As of July, cannabis is legal to grow, possess and use recreationally in New Mexico.
However, the drug is still illegal at the federal level, which means that getting access to bank accounts, loans and other financial resources remains a hurdle for the growers and manufacturers expected to fuel the state’s new recreational market.
While a few New Mexico banks and credit unions have dipped a toe into the industry, many have opted to steer clear until federal reform comes, leaving cannabis dispensaries, manufacturing operations and other businesses operating in the industry with limited options.
“When you start a business, the very first thing you do (is) file your incorporation papers and you open a bank account,” said Ben Lewinger, executive director of the New Mexico Cannabis Chamber of Commerce. “It’s so fundamental to everything that a business needs to be able to do.”
Lewinger said the limited access keeps growers without other sources of startup capital out of the recreational and medical industries, and makes life harder for those already operating.
Those banks and credit unions that have ventured into working with cannabis companies are reaping the benefits of capitalizing on a sector that many of their peers won’t touch, but they acknowledged that it takes a lot of time, money and work to do it safely and securely.
“You’re either all-in or you’re not in,” said Lonnie Talbert, president and chief operating officer of Southwest Capital Bank in Albuquerque, which currently works with around 100 companies in the cannabis industry. “It’s an expensive proposition.”
Large banks pass on industry
Without substantial reform at the federal level, don’t expect to see large financial institutions like Wells Fargo or Bank of America dive into working with cannabis companies any time soon.
Chris Moya, executive vice president of the Independent Community Bankers Association of New Mexico, said large, multinational banks are regulated by the federal government, where cannabis remains illegal.
At the state level, Moya said the path is a bit murkier. Moya said New Mexico community banks are jointly regulated by state and federal regulators. In 2013, U.S. Deputy Attorney General James Cole wrote a document, known colloquially as the Cole Memo, guiding federal enforcement in states where cannabis is legal. The document, and associated guidance from the financial sector, instructs banks looking to operate in that industry to invest heavily in security against money laundering and other violations of the Bank Secrecy Act.
Moya said the effort it takes to implement those security measures have caused a lot of local banks to think twice.
“It’s not that they don’t want to serve that market,” Moya said. “It really comes down to the regulatory burden and regulatory cost to even operate in that space.”
Marsha Majors, president and CEO of U.S. Eagle Federal Credit Union, which launched a stand-alone cannabis banking program in 2019, said not having
access to a bank account forces dispensaries to deal in cash, which can make them a target for criminal activity.
“It’s about keeping our community safe, and having these funds on the street does not add to a safer community,” Majors said.
Majors added that having an account at a financial institution can also help companies protect themselves against audits by maintaining compliant banking records. Moreover, Lewinger said the current system also makes it difficult for prospective business owners to apply for loans or other funding mechanisms to get their operation off the ground.
This, in turn, can keep New Mexicans with limited financial resources, including those who have been working in the illicit cannabis market, out of the newly legal industry, Lewinger said.
The effects could be particularly hard on growers operating under so-called micro-licenses, which cap product and cost at lower rates.
“Access to capital is the single biggest challenge that new businesses, particularly micro-licenses are going to face in New Mexico,” he said.
What have banks done
Both Majors and Talbert said their respective companies have not taken a position on whether cannabis should be legalized federally, but acknowledged that working with cannabis companies is a valuable niche for them.
Talbert, a former Bernalillo County Commissioner, said Southwest Capital Bank began looking at offering banking services to cannabis businesses serving the medical market in 2014 ahead of a planned expansion of the medical plant count.
The bank, which recently sponsored the N.M. Cannabis Legalization Conference at the Albuquerque Convention Center, determined that there was demand for banking services in the industry that other banks couldn’t or wouldn’t meet.
“There are so many banks that don’t want to be involved in any sort of risky activity,” Talbert said.
Today, cannabis customers at Southwest Capital can access bank accounts with the same services as any other small business, but with an extra layer of due diligence.
The bank added new tellers to handle the cash coming in from the industry, brought in new backroom employees who could help the bank stop money laundering and enforce other provisions of the Bank Secrecy Act. Talbert added that Southwest Capital invested in technology that could help it monitor and track businesses to make sure they’re complying with state and local regulations.
Talbert acknowledged that the program has been expensive to undertake, and said the bank has been hit with two orders from state and federal regulators stipulating that the bank must make changes, one of which he said was explicitly linked to cannabis. Talbert said the bank was able to satisfy the terms of the order that was linked to cannabis, and it has since been terminated, per the Federal Deposit Insurance Corp.
Still, he said the bank’s work with the cannabis industry has been met with an “overwhelmingly positive” response from customers.
“We felt that the opportunity that it presented to us, economically and obviously community-wise, safety and security-wise … made a lot of sense,” Talbert said.
On the credit union side, U.S. Eagle opted to make its cannabis banking program a stand-alone program known as Aery Group.
Majors said the credit union opted to make Aery Group a separate unit, with its own physical office space, to ensure the cannabis businesses they work with have a core group of staff to talk with, and to let regulators know that the program would not disrupt the rest of U.S. Eagle’s business operations. At the time â€‹it was established in 2019, Majors said the cannabis industry was “not as acceptable in our state as it is today.”
Majors estimated that setting up the program cost between $500,000 and $750,000, factoring in the cost to hire and train new employees. Aery Group currently employs four subject-matter experts who know the industry and the compliance protocols that go with it.
“We devoted a lot of time to making sure that our team is fully invested, fully trained and fully up to speed on what was required to ensure our success,” Majors said.
Additionally, Majors said Aery Group puts potential cannabis businesses through a rigorous vetting process, which includes a questionnaire along with extensive documentation on the background of the applicant.
Dan Mayfield, vice president of government affairs for the Credit Union Association of New Mexico, said in an email that Aery Group licensed the program from Safe Harbor Financial, a Colorado-based financial institution that helped pioneer modern cannabis banking. Majors added that the company has rejected applicants when issues turned up during the vetting process.
Once a customer is approved, Majors said they have access to “99%” of the services that a normal small business would get, including income validation and deposit insurance up to $250,000.
Now that cannabis is legal for recreational use in New Mexico, both financial institutions expect to expand their programs significantly to meet demand. Majors said Aery has seen an “onslaught of inquiries” since this spring. Aery had 18 accounts open as of June, and Majors said the company expects at least 50 open accounts by the end of the year, from across the cannabis industry.
Talbert added that he expects the recreational industry to be even more cash-intensive than the medical side, and the bank plans to expand its compliance programs to keep up.
“For us, it’s an opportunity for us to grow our customer base,” Talbert said.
As more states legalize cannabis, support is growing for substantial banking reform at the federal level.
One bill, the SAFE Banking Act, would prevent federal regulators from penalizing financial institutions for serving a legitimate business in the cannabis industry and ensures that they won’t be held liable for providing business loans, among other changes.
Moya, whose organization has endorsed the bill, said its passage would remove uncertainty and could help remove some of the regulatory burden for banks, encouraging more of them to move into the space.
Lewinger said he believes the bill could reach President Joe Biden’s desk by the end of the year. He added that making business loans a possibility could go a long way toward helping New Mexico’s burgeoning cannabis industry become more equitable down the road.
“I think there are a ton of people who just wouldn’t even consider the cannabis industry without it,” Lewinger said.