You may have heard that one of the biggest challenges for the cannabis industry is that credit card companies, and the overwhelming majority of banks, refuse to work with cannabis companies. That's how we ended up with the SAFE Act or the Secure and Fair Enforcement Act of 2019, which seeks to give banks coverage to process cannabis-related payments as well as offer them traditional banking options.

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Jesse: For TRICHOMES.com. I'm Jesse Betend and this is The High Ground. On this show, we feature leaders of the cannabis industry. We talked to everyone from Farmers to CEOs and Public Officials. Anyone making an impact on the cannabis community and beyond. You may have heard that one of the biggest challenges for the cannabis industry is that credit card companies and the overwhelming majority of banks refuse to work with cannabis companies. That's how we ended up with the SAFE Act or the Secure And Fare Enforcement Act of 2019, which seeks to give Banks coverage to process cannabis-related payments as well as offer them traditional banking options, but according to my next guests, even if it passes which at this point is honestly a toss-up, the SAFE Act is very likely going to fall short of achieving those goals. Here to explain why Kirsten Trusko is CEO of Emerging Markets Coalition, which specializes in building Financial Service Solutions for high risk markets. Zane Gilmer is a partner at Stinson LLC. He works with banks interested in entering the cannabis space. Zane, Kirsten, thank you so much for joining me.

Zane: Absolutely. Thanks for having us. 

Jesse: So I just wanted to start by asking you Zane, what exactly is the SAFE Act? And what does it provide in terms of protections for banks?

Zane: At a high-level the intent of the bill is to really open up access to banking for the marijuana industry by effectively protecting banks from a regulatory perspective like getting scrutinized by federal bank regulators for providing bank accounts to a dispensary or grow operation and because of the Controlled Substances Act prohibiting the manufacture distribution or sale of marijuana that really keeps a lot of banks out of the space and they don't want the regulatory scrutiny or maybe even the criminal exposure for providing that. So what the SAFE Act is designed to do is to sort of take some of that off the table. In theory that would then open up these banks to providing services. 

Jesse: And what are some of the ways that this act would be able to provide protection in a situation where cannabis remains federally illegal?

Zane: So the main thing that it does is providing a safe harbor for depository institutions. So the safe harbor does a few things, it prohibits Federal Bank Regulators from terminating or limiting the deposit insurance that is available to those institutions solely because those institutions chose to provide financial services to cannabis related businesses or service providers. It also prohibits the regulators from basically penalizing or otherwise prohibiting those deposit institutions from providing services to cannabis businesses, and they also sort of similarly can't sort of recommend that they don't provide services and so it's really kind of a make sure that the regulators don't do anything negative against the depository institution just because they want to provide services or that they are providing services. Now a key piece here or a caveat is that the ACT repeatedly refers to cannabis businesses as cannabis-related legitimate business or service providers and the legitimate piece is key because it's not just any cannabis business, it's those businesses that are in compliance with their respective state laws on cannabis related activity and so there's still a bit of work that the depository institution has to do to ensure that they're dealing with “legitimate” business rather than just an illegitimate cannabis business.

Jesse: And so because we have this situation where there are multiple States, each of which has its their own slight variation on a program, Kirsten that would mean that these institutions just because they have some sort of protection would still need to do a lot of work to make sure that they're in compliance with State laws as well as that correct.

Kirsten: It is and Jesse that's one of the things that's exciting and has advanced over the last gosh year or so, when banks first looked at entering the market they had to figure this out on their own and hire their own compliance people and try to find their own experts and it was very costly and some banks still do that but now there's platforms out there that are designed on behalf of the banks to know in-depth all of these changing rules and regulations at the State level as well as the federal level. So the banks can enter using one of these platforms and not have to have that resident knowledge or have to hire all that headcount. In my opinion and experience even if or when everything is fully legal at a federal level, this would still fall cannabis would still fall from a banking perspective into a high-risk market so if you looked at alcohol or gaming or other markets that are high-risk financial institutions and payment companies who would and towards higher risk industries would be more open to this, those who are very very conservative would still look at it as a high-risk market. 

Jesse: Zane you talked a little bit about some of the risks or the protections that they would want in order to go forward beyond potential criminal liability, is there anything else stopping them from being more aggressively involved?

