Credit union runs into trouble with US agency over too-lax cannabis activities

Access to banking services has been a problem for the legal cannabis sector in the US from the beginning – and the experience of one cooperative in Michigan shows that the relationship can be problematic for financial institutions too.

The US National Credit Union Administration (NCUA) issued a cease-and-desist order in February requiring the $69m Live Life Federal Credit Union in Fraser, Michigan to suspend all its cannabis-related account activities immediately. This means it can neither accept new clients from the sector nor process any transactions from existing clients, until the administrative order has been lifted.

The NCUA’s official announcement did not specify the exact reason why the order was issued. However, in an interview with American Banker, Live Life president Karla Haglund admitted that the problem stemmed from the credit union’s inability to file Suspicious Activity Reports (SARs) in a consistent or timely manner.

“The cannabis atmosphere is very fast-paced. You have to be on your toes all the time,” Haglund said. “It can be very draining for staff. You have to work a lot of hours, so we had slowed the program down anyway.”

Compliance protocols

Under the terms of the NCUA edict, which the credit union is not contesting, Live Life must make changes to “ensure all Suspicious Activity Reports (SARs) are filed accurately, completely, and on time”.

To improve its detection capacities, Live Life must “implement an automated system to effectively monitor and identify all transactions for suspicious activity” by no later than 30th April 2021.

This is the first time NCUA regulators have publicly sanctioned a financial institution for having lax cannabis compliance standards. However, two other cannabis-friendly banks – the Millennium Bank in Des Plaines, Illinois and Parke Bank in Sewell, New Jersey – were both required to beef up their anti-money-laundering practices to avoid such penalties, in 2016 and 2020 respectively.

Officials at the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) know that corrupt operators can exploit the legal cannabis trade to hide illegal profits or otherwise disguise the true nature of their businesses. Consequently, FinCEN has established strict compliance protocols that require banks and credit unions to carefully and thoroughly monitor the financial activities of their cannabis-sector clients.

In their reporting of potentially suspicious activity, financial institutions are expected to err on the side of caution – which apparently Live Life FCU failed to do.

The importance of staffing levels

Despite taking on approximately 150 cannabis-industry clients after recreational cannabis was legalised in Michigan in 2018, Live Life hired only two new employees between 2018 and 2020. Their income in fees rose from $64,326 in 2018 to $3.5m in 2020 based on their success with cannabis, so they certainly could have afforded to expand their payroll further to handle labour-intensive compliance requirements.

To avoid problems with regulators, it is vital that banks and credit unions working with marijuana-related businesses (MRBs) devote adequate resources to meet their compliance challenges.

They must provide sufficient funding for all compliance-related activities, and remain proactive in their hiring practices to makes sure their compliance sections are not understaffed and overwhelmed.

To maintain the upper hand over dishonest actors and to keep the regulatory sharks at bay, they should install state-of-the-art automated monitoring systems to streamline the compliance process, while decreasing the chances that questionable activity will slip between the cracks.

The vast majority of cannabis businesses may be honestly run. But one bad apple can spoil the barrel, which in this case means a financial institution’s good reputation.

What This Means: It’s important to note that this is not a case of getting in trouble for providing financial services to a cannabis business but rather for doing it poorly.

Financial institutions are required to file SARs in all kinds of circumstances, not just when it comes to MRBs. This is more a tale of what not to do when it comes to complying with money-laundering laws, regardless of the sector being served. In this case, the failure to file SARs was related to MRBs, but it ought not to have broader implications for the cannabis sector beyond one credit union dropping the ball on its legal requirements.

It does, however, serve as an example of what can happen if financial institutions serving MRBs fail to maintain adequate reporting practices.

– Sarah Ratliff CBD-Intel contributing writer

Following was an internal report published by CBD-Intel. It is republished with permission.