Agents aren’t bankers and why it matters for your MRB
The marijuana industry scored a major win as the U.S. House of Representatives voted in favor of the SAFE Banking Act. It was a historic first-ever vote on a stand-alone cannabis bill. The momentum is shifting. This bill would give Banks and Credit Unions, depository institutions, the certainty they need to fully serve their communities. It would provide much needed public safety, increase transparency and promote regulatory compliance.
With Missouri depository institutions being slow to adopt policies to provide normalized banking to the industry, some seemingly desperate Missouri marijuana businesses have accepted a watered-down solution. RegTech and FinTech companies are offering what is being called “banking” directly to marijuana businesses. All so careful not to offer bank accounts to their customers. Why no bank account? The agreement signed is an “agency relationship” using what is actually their bank account. Never explaining clearly these businesses they don’t actually have a bank account and have legally under contract given control of their funds to the agent. Under an Agent relationship, a marijuana business losses both possession and ownership of their funds; the money becomes, governed by the agreement, the agent’s money.
These new alternative banking startups that entered the market offer only “banking services”, these new service providers offer an agent/principal relationship, not the common bank/depositor relationship. The differences are important and the consequences significant for the business. The agreements entered to give the agent (them) control of the principal’s (your) money. The account is in the name of the agent, not the business.
The bank or credit union is released of liability for and is indemnified by both the agent and principal against any loss or expense honoring the agent agreement. The depository institution is not responsible, by agreement, to resolve account discrepancies involving the bank, the agent and the agent’s client. This is important given funds of various principals are often co-mingled into a single account by the agent. The principal, you the business owner and capital investor give up a lot in exchange for a glorified bill payment service and in addition are charged large monthly fees! These fees are often quoted at minimums of $2,000 a month but can easily exceed this number by several hundred if not a thousand dollars. Please read all the service agreements carefully. Remember the devil is in the details.
In addition, your agent in this relationship cannot guarantee uninterrupted banking. If the regulators of the depository institution holding the money are uncertain all reporting is being completed correctly by your agent, actions may be taken against the financial institution holding your monies!
Remember, you, as principal, have released your right to give instructions to the bank directly and therefore must rely on the agent to intervene in order to receive your money from their bank! In addition, how is your money insured? You are not a depositor; in most situations, you are an unsecured creditor of your agent. RegTech and FinTech startups come and go, as will your money if your agent files bankruptcy! You have very limited protection!
Banking services are not a bank account. Do not agree to something you do not fully understand. Research the claims being made by the agent. Does your agent really have an exemption from Missouri banking laws? Some agents claim to have been granted exemptions from state banking authorities. However, no such exemptions have been documented.
Research the agent’s responsibility under the current federal guidance. Are they properly registered, are they completing all required federal reporting? The devil is in the details.
Missouri depository institutions continue to move slowly developing marijuana banking policies and offering services. The astounding popularity of vote on the SAFE Banking act provides a renewed incentive for depository institutions to address developing policies, procedures, and deposit products. Without a set industry standard or federal banking law, depository institutions have been working from scratch as cannabis trade groups and bank trade groups continue working together for solutions. Myths are being dispelled. Regulators and depository institutions are having open conversations and Congress is moving forward.
Those depository institutions that in haste offered non-traditional options such as accepting agency accounts should reconsider as well. The problem is, this quick fix does not relieve bank management or their Board from the responsibility of filing SARs. They must also update their assessments and their policies to meet the challenges of these agents operating in the marijuana industry. The bank must understand the agent’s responsibility and their own obligations under these contracts and agreements. Depository institutions need to read and reread the details of all agreements entered by all parties!! Due diligence and monitoring cannot be assigned to the agent; the depository institution is still responsible.
These agents often comingle funds and aggregate receipts and payments. So why should that matter? This makes it more difficult for the bank to monitor and report transactions. Depository institutions should also investigate the agent. Is he a registered money service business? This elevates the account risk. If the agent is working directly with marijuana-related businesses, additional enhanced due diligence will be required.
It is important for the depository institutions to discuss the vendor and their claims of exemptions with their regulator. Bank regulators, in general, believe a third party deciding when and when not to file SARs is not ideal, because the bank is legally responsible. In the end, it will be bank management and their Board of Directors that are held responsible when regulators find exceptions or have disagreements with the SARs for actions flagged, or not flagged, by the agent RegTech service provider.
Marijuana businesses need to know they do not have a bank account or even direct control without agent consent over their cash under an agency account. It is important for MRBs to discuss the complex nature of this arrangement with their attorney, accountant, or banking industry consultant. If an agent has your money today, it is urgent to have the relationship reviewed by a professional immediately. Re-examine your decision and any contracts or agreements that have been entered. Marijuana businesses need not separate themselves from the legal ownership of their money. There are other options including direct relationships with depository institutions, prepare yourself and do your research!”