May 20, 2014
Editor’s Note: With 2013 in the rear-view mirror, Anthem asked Northwest credit union presidents and CEOs to reflect on the past, consider what lies ahead and talk about the challenges — and the opportunities — that await credit unions in 2014. Look for “The CEO Perspective,” an occasional series of interviews from the corner office, in upcoming Anthems.
Sure, Washington voters made recreational marijuana legal in 2012. Yes, that decision created an industry of growers, processors and retailers that could be worth as much as $1.5 billion by the end of 2015. And okay, the Financial Crimes Enforcement Network (FinCEN) did issue guidance that seems to clear the way for the banking of those licensed businesses.
But the manufacture and distribution of pot is still a federal crime, and financial institutions that knowingly open accounts or loan money to marijuana businesses still risk federal prosecution for money laundering or conspiracy. So would a credit union CEO have to be high to even consider the idea?
Carla Altepeter doesn’t think so.
“Numerica is neither an advocate nor an opponent of marijuana legalization,” Altepeter says. “We’re simply a financial institution that is serving an important need in our community.”
That need, Altepeter says, is one of public safety. Without a safe and secure place to deposit their money – or the ability to pay suppliers with a check -- marijuana businesses will be forced to deal exclusively in cash. “We are very concerned about the possible crime associated with large-scale, cash-only businesses,” Altepeter says.
And so Numerica has set itself up to be what Newsweek magazine calls Washington state’s first “Bank of Amerijuana.”
The credit union will offer accounts only to growers and processors — not retailers — after a “slow and careful” review of the risks and compliance requirements spelled out in the FinCEN guidance. (Financial institutions would need to monitor retail stores so that large volumes of marijuana are not diverted from Washington to states where it is still illegal, something Numerica says it can’t control.)
Other restrictions on accounts — from limits on total deposits and how deposits are made to the availability of related services — are also designed to mitigate risk. “As we do with all business decisions, Numerica has entered this business slowly and safely,” Altepeter says. “And we will continue to review and refine our processes and procedures.”
Through the middle of May, dozens of businesses had inquired about opening accounts, Numerica officials say. But applications have only been sent to two businesses, and both are still pending.
When all is said and done, of course, Numerica won’t be the only financial institution in Washington to open accounts for licensed marijuana businesses. In fact, Seattle-based Salal Credit Union announced this month that it, too, will accept pot growers and processors as members. But Numerica will be the first, and that has put Altepeter squarely in the spotlight.
Under her leadership, Numerica has become the state’s fifth-largest credit union, with more than 100,000 members and total assets of more than $1.3 billion. Altepeter also serves on CUNA’s World Leadership Development Committee, the NWCUA’s Governmental Affairs Committee, the Greater Spokane Incorporated Board of Directors, United Way of Spokane Board of Directors and the 2nd Harvest Board of Directors.
Altepeter has served on the boards of both the Credit Union National Association and the Credit Union Executive Society. In 2010, she was inducted into the CUES Hall of Fame; in 2014, she received the Inland Business Catalyst Women in Business Leadership Award. She is a past recipient of the Tempo International Distinguished Service Award, the Athena International Leadership Award, and the Sam Walton Business Leader Award.
In a recent interview with Anthem, Altepeter talked about Numerica’s role in the community, and about the process involved in deciding to serve Washington’s licensed marijuana businesses.
Q: No one denies the need to provide financial services to legal marijuana businesses; you’d have a lot of folks walking around with bagfuls of cash otherwise. But you also don’t see a lot of financial institutions jumping into the fray. Why is Numerica willing to take the lead?
Numerica’s mission is to enhance lives and build communities. We do this by serving the well-being of each and every member, and the communities in which they live and work. We believe that it is in the best interest of our members and of their communities that I-502 businesses are able to safely manage their business finances through a financial institution, rather than fully operate as a cash-only business. We are very concerned about the possible crime associated with large scale cash-only businesses.
Q: We’re talking about a multimillion-dollar industry. In fact, some estimates say there could be as much as $1.5 billion in play by the end of 2015. How many accounts do you expect to open, and what’s the potential impact on Numerica’s bottom line?
We’ve limited the number of accounts that we’ll be opening by limiting which I-502 licensed businesses we’re willing to accept membership applications from. We are currently accepting applications only from I-502 marijuana producers and marijuana processors that are licensed by both the state of Washington and the appropriate municipality.
We are further limiting applications to those who are from municipalities where our branches are located and in which there isn’t a moratorium. Some municipalities are imposing moratoriums preventing licensed I-502 businesses from operating in their city or county.
At this time, we are also limiting the amount of deposits we are accepting to 5 percent of total deposits, because of the potential liquidity risk should there be future changes in federal policy.
It’s hard to estimate how many accounts we will be opening, since it is dependent on the number of licenses granted by the state and the individual municipalities, and the number of applicants who qualify in our application process.
Q: Have you had inquiries/applications yet, and if so, do they seem to be coming from folks who meet your criteria for new accounts? If all goes as planned, when do you expect to open your first account?
We have had quite a few inquiries, but to date we have only sent out two applications. Many inquiries have been from potential licensees who have read incorrect reports of the types of businesses that we are accepting or who are not within Spokane County.
The two applications we’ve sent out have not yet been completed and returned. Once they are, it will take another 7-10 business days to process before we can open an account. We believe it likely that initial submissions will not be complete, and that we will have to go back and ask for additional information.
Q: There has been some discussion in the financial services industry about the idea of charging licensed marijuana businesses a fee for opening these accounts. Do you have a pricing structure in place?
