California Cannabis: Department of Business Oversight Issues Somewhat Helpful Guidance to Financial Institutions

Earlier this month, on October 3, the California Department of Business Oversight (the “DBO”) issued a Cannabis Banking Guidance memorandum to its state-chartered financial institutions (banks and credit unions) to help them make appropriate risk assessments in serving cannabis-related businesses and comply with federal guidelines.  The memorandum is in the form of an extensive questionnaire. The DBO’s Commissioner, Manuel P. Alvarez, commented: “If financial institutions choose to serve the cannabis market, they must understand risks and build out their compliance infrastructure accordingly.” “By making this questionnaire available to our licensees, we hope it can serve as an additional resource for banks and credit unions as they roll out their cannabis banking programs.”

With a focus on ensuring banks and credit unions thoroughly examine a Marijuana Related Business, or MRB, the first section of the questionnaire is titled “Program Governance.” Questions in this section include whether there is a comprehensive assessment of the business, and whether a financial institution has a contingency plan in case federal or state guidelines change. This section also focuses on due diligence, as determining where an MRB’s money comes from is critical.

Other sections include recommendations for business file review, account testing/identification of FinCEN red flags, and FinCEN filings.

The questionnaire also pulls from the now-rescinded Cole memorandum in one of its sections. It asks, “Does the financial institution specifically monitor for the eight priorities found in the Cole memo?” which include preventing the distribution of marijuana to minors, preventing revenue from the sale of marijuana from going to criminal enterprises, and preventing the diversion of marijuana from states where it is legal under state law in some form to other states.

California Bankers Association’s Senior Vice President, Beth Mills, said the guidance is helpful to have in written form but that much of it is a reiteration of what the department has said verbally in the past. “It is helpful for banks who are sort of weighing the pros and cons of trying to wade into that.” She added that the California Bankers Association is “still focused on a federal fix,” in the form of a change “that would really, truly make it okay for our members to bank this industry.”

In line with Proposition 64 and actions by other states, the DBO also reaffirmed on the same day that it would not bring regulatory actions against state-chartered financial institutions for solely establishing a banking relationship with licensed cannabis businesses. These financial institutions will still be required to comply with FinCEN’s BSA expectations, including the FinCEN guidance and priorities set forth above, and they were urged to identify, evaluate, and manage risks appropriately. Commissioner Alvarez stated, “We stand ready to assist our licensees to make sure they properly develop their cannabis banking initiatives.” “We will not be an obstacle to banks and credit unions that adhere to federal expectations regarding cannabis-related businesses and responsibly manage their risk.”