How To Sign Delaware Banking Presentation

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hello everybody my name's Frank Segal and I am the co-chairman of the canvas Business Advisory Law Group that burns in Levinson and the chairman of our business law group with my partner Scott Moscow and my partner Katrina Skinner on today we're pleased to present to you I called this microburst women webinar where we're gonna talk a little bit about canvas banking we're gonna try to get a lot accomplished in a short period of time well presentation will only be about 20 minutes we want to just give you guys a an overview of some issues that we are constantly confronting in the cannabis industry with respect to banking for those of you who aren't familiar with burns Levinson we are premier corporate middle-market law firm based in Boston we were one of the first firms to get into the cannabis space about almost 10 years ago and we have a national practice handling clients from Boston to California and internationally as well we're truly focused on all aspects that affect our clients in the industry but with a particular focus on corporate M&A capital structure and banking lending and regulatory as well we continue to grow our practice nationally and our group which is over 15 attorneys today and we were thrilled particularly in the banking area to have Katrina Skinner join us several months ago Katrina was the president and general counsel of safe harbor I should talk a little bit about that but truly is one of the leading regulatory banking experts attorneys in the country and has significant experience in guiding credit unions banks and other groups that we'll talk about today throughout the regulatory process and maze that you have to go through for compliance so ask questions come up please feel free to at the Q&A box as I said we'll talk for about 20 minutes and then we will try to address some of your questions again giving a an overview on some of the major issues that are out there so what like to just briefly do is Scott maybe just give a brief introduction on yourself and Katrina and then we'll dive right in sure so thanks Frank I think maybe what I can do first is kind of give a introduction of what we're trying to accomplish so over the next three plus months we will be having a series of micro webinars microburst as Frank called it just like this which we will discuss various concrete small aspects of the whole cannabis banking financial world that we are in as well as either two or three major one more in debt in terms of certain issues that are affecting the industry as mentioned we are here we are welcoming Katrina Skinner to our partnership Katrina has a national reputation with respect to banking and cannabis and as well as has been involved with hemp CBD issues as well my name's Skye's people know I've been with Frank as a partner in this endeavor since I think we started in 2013 the oldest too many most law firms have really made a dedicated portions of cannabis and what we're here to start with is about banking and cannabis and you know maybe about six or seven years ago it was very very difficult if not almost impossible for cannabis companies or Mr B's to actually obtain a true deposit account you know safe harbor and partners credit the partners Colorado units one of the first certainly in in the industry to accept deposits but that has slowed expanded and while banking still remains a difficulty for for Mr B's depending on what part of the country there are more more banks and credit unions that are looking to get into the space or are already into the space and we are hopeful that this series of webinars will provide some information and not only just for banks and credit unions but certainly for operators themselves so they can understand a process as well as other institutions that deal with financial issues including MSBs or money service businesses payment processors broker dealers vestment bankers etcetera all of which have there are some regulatory restrictions imposed upon them to be part of or take part of the cannabis world so let me before I go on let me turn it over to Katrina and maybe she can just kind of give a little introduction of herself and then we can kind of delve right in thanks cotton Frank likes cotton Frank said my name is Katrina Skinner I have actually been in the cannabis law space since the end of 2012 I entered this base some colleagues of mine brought me in on a case to do some civil aspects that took a couple years and as a result of that case after it was resolved another one of the attorneys that I was working with introduced me to Sundy Seyfried and partner color at a credit union they were just starting she was starting to save Harbor banking program which Frank and Scott referred to and she asked me if I would do a legal review of the program so I did the first legal review of her pilot program in 2015 and that's kind of what got me started into the space and I was fortunate I stayed working with safe harbor as outside counsel for certain matters and then when they decided to expand the program nationally they brought me in house and I as in-house counsel and eventually became the president yet to work with a lot of great financial institutions throughout the country and that's where I met Franken Scott because they served as outside counsel for safe harbor services and when I decided I wanted to go back to practicing law and they presented me with this opportunity to join the team so it was a great fit and I'm super excited to be part of the team and work with this caliber of attorneys and to continue the mission of normalizing banking for cannabis related businesses great and then as as I said we have a national footprint and banking is at the forefront of it and we you know by rolling out a national program for our clients for compliance that we're gonna dive into right now so I'm gonna be the I guess the moderator so to speak and we're gonna cover a couple key topics but as anyone on this who's attending this is probably asking themselves and we could ask this question all the time what are the you know threshold and primary concerns about entering into this space particularly the question comes up what's the Bank Secrecy Act all