We are charging fees to open these accounts, and other fees for services as well. Our philosophy regarding fees for these accounts is to assess the appropriate amount of fees to cover our cost and make a small profit.
Since these accounts are labor-intensive to set up in order to meet all of the FinCEN requirements, we are charging a relatively larger account-opening fee than usual to cover our costs. We are also charging some pass-through fees. For example, we have arranged for armored transport and cash-management services when business have large amounts of cash to deposit. The fee for this will be passed on to the business.
Q: The decision to open these kinds of accounts isn’t just about deposits and fees, of course. For most credit unions, the bottom line is this: Marijuana is still a Class 1 narcotic, and despite FinCEN’s guidance, the manufacture and distribution of pot is still a federal crime. That means financial institutions, theoretically at least, could face prosecution for money laundering or other charges. What role did that play in Numerica’s decision to bank marijuana businesses?
Numerica has slowly and carefully reviewed the issues and established procedures to mitigate the risks associated with accepting deposits from I-502 businesses while still supporting the community. We have conducted, and will continue to conduct, regular discussions with our regulators and the Washington state Liquor Control Board in order to protect the credit union from associated risks and help keep the community safe.
In order to further protect the credit union from associated risks, we have limited the checking account services available. I-502 business members will not have many of the features of a regular checking account, such as debit cards, online bill pay, mobile banking, night deposits, credit cards, courtesy pay, remote deposit capture, Numerica Financial Services products, and shared branching.
In addition, each I-502 member is limited to $5 million on deposit at any one time. And lending to I-502 business accounts will not be permitted.
Q: Is there anything in the FinCEN guidance — or the Cole Memo that accompanied it — that makes you think that, at some point, somebody at the credit union could go to jail? Confiscation of assets is one of the enforcement options available to the Feds — is that a concern? If not, what most worries you from a legal standpoint?
Of course it was a concern. That’s why Numerica has slowly and carefully reviewed the issues and established procedures to mitigate the risks associated with accepting deposits from I-502 businesses, while still working toward safeguarding our community. As we do with all business decisions, Numerica has entered this business slowly and safely. And we will continue to review and refine our processes and procedures.
Q: For many credit unions, the “enhanced due diligence” outlined in the FinCEN guidance seems overwhelming. How much of a compliance burden do you foresee? Will Numerica need to staff up to handle compliance issues? And to what degree will you rely on the Liquor Control Board’s licensing process to make sure you’re staying clear of FinCEN’s “red flags” and the Cole Memo’s eight enforcement priorities?
Again, we have taken considerable time evaluating the policies and procedures necessary to serve our I-502 members, keeping our members’ best interests in mind. By working with the Liquor Control Board and our regulators, we determined what services we can safely offer and still meet all compliance requirements.
Although we won’t share our actual processes and procedures, we can say that initial and ongoing due diligence will take significant time, and that we have a qualified team to handle that additional work. No additional personnel are being hired at this time.
Q: What about reputational risk. How did you sell the idea to Numerica’s board? How will you sell it to your members, and what kind of reaction do you expect?
The answer to this question is the same answer I gave to explain the “why.” Our mission is to enhance lives and build communities. We believe that it is in the best interest of our members and of their communities that I-502 marijuana businesses are able to safely manage their business finances through a financial institution. It provides safety to the communities that Numerica is committed to serving.
Q: You talk a lot about a "slow and careful" process in putting this program together. Can you give some examples of the kinds of things you had to consider — positive and negative, from inside the credit union and out — as you worked toward the decision to offer these accounts?
As we put the program together, we had to discuss some key issues that had both negatives and positives:
- We knew we had to balance our workload. We had to focus on areas where we currently have branches, knowing we could handle the response and the due diligence involved in opening and servicing these accounts.
- We took the federal regulations into account and conducted a risk assessment. We determined that we had to limit who we could accept applications from and what services we could provide in order to protect the credit union from associated risks as well as help keep the community safe.
- And we had to consider the safety of the communities we serve — a benefit that ultimately led us to find a balance and make the decision to offer services.
These issues influenced the final product: an I-502 checking account. Marijuana retailers are disappointed that we are not able to accept deposits from their business; processors and producers are very grateful.
While offering financial services to the marijuana industry is controversial, we maintain that this is an important community-safety issue and we are committed to the well-being of our communities.
Q: Gaze for a moment into your crystal ball. What does the future of banking marijuana businesses look like — a state-owned bank? More credit union involvement? An expansion into lending and other services?
If the federal laws stay as they are now, then I don’t foresee much change in the financial services available to marijuana businesses. A state-owned bank would have to stay in compliance with the Bank Secrecy Act (BSA), just as a non-state-owned bank would. I do predict that, in time, more financial institutions — including credit unions — will offer a limited amount of services to licensed marijuana businesses.
Q: Today, providing financial services to marijuana businesses is either a “risk” or an “opportunity,” depending on who you ask. What will it take for more credit unions to see the opportunity you do?
Numerica is neither an advocate nor an opponent of marijuana legalization; we’re simply a financial institution that is serving an important need in our community. That said, it will take a change to the Anti-Money Laundering Act. That change would provide an exemption for those financial institutions that provide services to businesses that are legal under state law.
Read more in Anthem: For more information about the banking of licensed marijuana businesses in Washington, including links to the FinCEN guidance and Cole Memo, go here. Scott Jarvis, director of the state’s Department of Financial Institutions, answers questions about the agency’s position here. Hal Scoggins, an attorney with the law firm Farleigh Wada Witt, shares his perspective here.
Questions about this story? Contact Gary M. Stein: 503.350.2216, firstname.lastname@example.org.