Zane: Yeah, I mean from a regulatory perspective, which is really what the SAFE Act is designed to remedy in my view, that's the bigger obstacle than the criminal component. The criminal complaint is obviously very real. It's a game changer if it ever came to fruition but in terms of whether that actually occurs or not it's we just haven't seen it and so the risk there is fairly slim but that slim chance that it comes to fruition is a big deal, right? But on the regulatory side, that's the real, the more immediate issue because Federal Bank regulators are in these Banks all the time doing examinations and of their bank secrecy act and anti-money laundering policies. They're just sort of general safety and soundness reviews and so those are the folks that the banks are really concerned about in appeasing them and making sure that they have the proper structures in place which to Kirsten's point, I mean, it's expensive and while there are a number of outside vendors that provide varying degrees of this support the bank still have to pay for it and you can't completely outsource all of these compliance obligations to a third party and so there's a lot of cost to be born and with that if there's a misstep these regulators have the ability to enter, you know enforcement actions or decrees against the financial institutions and that could affect their their broader business and so that's the bigger concern in making sure that those I’s get dotted and T's get crossed.

Jesse: And Kirsten you've talked before about some of the risks potentially involved here if institution was caught processing fraudulent payments, they might for instance lose the ability to ever process payments. What our banks worried about?

Kirsten: Well, I think part of it is optics and this is where as more and more articles and things come out about the benefits of cannabis and responsible business owners and and the benefits of the tax money come to the community, that's really key because a lot of the banks and financial institutions that are in this are regional and community and Credit Unions. They are part of the community. They are serving the community and that's how a lot of them have explained to us how they've gotten in where along time business client in some other business ended up leasing to a dispensary or something and so these are longtime relationship so that's part of the challenge but just to highlight a positive and as we talked to the cannabis related businesses into the financial institutions, these are really what they're sharing, these are very loyal businesses in banking we call them sticky, so when there's a good strong relationship form like you were talking about Jesse whether it's payments or lending or core banking the cannabis related businesses really value a good financial institution and a good relationship and they stay which is really helpful for the bank and these are higher risk and higher reward so the revenues related to these are higher than say a coffee shop would be so there are some real positives to this and that is what's one of the reasons that the financial institutions in the payments companies are really interested in the market.

Jesse: Zane you have actually worked with banks to set them up to be able to process cannabis payments, for people that are unaware of kind of how that's possible, what does that look like? And what kind of banks have some skin in the game?

Zane: Yeah. So there are a few iterations that exist the most common bank dispensary relationship is just one of a depository relationship. So just like, you know you and I may have a savings account at a bank and we take our money and we go and put it in our deposit account at the bank. That's the most common relationship and then the complicating factor with that is unlike you and I taking our money down there, you know where we may be taking a few hundred bucks down there at a time, they're taking you know thousands and thousands and thousands of dollars at any given time all in cash to the bank and so the challenge there is how you actually get the money from the dispensary to the bank and credited in their deposit account and so their armored car services that will oftentimes pickup the funds directly from the dispensary and then take it either directly to the Federal Reserve or to them off site and so that's the more typical approach. The other piece is the payment side of things where you non-cash transactions as Kirsten alluded to this is bigger than banks, there are payment processors involved in credit card companies. The credit card companies own policies prohibit marijuana transactions from being processed through their card so visa and MasterCard have policies against that so what has entered the space really is kind of what's called a closed loop transaction, which looks more like a debit transaction where money is effectively being pulled out of your account, your deposit account and being paid or credited into the dispensaries account through the use of technology, fintech really and there are a whole bunch of models out there that allow this to happen, but it's done that way and it's more of a ledger accounting transaction rather than you know, a credit transaction that goes a credit card company and so these fintech companies have popped up and they basically allow you to load money like Starbucks or something else where you have like a prepaid sort of system and then as you go and make a transaction, it debits it off of your account with the dispensary and moves that money into the dispensaries funds and so the iterations of that are many but those are kind of the main transactions that are out there.

Jesse: So this conversation really was prompted Kirsten, by conversation we had off mic when we were talking about the SAFE Act and you said you know, even if it passes it's not going to fix all the problems. In what ways does the SAFE Act not provide enough coverage?

Kirsten: So as long as this is still federally illegal then Federal banks and payment companies are still going to be challenged, just their operating rules that say if something is an illegal substance then you cannot transact and that blocks out the major card networks, blocks out the National Banks. SAFE doesn't solve all that.