about am I you know committing money-laundering am i aiding and abetting and these are usually the first questions were asked by clients who are interested in getting into the space so I'm gonna throw that out to you guys to to address the bank let's start with the Bank Secrecy Act and then talk a little bit about the an time money laundering so Scott I'll go ahead and take this part of it and you can jump in wherever you want to help so one of the primary concerns for financial institutions or other businesses actually who are involved in the financial aspects with cannabis related businesses is what are the risks and this is a big concern of regulatory agencies as well so it all starts from the fact that under federal law cannabis remains illegal under the Controlled Substances Act and as a result of that any proceeds that are gained through the cultivation are set sale of cannabis are illicit or illegal funds so by providing banking services or financial services it's technically money laundering under the federal law and that causes a lot of pause and concern for directors and officers of financial institutions who want to get into the space in addition to not only money laundering but it also implicates aiding and abetting and some other federal laws or criminal statutes that potentially could subject people to prosecution however we don't know of any financial institution who has been prosecuted for providing cannabis services providing that they're doing it in a compliant way but it all starts with doing it in compliance with your BSA obligations that financial institutions have and in compliance with the 2014 FinCEN guidelines while the Bank Secrecy Act and in warding off the potential money laundering Dean's or financial terrorist acts which is also part of Bank Secrecy Act just one state that the BSA while does have special prominence in the whole world of cannabis BSA has nothing to do what was passed in I think 1970 so way before the first before California being the first state to legalize medical marijuana and so I think what's important for folks to understand is that most if not all banks and credit unions will have their own BSA officer as part of their internal compliance team and so what what we will find out in the next you know this webinar further webinars is that within the framework of the BSA it does provide us with some guidance as well as some restrictions as to how these such as deposits can be or cash to be banked yeah essentially the BSA is the set of rules that requires financial institutions to help and prevent money laundering so cannabis banking is to me just an additional layer of compliance on top of the current BSA obligations that financial institutions have I like to say you take your BSA policy and sprinkle some cannabis dust over it or anything else cannabis related but Katrina maybe you can talk about that extra layer of protection that is required and the kind of things that we tell our clients as part of a regulatory package and checklists we put together for them things like know your customer and how that kind of scrutiny is much higher because we get into issues about how these funds US based are they foreign funds things of that nature which gets brought up in capital raisers and lending transactions compliance issues with various cannabis commissions and states where you can shed a little light on that sure so again those some of those regulations you were talking about like know your customer those are just part of all anti-money laundering programs that financial institutions have to have but if you layer on top of the cannabis because of its legality at the federal level FinCEN through the 2014 guidance issued outlined enhanced due diligence so in order to know your customer FinCEN has outlined additional items that you need to ask for so if you're getting a cannabis company is getting a bank account they're going to be expected to provide additional information about the companies such as their license a copy of their license to make sure they're actually licensed as well as the application for the license so I like to say it's more akin to loan underwriting if you're going to get a loan rather than it is to just opening a typical bank account but financial institutions need to know the source of funds to make sure they're not being derived from truly illicit cannabis monies and especially with international it implicates a lot of international treaties and that sort of thing so banks are willing to accept cannabis related funds are going to typically scrutinize those funds and the source of those funds far more than they would normal I think I think also part of that too is as we know most if not all these are companies where there LLC seek warps that there's some form of entity and so as such any bank or credit units going to bank MRB they need to know who the owners are the beneficial owners and even outside of cannabis right Vincent requires that any entity that is going to bank with a bank non cannabis anyone who owns more than 25% of and/or the voting power they need to be enclosed and oftentimes with these cannabis PSA policies that percentage is lowered so it's not uncommon as a threshold that any person who owns more than 10% sometimes as low as 5% will have to be disclosed and often when we represent operas as well and sometimes there are folks who may own more than 10% who don't want to be disclosed but but unfortunately that's part of the process in order for that company to be able to obtain that depository services so I think it's important because many times people believe oh you know I can buy into an LLC or C Corp and remain anonymous that isn't necessarily true in the cannabis world a-and and certainly be even in non cannabis you owned over 25 percent rules that Vincent beneficial ownership rules that Vincent promulgated I guess it was 2018 25 percent threshold over 25 percent threshold you have to disclose so that's a good segue into the discussion about who's really covered by the VSA regulations because a financial institution is a much broader definition and we have on the call today attendees who are broker dealers investment bankers maybe you can talk a little bit about how that plays into this because people are raising