In 2015, around the same time Prime Minster Justin Trudeau was on the hustings wooing voters with a variety of promises that included legalizing recreational cannabis, the Royal Bank of Canada (RBC) dumped Ontario medical maijuana Canopy Growth from its customer list. The reason? RBC explained that it was unable to work with the cannabis sector. This helped cleared the path for Ottawa’s Alterna Savings and Credit Union (133,309 members, $4.2 billion in assets) to scoop Canada’s largest medical cannabis producer, with a market capitalization of $7.5-billion.
The rewards for moving fast were significant. Within 72 hours of Canopy announcing its new financial partner, every major newspaper and broadcaster across Canada was chasing Alterna Savings for comment. Members supported Alterna Saving’s decision, sharing stories of critically ill family members who relied upon medical cannabis to alleviate pain, nausea and poor appetite. Cancer agencies expressed gratitude. “We didn’t have one negative issue,” says Alterna Savings CEO Rob Paterson.
Alterna Savings and its national subsidiary, Alterna Bank, provide service to about 60 percent of licensed producers in Canada, with member businesses in every province. It’s still the only credit union “all in” with the cannabis industry, Paterson says. And with the legalization of recreational pot poised to become law sometime this summer, the temptation for other credit unions to jump on the herbal bandwagon is growing. Deloitte and ArcView Group, which promotes cannabis investment and market research, both estimate that the legal pot industry in Canada will be worth upwards of $23-billion in a few years, for both retail and marijuana products and services.
Ian Dawkins, policy analyst and board president of the British Columbia-based Cannabis Commerce Association of Canada, says more than 30 cannabis businesses across the country have approached him for advice on obtaining loans and basic accounts from financial institutions, most of which, like RBC, have turned out to be reluctant suitors. Why have most financial institutions resisted temptation? The answer is one part prudence, one part stigma and one part holding back for final rules of the game, says Peter Guo, partner at BC Enterprise Risk Services at MNP, a national accounting, tax and business-consulting firm.
The first issue is that very few cannabis producers — less than 100 — are legal yet. Some are caught in
licensing limbo with Health Canada, a process that can take years. Storefront sales are still illegal, although each province is working out policy guidelines. Edibles are illegal until 2019, even while entrepreneurs are experimenting with recipes and acquiring commercial kitchens. And an unknown number of growers — some licensed for medical purposes and some not licensed at all — are currently supplying the recreational demand. Statistics Canada estimated this cannabis black market was worth as much as $6.2 billion in 2015, almost as much as Canada’s wine market ($7 billion) and a third of what the forestry sector contributed to GDP.
“Cannabis is business. The business just happens to be cannabis.” – Peter Guo
Guo refers to these nearly-there legal businesses as a grey zone, adding that there’s a world of difference between an entrepreneurial farmer and organized crime. Researching the industry and talking with participants is the only way to learn the difference. But that takes a lot of effort that many credit unions can’t afford. “Credit unions are known for working with communities and business owners when other financial institutions won’t,” says Guo. “On the other hand, from a prudent management and governance perspective, it’s not like credit unions can just shovel members’ deposits off the back of a truck and whoever needs it grabs it.”
Before credit unions put out a shingle welcoming cannabis-growing members, they need to understand the market well enough to meet know-your-customer (KYC) requirements. “People are not stepping in because they don’t fully understand the regulations around cannabis from the medical to the consumer regime, the licensing practices, the full province-by-province distribution plan and what online sales will look like,” Guo says.
Just because financial institutions are slow to declare support publically doesn’t mean banking service isn’t happening behind the scenes, Guo adds. There are those that see their agriculture and retail clients expanding into the cannabis space and, for the sake of an established relationship, continue to bank with them.
Guo clarifies that even though MNP can’t do accounting for grey-market clients yet, it doesn’t have to wait to build the adviser-client relationship. Because of its willingness to advise cannabis entrepreneurs at earlier stages, it has become the go-to accounting firm for the cannabis industry in Canada, as well as financial institutions looking to understand the sector.
It isn’t easy to understand. The already-onerous background checks and research required for KYC are further complicated for cannabis businesses by regulations that are still evolving on three levels of government. Lack of certainty about retail distribution is a particular challenge for credit unions trying to work out the typical revenue flow for a business in this industry.
Even with these obstacles, due diligence on Canopy Growth was a cakewalk compared to Paterson’s expectations. Alterna Savings found that the company had scrupulous records and had already passed years’ worth of Health Canada’s investigations and onsite inspections. “I was shocked at why the Big Five would turn away from the industry given what these individuals have to do from a licensing stand- point and RCMP background checking,” says Paterson. “By the time they’ve completed this incredibly rigorous process, these are legal licensed businesses.”
The answer marks another opportunity for credit unions. Since Canadian credit unions don’t cross the border, they don’t have to worry about cannabis being illegal in the United States. In contrast, Canadian banks are under pressure to keep what the American regulator perceives as “international drug money” out of their asset mix, or risk losing out on US capital markets. “Banks don’t want any difficulty with the US regulator,” says Paterson. “They’re deciding to put their interests globally over the interests of Canadians.”
Overcoming stigma and industry misconceptions is another factor Guo has identified as holding credit unions back. Although 68 percent of Canadians support legalizing cannabis, there are still conservative areas and less-supportive memberships that each credit union will have to take into account. That wasn’t a problem at Alterna Savings, as a significant portion of its membership works in Ottawa’s civil service, including Health Canada. This proximity gave Alterna’s board the chance to look at actual risk for this sector versus perceived risk based on stereotypes. For example, a general concern is that cannabis proprietors might use the business to launder money. Alterna Saving’s role, says Peterson, is making sure producers have internal processes to track sources of funds, just as they would with any startup.
Canada’s business world had stopped thinking of weed as the product of organized crime and started talking about it as an emerging market with incredible investment opportunities. Guo advises that credit unions approach the cannabis sector as they would any other emerging business. “Cannabis is business. The business just happens to be cannabis.”
But for Paterson, there is also an altruistic side to supporting the budding industry. “This is about helping Canadians in critical care and providing them access to needed medical cannabis. It aligns with the credit union mandate of making a difference to Canadians in our community.” ◊