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The Cannabis Conundrum

When recreational marijuana is legalized, should CUs serve the estimated $10 billion industry?

Marijuana is a growth industry in Canada. While the number of Canadians using medically authorized marijuana has climbed significantly in recent years, the real expansion of the legal cannabis market will happen when the Trudeau government fulfills its promise to legalize the drug’s recreational use in spring 2017. It’s an industry that some credit unions already serve, and others are considering.

Medical marijuana is used most widely for the relief of chronic arthritic pain. It also is used to reduce nausea and vomiting from chemotherapy treatment, seizures from childhood epilepsy, and muscle spasms from multiple sclerosis.

weed_quote1From 2001, when Health Canada introduced the Marihuana Medical Access Regulations (MMAR ), until 2013, when the former Harper government replaced them with the Marihuana for Medical Purposes Regulations (MM PR), the number of authorized users climbed to 30,000 Canadians from the initial 500. As of January 31, 2016, it reached 43,000.

Whereas under the old program Health Canada licensed only a single company to grow and sell the country’s legal supply of cannabis, the new regulations have opened up the market. Health Canada has received 1,500 applications and so far has licensed 30 producers: 16 in Ontario. These licensed growers have to meet strict conditions regarding quality control and site security, submitting to monthly inspections by Health Canada officers. Initially, growers were allowed to sell product only in dried plant form, but in 2015, the Supreme Court of Canada expanded the definition of cannabis for medical use to include oils, tea, and edibles, such as cookies and brownies.

Store-front dispensaries defy laws

Meanwhile, parallel to the legal cannabis growers, a network of some 300 storefront dispensaries has emerged across Canada in defiance of federal law. Unlike the licensed growers, which are limited to mail-order sales, dispensaries offer face-to-face consultation about how to take the drug and which strains are most effective for certain medical conditions.

Responding to the growth of the number of dispensaries, almost half of which are located in Vancouver and Victoria, B.C., those two cities have begun the process of legalizing and regulating them at the municipal level.

Both the licensed growers, represented by the Canadian Medical Cannabis Industry Association (CMCIA ), and the dispensaries, represented by the Canadian Association of Medical Cannabis Dispensaries (CAMCD), say they favour a competitive system of multiple distribution channels when the Trudeau government legalizes and regulates recreational marijuana.

A government distribution channel?

But speculation at the provincial level has focused on the liquor commissions as the likely distribution channel, albeit a monopoly. Liquor stores have experience verifying customers’ ages. Both associations warn, however, that placing alcohol and cannabis in the same retail space would invite substance abuse. The contention is that alcoholics trying to maintain sobriety by using pot as an alternative to alcohol would be needlessly exposed to the temptations of a retail liquor store.

“If anyone tells you what the distribution system is going to look like, that’s a nose-stretcher,” says Cam Battley, a spokesperson for the CMCIA .

Legalization to curb organized crime

Liberal MP Bill Blair, Toronto’s former police chief, is leading the task force that will hold public consultations on the legalization of recreational marijuana in Canada. Blair said the goal is to strictly regulate the drug and restrict access to it by minors. Legalization will also take billions of dollars in black market sales away from organized crime, he said.

Similarly, in her announcement on April 20, 2016, Federal Health Minister Jane Philpott said the Liberal government will bring a legalization bill before Parliament in Spring 2017, keeping marijuana “out of the hands of children, and profits out of the hands of criminals.”

A report entitled Economic Insights, issued by CI BC World Markets in January, says that while legalization would not spur a dramatic rise in marijuana use, bringing production and distribution “above ground” would give Canada’s federal and provincial governments as much as $5 billion annually in tax revenues — if all black market sales are effectively curbed.

The report estimates the Canadian cannabis market, once brought above ground, would be about $10 billion annually.

The report bases its estimates on the experience of Colorado and Washington states, the first two American states where recreational marijuana sales were legalized and taxed. (Oregon, too, has legalized recreational sale. Such sales remain illegal under U.S. federal law.)

Should CUs serve the recreational market?

As the licensed producers and the unlicensed dispensaries position themselves to serve the prospective recreational market, financial institutions are grappling with the legal, business, and social issues of providing them banking services.

“The credit union industry is still fairly cautious in looking at these businesses and the opportunities,” says Annette Kuckartz, national leader, Credit Unions, at MNP LLP. “The discussion hasn’t really hit at the national level.”

In April, howMoney Tree growing out of a Money Bag with a Canadian Dollars isolated on whiteever, the Canadian Credit Union Association’s Central Compliance Managers’ Working Group hosted a webinar, entitled “The Medical Marijuana Regulatory Framework,” featuring officials from Health Canada and the Department of Finance.

Rob Paterson, President and CEO of Ontario based Alterna Savings & Credit Union (124,000 members, $2.9 billion in assets), has accepted two licensed growers among his credit union’s commercial accounts.