money the money's going into the bank accounts and there's compliance issues that those groups need to be concerned about as well Scott do you want to take this one yes so under the BSA there are certain obligations at all covered covered financial institutions have to comply with one is for instance filing suspicious activity reports or SARS and under under the law you know most people think okay this only applies to banked credit but that's only a sus parties that are covered by BSA and has been compliance obligations and reporting obligations imposed upon them so it's not just the credit unions or the banks it's also broker dealers or sellers of commodities and securities investment bankers money service businesses or MSPs and that could be money transmitters payment processors some unregulated lending entities trust companies and casinos which come to make sense they're predominantly all-cash business as well and as such you know technically those types of entities that already we'll have a BSA policy in place or sure as part of their compliance but they would probably will need to ensure that their BSA policy is kind of sprinkle of the cannabis dust if we were talking about earlier and make sure it's not only compliant BSA but certainly with the 2014 fates and guidelines that we received in terms of banking or dealing with cannabis businesses yeah and I just like to add that if these other types of entities or businesses that aren't traditionally considered financial institutions meaning anything but banks credit unions if those operators are those businesses have their own bsa/aml programs especially the cannabis components and they're dealing with cannabis that really gives a level of comfort for the financial institutions that they in turn want to bank with because if those financial institutions are willing to take cannabis funds then they will look to their own customers to make sure that they know their customers customers especially when the money is moving back and forth so that often times makes a difference in getting a bank account for some funds or merchant processors or even payroll companies have the same situation if they can prove that they are also meeting their bsut obligations that certainly is helpful for their financial institutions that they're looking to thank with as well you know quite often people come to us and you know whether it's a bank or investment banking group broker-dealers and they say well I want to get into this and you're telling me no banks never been prosecuted we're not aware of you know investment bankers or broker dealers in the cannabis space for getting prosecuted for doing the raise people want to know what kind of guidance is out there and obviously that takes us to the Cole memo and to FinCEN guidelines can you Katrina let's talk about the Cole memo and then Scott wants you to address the fence and guidelines as to how we try to give clients some come or comfort with respect to the regulatory environment that's out there well the Cole memo was a memo written by the Department of Justice to outline to its prosecutors nationwide what the enforcement priorities were it was early on when states started to legalize marijuana and there was it was still at the newer stages of the conflict between federal and state laws so what they did was they issued this memo saying to the prosecutors here's where we need to use our resources and there were eight priorities listed and if those priorities were implicated then that gave the prosecutors more discretion to go ahead and enforce those or pursue those cases it was rescinded by attorney general of sessions when he came into office but it is still a best practice and it's still something that most financial institutions or even other entities that are working with cannabis fina cial transactions follow so it it still goes along with the enforcement priorities of the Department of Justice it contains things like if the funds are are being used to purchase by your arms or money or it's being diverted to minors that sort of thing or or on federal lands cannabis and all of those so if those are implicated then it's more likely that prosecutors are actually going to take action against those type of violations versus those operators and states that are operating compliantly with state law when Finn's on issues and I think February 2014 well bumped off so apologies so anyways these were guidelines especially since cannabis has been traditionally an all-cash business do the lack of credit cards I know there are some debit card programs but for the most part some all-cash business to this day and so Finn I guess protocols I don't want to say rules there's not really rules but just basically saying hey if you kind of follow along fulfill your BSA obligations make sure and of course these are broad strokes here make sure that the that the priorities aren't being violated by the MRP as a deposit you know know your customer make sure that you have certain protections against or looking to protect against money laundering down the line those are the types of information or guidelines we've gotten from Finster and also I think what's important is that recently has been since since has rendered or be scheduled from 2018 farm bill we have seen things and has issued certain statements with respect to banks and Craig's looking to Bank those and essentially while you don't need to file an initial marijuana SAR or suspicious activity report as you do every time you open up a bank account for a cannabis company you know the banks and credit unions are still required to ensure compliance of ESA and so for example the HAMP company it's growing cultivating handling hemp it the bank we know that the bank needs to make sure they are licensed right and the bank needs to ensure thereafter that they continue to be licensed they're in compliance they're not getting they're not getting any issues with Department of Agriculture they're not over the percentage over and over again in terms of testing if a that does occur then yes stars have to be filed but essentially this has given banks and credit unions maybe comfort in terms of providing those such services to hemp companies yeah no that's a good point because what we are seeing