Zane: Yeah, and on that note, I mean there, Kirsten you mentioned earlier one of the things that can't be really addressed in any of this which is reputational issues. So if the bank or credit union or other financial service provider, you know doesn't want to be involved in this because they're afraid that it may affect their other non cannabis relationship business lines the SAFE Banking Act doesn’t solve that because marijuana still remains as a controlled substance under this regime. It just provides some sort of regulatory protection but more to the question Jesse and to what Kirsten was just mentioning, even if it passes the bank still have to do work to figure out as I mentioned earlier, whether these are legitimate marijuana businesses and that takes a lot of work because every jurisdiction has their own licensing structures, their own regulations and so to really know whether you're in compliance with their respective states marijuana laws and therefore constitute a legitimate cannabis business somebody, mainly the bank has to go in and figure that all out by doing all of their due diligence up front and then I'm going monitoring to make sure that you stay in compliance and and all of those proceeds still fall under the SAFE Acts, safe harbor because if they don't then you're basically operating under the same regime that we're operating under now, which is no protection for any of these transactions and so I don't see that this is going to solve everything for all of these institutions. I do think that you'll see more institutions enter the space just because it gives them a little bit more regulatory cover but I don't think you'll see you know, every one of your local Community Banks and credit unions or certainly the Nationals getting involved just because the SAFE Act passes. 

Jesse: One of the other issues with lack of access to banking is not just payments themselves, but access to loans or Capital when starting a business and that's particularly relevant when you're talking about social equity applicants, which happened to be the same groups that have historically had lack of access to banking or trouble getting loans. There's this whole other issue where even if cannabis was legal it doesn't necessarily mean that everybody would have access to Capital or the ability to start their business?

Zane: Yeah lack of or insufficient access to Capital is I don't know if it's bigger than but certainly as big of a problemas lack of access to depository services for different reasons some of which you described in terms of social Equity issues, being able to actually apply for these licenses in the first place, to be able to have the necessary Capital to get the licensing regulatory regimes to accept you as an applicant or even being able to invested by or expand your business and so those are certainly issues that aren’t going to change based on the SAFE Act as I, you know, tell clients all the time, it's one thing if you provide depository services and you've done the risk analysis to decide whether or not you know, you want to provide depository services because you can make a little bit more money in the risks, you know, you figured out that you can do this on a cost-effective basis and your risk really isn't enough to warrant you staying out of it the that's a whole different issue than if you decide to take the bank's money, which was really other customers money and loan it out to a cannabis business because the risk profile is different if things change and regulators come in and tell you to stop participating in this industry or worse the Department of Justiceor other law enforcement agencies come in and start wanting to try to enforce the Controlled Substances Act against you it's a lot harder to exit that line of business if you have loans out because you can call those loans all day long but you're at the beck and call of the cannabis company to return that money to you so you can fully exit that line. It's a different issue if you're just trying to give people, you know their own money back out of their deposit account and exit the industry. It's just not the same risk profile but you know to your original point, it is a bit of an issue and I find it really perfunctory frankly that that in many states that where marijuana is legal both on the medical and recreational side that many of those States during the pandemic designated these businesses as essential businesses just like a whole bunch of others so that they could continue to operate when others had to shut down yet they didn't have the same access to Federal funding to you know, that other businesses did whether they were essential or not and so we're creating this very sort of odd structure here where we're basically using the Controlled Substances Act as a shield when we want to and we want to act as though these businesses don't operate and people don't use them and they're not otherwise legitimate yet on the other hand we tell them that they can stay open because they're essential. It doesn't make much sense to me. 

Jesse: Kirsten, the situation is that when someone applies for a loan with a bank they could be denied and that bank doesn't have any responsibility to necessarily explain why they were denied. Is that also right? 

Kirsten: No, it’s partially right.

Jesse: Okay.

Kirsten: It will be something that will say insufficient assets or they'll always be some reason but it's not always the level of detail like like we discussed earlier of what that business owner needs to know and one of the things that comes up a lot in cannabis financial services that we don't see as much in other verticals is the whole social Equity topic and I think when we talked earlier it had been about people that are seeking to open dispensaries or grow houses and they don't have their own assets to go ahead and do that and they might not have access to family and friends who have a lot of of assets that they could lend them so then you go to the bank and the bank will say well you have insufficient assets or you have insufficient business experience or insufficient loan experience in this industry so there's all kinds of things that make for kind of a circular argument that can be really frustrating as even as some of these States seek to kind of equalize under a social Equity program for the licensing, but then the licensee still have to be able to borrow the money to build the facilities and build out the business.

