prospective customers in these categories will be coming through your doors as changes in technology and legislation enable a host of new licensed, bona fide businesses, products, and services.
Across the country, boards of community financial institutions are asking themselves an important question: To bank or not to bank these customers?
Either response carries risk. If your institution decides not to bank these customers, let me ask you this: What monitoring systems do you have or will you put in place to ensure you’re not banking them inadvertently, without the enhanced due diligence and oversight needed?
On the flip side, many community banks see the business case for banking these emerging businesses, confident their institution can manage the risk. They very well may be able to. Even so, some still express concerns about whether their enhanced due diligence and monitoring systems will pass muster with regulators.
Whatever your decision, it’s critical to fully understand the risks involved. That should start with a thorough risk analysis and assessment, which lays the foundation for further planning. Regulators want to see that you have proactively identified the risks and can demonstrate what you’re doing to mitigate them.
Banks also must show regulators that their board was involved and that management has implemented appropriate resources and programs. Regulators want to see that your institution has gone through a change management process — that you’ve tested before and after to be sure the monitoring systems you’ve put in place are working.
Have questions about the strength of your systems? Engage in a conversation with regulators. Share your plans, your research, and your proposed processes, and ask for their thoughts. Plante Moran consultants also can serve as a sounding board when it comes to assessing your particular risks and plans for mitigation.
Finally, if you say you’re going to do something, do it. It’s not enough to simply have a written policy and procedure; you’ve got to follow through.
State legislatures are approving these higher-risk businesses and want them to bank in legal financial institutions. The bottom line for community banks is this: Yes, you can bank these customers; you just have to do it carefully, to ensure you’re doing what’s expected to comply with the laws under which you operate.
- Although several states have legalized medical marijuana and two have legalized recreational use, the federal government still prohibits it, creating potentially confusing and seemingly conflicting rules and guidance.
- FinCEN issued guidance on Feb. 14, 2014, that requires financial institutions to adopt procedures to closely scrutinize all activities of a marijuana business; banks also are subject to regular reporting requirements.
- On the same day the Department of Justice issued a memo strongly emphasizing that marijuana is still illegal under federal law and further states, “Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution.”
- Offers anonymity and can involve many parties, making it difficult for banks to identify specific customer activity and determine whether that activity is suspicious.
- If virtual currency customers meet the definition of a Money Service Business, they are subject to additional requirements with FinCEN and each individual state’s money transmitter laws.
Private ATMs and video gaming
- The nature of these cash-intensive businesses makes it difficult to determine whether activity is suspicious.
- May be subject to state licensing registration requirements.