is more banks being receptive to not only taking deposits from hemp companies but actually making long credibility's and we'll will touch on that briefly at the end as to what's going on in the marketplace why don't we talk about and this applies to operators who are on attending the webinar today as much as the banks and credit unions who are just in this space let's talk about the complexities been opening up the accounts and getting qualified and what should an operator and it applies equally to to a lender what should they be looking to do and be prepared to do Catrina because the scrutiny is much more it's much harder than just going down to an institution and opening up a checking account sure just in the interest of time I'll just go very high level but the due diligence we're gonna run over few minutes so tomorrow due diligence is much more stringent and it requires transparency so in it relate to me and in my experience and the financial institutions that I've worked with it depends on the ability and willingness of the operators to provide the information that's been being requested and each financial institution is going to have their own due diligence requirements but there's some standard ones because they're required under the fifth some guidance that includes again licenses information on your licenses and a copy of your application for the license that one things people a lot operating Gus so if you have an operating agreement your bylaws you should expect that of certificates of Good Standing for your from your entities whichever jurisdiction they operate in Delaware is always a sticky one that really slows things down because they don't make it readily available tax returns financials and list of vendors a list of who you anticipate paying list of locations and typically there will be risk ratings done by each financial institution so there's going to be an interview and it's it's somewhat of a time-consuming process but quicker operators gather all the information the quicker the application process goes and that's usually what delays it is if the information dribbles in is going to take longer than if you've got a nice concise application packet and again whatever financial institution that the operators working with is going to have that ready it may be done on paper it may be done on automated platforms some financial institutions are using automated platforms now that's making things easier but it's not just come down with your driver's license and sign the signature card that's not going to happen I'm in many ways you know so I've done lending as Frank or sadly decades now mean we've been we're doing this that long but to a certain extent what the information that's being requested probably isn't that dissimilar from information that would be requested in terms of underwriting or doing due diligence for a true commercial law you know so they will ask for everything to the extent you've done previous capital raises they'll want to see those types of documents and be able to verify where the source of money has come from that you're depositing into that particular bank and and in any type of information you know banks and credit unions probably will go overboard ask more and require any sort of documentation that you may have as part of your corporate existence in corporate being there's an expectation of transparency so the more transparent the legal entity customer is going to be the quicker and easier the process is and it's not because they're trying to invade privacy but rather it's trying to again verify that the entity is legitimate as are its owners and that type of thing so being willing to share the information is going to make the process much easier and I was just gonna add that for those on the phone deal with capital raises as part of this process obviously the funds have to be deposited so the bank or credit union is gonna be looking at the KYC on where those funds are coming from and you will have a much higher level of scrutiny when you're taking in investors particularly if you're looking at overseas investors not just kyc but background checks the scrutiny is much more intense and if your investment banker on the phone you're gonna want to make sure that as part of the process you're making you're making sure that kyc is big because you're bringing in those proceeds so sometimes you might get additional certifications directly to you from the invest so it is much more rigorous process it's not prohibitive but you know it's to protect the operators as much as it is to protect the institutions as well so in the interest of time I didn't want us to hit on what we're seeing in the marketplace as ancillary companies that are coming into this space as well and just in general what you're seeing with respect to more lenders coming into the space and how you know that could create changes in this ecosystem that is being developed or create opportunities for this ecosystem so Katrina what what what are you dealing with the pretty much daily on that front seeing a lot of new companies and I think we're gonna have some webinars and that's part of this series that we're gonna do where we will feature some of the industry partners and strategic partners that you're going to need if you're in this space such as cash transport merchant process being lending solutions and even for compliance for financial institutions that are interested in this base some of the new automated platforms that are coming out to make their jobs easier so that's kind of what I'm seeing a lot of right now I think one thing that I've been working with and we will definitely showcase in the next few weeks as everyone knows the Dino or director and officer liability insurance is very very difficult to obtain or end or very very expensive to for a actual plant touching cannabis operator there are now certain programs that insurers are coming out with which will provide specific Dino insurance for the directors and officers of a financial institution that's entering into the space so not just the the banks and credit you know what do you know insurance for the directors officers but certainly for broker-dealers investment bankers MSBs merchant processors oftentimes their steno insurance has a