Jesse: Recently, there was a report from Fincen that showed that as of this year in 2020, there were less banks that reported processing cannabis payments. It's down from I think 715 they reported in 2019 to 695 in 2020. Does that say anything? It's not a massive difference in numbers but when you see something like that, does that spark anything and either of you?

Zane: No, because those those numbers initially are flawed so when you start comparing them to themselves that they don't make a lot of sense so the way Fincen and reports the number of financial institutions involved are based on is based on financial institutions filing SARS, suspicious activity reports as you indicated and the problem with that is there's a lot of inconsistency with the way financial institutions file those SARS and so they file them for a lot of different reasons and Fincen doesn't really distinguished whether or not the underlying SARS was was properly filed. So for instance the SARS are typically only supposed to be filed for direct like license to grow or dispensary operations, you know, sort of plant touching, selling entities not necessarily indirect relationships like a real estate sort of deal yet some institutions either out of confusion or an abundance of caution will file marijuana-related SARS on non plant touching ancillary businesses that are way down the supply chain or touching chain and Fincen and doesn't distinguish between that if it gets filed to get filed and it gets counted and so number one there's an issue there so we don't really know whether the underlying data even from 2019 is accurate but the other issue between year-to-year and Fincen I think notes this in their their own reporting some of the downturn could could result from just banks not reporting as often as they were and 2019 art because of the pandemic it through a lot of you know, administrative and regulatory wrinkles into bank operations and so some banks aren't filing them as regularly as they were. So when you file a SAR, typically you can do what's called a continuing SAR and file every either 6090 some in some cases a hundred twenty days after you filed the initial one and maybe they were filing every 30 days before and they've now extended that out to 60 or 90 days because of the pandemic and depending on when Fincen and then reports you have a lag and reporting. 

Kirsten: Yeah adding one more piece to that too is with those the banks that file, it doesn't mean that they are actively and proactively banking cannabis. The banks are filing if they have found that they've had a cannabis related transaction so we've seen articles that say, hey we should have plenty of banks because they're 700ish who are actively banking cannabis and that's that's just not the case. What we've seen in our estimates is somewhere around a hundred maybe a little higher than that. So those others that are reporting their suspicious activity reports in Fincen and aren't necessarily actively going out and trying to serve the cannabis industry. So it still is a dramatically underserved market in most States.

Jesse: That's interesting. I also wanted to kind of ask, I suppose this one's a little bit more of an opinion but I've heard of people who have been denied for the opportunity to have banking and they're not at all plant touching. Do you have a sense that banks are being overly cautious in these situations? What's your sense of that? 

Zane: It's all over the board and you know what one of the things I do with bank clients out of the gate is to sort of ask that question, you know because these things aren't all the same. So, you know, I try to go through the risk profile of each of these supply chain participants and whether it be plant touching or second tier, third tier or somewhere down the chain and everything sort of shifts in terms of risk the further away from you the plant you get. I sort of use the analogy of the target and the bullseye and the bullseye being the highest risk and usually it's the marijuana growers and sellers that typically are in compliance or have loose compliance with state law. Those are the highest risk, right and they you know,and everybody's aiming for the bullseye. So if you're dealing with them, you might get hit by the dart, but the further away you move by analogy you get further out to the perimeter of the dartboard and you still may get hit because there's risk people are still aiming in your direction, but you're less likely to get hit because you're not you're not the focus of the target and so there's a risk for people in the supply chain just because they are doing business with marijuana related businesses but the further you get out the more attenuated it becomes and less risky for the financial institution. So yes, we do see banks not willing to take on you know, retail companies that are selling CBD or the construction company that does business with grow operations or whatever but usually you're less likely to have a problem if you're a construction company and you do a couple of grow build-outs a year. Whereas opposed to if your whole construction business is designed for an involved in growing, you know, building up row operations. That's going to be a bit different analysis for the bank. 