“They’re looking for support in the normal business practices that any business would be looking for — deposit and lending,” says Paterson, during an interview with Enterprise. “We made sure they were licensed by Health Canada.”

Alterna hasn’t been approached by dispensaries seeking to open accounts. “There we would have the legal issue,” says Paterson. “We’re following the changes to see what does emerge. If they become licensed, legitimate businesses within Canada, we would absolutely look at providing them with the appropriate services for banking.”

On the West Coast, matters have evolved further. “The credit unions are more willing to give the dispensaries accounts than the banks are,” says Dana Larsen, vice president of CAMCD , the dispensaries’ association. “The credit unions are smaller, local, and have more of a social conscience.”

Vancouver City Savings Credit Union (504,000 members, $19.7 billion in assets) confirmed that it has four dispensaries as members, but declined to be interviewed. Vancouver’s single- branch CCEC Credit Union (3,200 members, $36 million in assets) serves “more than six” dispensaries, says Ross Gentleman, general manager and CEO , who retired at the end of June.

These commercial accounts need services typical of any small business, with one difference: “To the degree that they may have excess cash needs,” says Gentleman, “there may be service-charge packages that are considered for those accounts.”

CCEC requires the dispensaries that have become members in the past six months to belong to CAMCD , which the credit union regards as “at least a self-policing body.”

Gentleman is unfazed by the fluid legal status of dispensaries. “Legality becomes a dubious word here,” he said. “You can say they are operating illegally in some respects, but they are condoned by the police, by the health authorities, by the courts.”

While CCEC has made a commitment to facilitate distribution of medical marijuana, says Gentleman, “that doesn’t mean we’re going to provide services to people who are involved in the recreational marijuana industry.

“There is a business opportunity here,” he adds, “but there is also an issue of social need. We didn’t respond to this issue on the basis that there’s a growing industry here and we want a toehold in it. We responded more from there being people out there who are desperate to have access to their medication, and we can be helpful in facilitating that.”

Risk versus reward

Credit unions that are exploring ways to help these new businesses in their communities need to understand startup challenges, along with anti-money laundering and regulatory issues these operations face, if their risk is to be appropriately managed.

Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, Canada’s financial institutions are required to report to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) all large cash transactions or electronic fund transfers of $10,000 or more, as well as any transactions where there are “reasonable grounds” to suspect money laundering or terrorist financing.

CCEC said it has turned away about 10 marijuana distributors because of doubts about the “character or intentions” of the individuals involved. And CCEC has had to report some of its distributors’ transactions to FINTRAC due to the size of the transactions involved and the fact that they were in cash.


(Unlike other reporting obligations, there is no monetary threshold for reporting a suspicious transaction. The key is whether the reporting institution has reasonable grounds in the circumstances to believe that the transaction may be linked to money laundering or terrorist financing.)

Before a new account is even opened, credit unions have to perform due diligence (verifying the corporate entity and the signing officers) as well as a risk assessment of the new member. A risk assessment is also required on how the new account affects the credit union’s membership on a sectoral basis.

“We look at industry concentration and whether there are particular risks within an industry that we need to be aware of,” says Brian Lawson, Alterna’s vice-president, Retail Operations. “If you get into a lending relationship, industry concentration risk becomes even more of a concern.”

Whenever a financial institution enters a new market or a new service area, “there’s a lot of due diligence that has to happen,” says MN P’s Kuckartz. “You have to be able to monitor and manage the risk you’re taking on. You need to have a clear understanding of how much you have invested in different areas. The more you understand the industry and the products, the less your risk will be overall.”

As Canada moves boldly into an era of legalized cannabis credit unions thus face both opportunities and challenges. ◊

Up in smoke: Canadian cities crack down on illegal dispensaries

At time of writing, city bylaw officers in both Vancouver and Toronto began cracking down on illegally operating storefront dispensaries. The City of Vancouver filed injunctions against more than 100 unlicensed shops violating city zoning bylaws after they failed to heed warnings to shut down by April 29. Shops operating without a business license face fines of $250 per pot-aboveday they stay open. According to the City of Vancouver’s website, to date 12 dispensaries have been issued development permits, while just one has actually had a business license issued in addition to a development permit. Both are mandatory. Compassion clubs and marijuana-related retail businesses must also comply with city zoning requirements.

In late May, the City of Toronto took a different stance, instead targeting property owners renting premises to pot shops. More than 78 notices were issued for violating zoning and other bylaws, but unlike Vancouver, penalties are determined by the courts. Corporations and individuals who violate zoning bylaws face maximum fines up to $50,000 and $25,000 respectively. During a blitz, Toronto Police Service arrested an estimated 90 people and laid more than 185 criminal charges against business owners or operators under the Controlled Drugs and Substances Act. – J. Gyenes