hole in it because it will have an exclusion for any intentional wrongdoings and since cannabis is federally illegal certainly most companies would say ok well you're working in the space so there's no coverage this is perplexed the industry I think for many a year and and I think well I know for a fact I've spoken with a few groups over the last two weeks there are products coming to market more investigation and and within the next 30 days another one of these features discussing what those products are pricing how they work how they deal with wrist and I think Katrina is often spoken about one of the main concerns that new entrance to the market new covered financial institutions whether Broker Dealer Bank whatnot have is how do we make sure our directors and officers feel Ayana say safe but still feel that the risk has been mitigated by kind of pursuing this new line of businesses in the cannabis industry definitely so the development of new products the insurance products were do you know in the DAO space are going to be huge and should be another element of this entire program that gives a level of comfort in addition to the ongoing endorsement of the FinCEN guidelines you know legislative changes this is just one more area that it's going to help and make it easier for those financial institutions looking to get into this space yeah it's look it's an entirely evolving industry what we're excited about it at VNL for the audience is that we have clients like yourselves out there that are at the cutting edge in the forefront you know Gartner Federal Credit Union was one of those credit unions that was the first to take deposits and the adult market and we either counseled and we advised them through that process but now we have merchant processors we have clients who are developing credit new lending programs so we see this evolving everyday and it's exciting for us to be able to work with those kinds of clients and if any of you are on the call obviously consider giving us a reaching out to us so we can assist you as well I want to end this though because everyone always asks about the safe banking act and Katrina and Scott have been following it closely and nobody has a crystal ball we're in a whole new world with a pandemic it's you know which is horrible in and of itself creating enough political issues over whether you wear a mask or not can you get a safe banking Act passed in this environment it's a whole nother issue but maybe you guys can give your insight as we wrap this up into where you see the safe banking act and to the extent you do have a crystal ball where you think that might come out soon or in the near future Katrina and I hope we had one question that this kind of touches on about what lawmakers are doing and and is it going to help the entire space if we get some of that guidance so I hope if if this question is if we don't answer it directly just please reach out afterwards and I'll be happy to to opine on my opinion as a whole thing but I think if the legislation passes it's going to be it's going to be a big help because it gives additional guidance for financial institutions and it removes the personal liability for the directors and officers who are operating these programs and removes the liability for insurance companies as well who are providing financial services and those are two really big hands the other big part of it is it requires federal examiner's to establish exam criteria so that should simplify and set expectations for financial institutions who want to get into this space and so I think that if they pass it it's going to help the entire space and it will open it up for additional services for ancillary companies and whatnot electronic payments and that type of thing because there will be better guidance there will be normalized banking or at least somewhat normal banking in the Senate it won't be it's still going to always be highly regulated but you should have more players in the space which should facilitate human processing ecommerce solutions that type of thing so with that necessarily do when that I'm not saying if I'm saying when the safe Banking Act passes that won't necessarily do away at the level of compliance and or KYC slash due diligence that these banks have to proceed with certainly not until cannabis is totally D scheduled and maybe even not then but in terms of a crystal ball we know the House passed a version of the SAFE Act it's stalled in the Senate this year now there's talks well night and talks so then for the next coronavirus package will be package from the government in the version that the house has passed it does contain similar protections that would be offered the SAFE Act for financial institutions of both to take cash deposits to lend provide other financial services the news a lot many of the Republican senators have a sadly over the fact that that terms of trying to create new jobs or provide economic relief to those affected by the pandemic the house was trying all the Democrats were trying to attach a canvas banking bill I personally don't see a version of you know the cares Act with safe Banking Act passing this year solely because it's such a highly contested election and everything that it's pass has so made major over sure with respect to the presidential election with respect to the controls second I do believe regardless of wind that in 2021 or 2022 at the some version will past just because there are there is enough bipartisan support it's just that there are some holdout all right well we've gone a little over but you know as we said these are like microburst flash floods of information we're trying to share with you we have a series of these webinars coming up we're going to continue to come before you with relevant information hopefully cutting edge developments in the industry as I said we've got some clients that are doing very exciting things that we will be sharing with you in the future and we'll continue to host these events and if anyone has any follow-up questions you have our contact information feel free to reach out to us and we're not working with you we hope we have the opportunity in the near future and we'll be back in touch with you soon so thank you and everyone stay safe bye thank you