Kirsten: This was one of the driversfor for co-founding Emerging Markets Coalition and choosing to serve the cannabis related industry first is we heard all these horror stories of CPAs and accountants and lawyers and all kinds of folks who were seeking to serve the industry and we're having their bank accounts shutdown summarily, their mortgages called. I mean it was it was crazy and they weren't plant touching to the question that you're asking so this is part of the idea of bringing together, which is what EMC does bringing together the financial services industry and the cannabis industryso that we can proactively go to media, go to federal and state government, go to lawmakers and law enforcement and educate on these are very legitimate very professional businesses and we pay our taxes and we do our proper audits and to replace some of the misinformation that's out there because some of the challenges you just talked about are based on misinformation and misperception where the bankers or their board have been told, hey stay away from that stuff, but they don't understand there's a huge professional business sector here that they're missing. 

Jesse: I want to ask you about another aspect of your previous career Kirsten, we saw last month the US Department of State released a report that showed two instances at least that they documented of Black Market cannabis being involved with human trafficking and you have some previous experience working to fight human trafficking. How do financial services play into preventing human trafficking and why would having financial documents make it more possible for law enforcement to prevent these kinds of things?

Kirsten: Well, thank you for asking Jesse and yet it was actually the pro bono work I've done an anti-human trafficking for years that that got me helped co-found Emerging Markets Coalition. Last year I had gotten a call from some law enforcement friends who call when they have a anti-human trafficking case to say hey, you know help us follow the money bringing your banker friends, your payment friends and let's work together because we've had some really good success if you can follow the money trail then you can often catch the criminals much higher up the food chain and so this case came in and it was all cash. I said guys there's no money trail, but there's no electronic money trail here and it turned out that that particular case was cannabis cash and any industry that's high cash-based is going to attract nefarious characters and illegal activity.So it's not just this industry. It's any that's heavy cash and one of the things we've been pushing as EMC is to normalize financial services and then make sure that the transactions, the financial transactions are electroniconce, they’re electronic, they're transparent, they're traceable you can fairly tax thembut that law enforcement to be able to follow the money trail is critical to catching criminals and by electronic filing these cannabis related transactions and making the financial transactions traceable it's huge in a battle against human trafficking or money laundering or virtually any crime. 

Jesse: So what do people like you need to make that case to the media, to society, to voters? How do you make this change? So it's a couple of things, one in this industry like other emerging industries, there's a flood of information in a desert of facts. So you see all kinds of articles and things out that either aren't entirely accurate by accident or somebody is trying to is doing this on purpose, to try to change the story. So part of it is working together with researchers and industry and government to capture what's true. What are the true dollars transacting through the system? What are the tax potentials? What are the payroll potential? What are one of the benefits and challenges that might come. The other is very proactively bringing the financial services industry and cannabis industry together and together going to Capitol Hill, to the state to law enforcement, to media, to consumer advocacy groups and sharing the facts and making sure that when people have perceptions they are based on fact and in a previous industry, my co-founder and I were able to go to do that and now that industry is normalized like nobody even thinks of it as something exceptional and that's what we're hoping to do here is to shine a bright light on on the facts good and bad and get fair treatment and normalized financial services. 

Zane: Yeah, I mean, I think to Kirsten’s point, I mean and its education and let's not forget that the US has spent a ton of money on the War on Drugs, but over the last few decades and you know without picking a side on whether that was proper  or not or whichever view you have that's the fact and so there are a whole bunch of bull, you know, Federal legislators who some of which have lived through that, who voted on legislation that funded those efforts and you know, there's a perspective that they hold that is negative to the industry and rightly or wrongly those things trickle down to media and to everybody else and meanwhile, we have an industry that's sort of burgeoning, developing a new states around the world really and there's a huge inconsistency there and it's not the same industry this started in 2014 in Colorado. For instance with recreational. It has become very sophisticated and well-developed and you know, there are a lot of stories to be told there and frankly need to be told and so I think it's just a matter of education and being willing to learn and listen and maybe change your viewpoints from what you held two decades ago. 

Jesse: Zane Gilmer is a partner with Stinson LLC, Kirsten Trusko is the CEO of Emerging Markets Coalition. I want to thank you guys both so much for taking the time to talk to me.

Kirsten: Thank you. 

Zane: Thank you. You can find more cannabis industry reporting at TRICHOMES.com as well as more great shows like this one. If you are a member of the cannabis community and you have a story you want to share with us, reach out. You can reach the show at HighGround@TRICHOMES.com. Please take a second to subscribe to the Podcast and write a review. It really helps others find the show. You can also join the discussion with industry insiders and get your voice heard by joining the community at TRICHOMES.com and following us on all social media. The show is produced by David Fortin. I'm Jesse pretend. Thank you for listening.