Despite what you may have heard, it’s not illegal for federally licensed banks to serve cannabis companies. The truth is that these relationships are legal, but they create sufficient regulatory and operational risk, and require such onerous compliance work, that most banks decide the industry isn’t worth the trouble. Dama Financial’s product and service suite enables FDIC-insured banks to serve cannabis companies.
“Everyone should have access to transparent and compliant banking,” Dama Chief Revenue Officer Eric Kaufman says. “That should be a commodity.” Companies with bank accounts are more likely to pay their taxes and operate in accordance with the law. But at the moment, cannabis companies can only work with the banks that make the “risk-based decision,” to work with them. And the banks that do need guidance for how to serve the industry in a responsible way.
To build its business, Dama had to address a catch-22: the small and medium sized banks for whom cannabis clients can move the needle generally lack the compliance capacity to do so with an acceptable level of risk. Dama’s solution has been to essentially become the cannabis compliance department for those banks.
For its bank clients, Dama assists its sponsor banks with the three main aspects of compliance, all of which aim to prevent money laundering and criminal abuse of the financial system: 1) The Bank Secrecy Act, 2) Know Your Customer guidelines and 3) Anti-Money Laundering rules. For each category, Dama assists its sponsor banks with their compliance efforts and reporting requirements.
Initially, Kaufman says, it was difficult to find banks willing to “rely upon a third party to render compliance associated assistance with a risky industry.” But the company’s founders chairman George Gresham, Dan Henry and CEO Anh Hatzopoulos had a background in banking the previously unbanked that they were able to apply the needs associated with banking cannabis businesses.
In addition to managing basic banking services including accounts and bill pay by checks, ACH or wire, Dama has provided clients access to armored car cash pickups as well as more sophisticated financial services such a B2B payment platform and Paytender, a service retail customers can use to pay dispensaries and delivery services. Kaufman compares it to “Venmo meets the Starbucks app.” Social equity cannabis businesses receive special pricing.
The banks serving cannabis companies aren’t always eager to advertise their offering. Dama has extended its services to include sales and marketing outreach to the industry.
The SAFE Banking myth
In recent months, some cannabis businesses have dared to hope that the industry could soon routinely access the financial system. The SAFE Banking Act, which would provide a safe harbor for financial firms serving cannabis clients, has passed the U.S. House of Representatives several times. Meanwhile, Senate Majority Leader Chuck Schumer (D-N.Y.) says he wants to legalize cannabis federally, which could de facto enable cannabis companies to obtain bank accounts.
While this might seem to make Dama’s core services unnecessary, Kaufman says the company is well-positioned for federal legality. “There’s a lot of misperception about the Safe Act,” he says. Even if it does pass, he says cannabis operators will continue to face significant hurdles in their interactions with the financial system.
He calls the banking bill as it’s currently written “baby steps in the right direction.” However, it doesn’t provide for rules regarding how to safely bank the industry. Cannabis will have to be federally legal before major banks consider offering the industry accounts, he predicts, and regulators will undoubtedly develop stringent guidelines for doing so. “We’re a compliance organization and compliance isn’t going away,” Kaufman says.
“At the end of the day banks are inherently risk averse,” Kaufman says. Today, nearly 90 years since the end of alcohol prohibition, only four major banks work with liquor companies on any real scale, he points out. This is because any business where there’s a lot of cash creates a red flag for money laundering, and about 35% of retail alcohol purchases are made in cash, raising substantial compliance concerns.
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