Ten Tips for Cannabis Deposit Account Agreements

With cannabis now officially legalized in Minnesota and the Office of Cannabis Management working to develop its regulatory licensing and oversight program for cannabis businesses, many bankers are also hard at work putting together cannabis banking business lines. Conversations with banking regulators are taking place, policies and procedures are being drafted, and compliance teams are studying up on state and federal guidance. But there’s another important piece of this puzzle: the deposit account agreement.

Banking relationships with high-risk industries sometimes require an agreement beyond the bank’s standard business account terms and conditions document — often in the form of an addendum to the standard account agreement — and cannabis businesses are a prime example. For banks looking to adopt this approach, here are 10 tips to keep in mind:

1. Complementary agreements. Remember that this addendum is to supplement the standard deposit account agreement, not replace it. Keep the provisions limited to those necessary to amend and adapt the account agreement to the cannabis relationship.
2. Acknowledge the legal landscape. It makes sense to explain why the addendum is needed and acknowledge the applicable state laws, the current attitude of banking regulators and law enforcement, and the fact that cannabis banking still carries an asterisk for its legal permissibility. This protects both parties if the landscape changes or regulatory actions are taken against the bank or the customer.
3. Representations and warranties. Because cannabis businesses must meet a strict set of conditions to be in good legal standing (and therefore qualify for banking services), it is logical to include some representations and warranties tailored to cannabis businesses’ unique activities, licensing, and legal compliance.
4. Monitoring. The enhanced monitoring and diligence activities involved with cannabis customers are a big focus of the bank’s policies and procedures, and it is important to memorialize those rights and obligations in the addendum. There may come a time when the bank needs some contractual muscle to enforce its rights to receive business records, demand copies of communications from cannabis regulators, or perform onsite visits, particularly in the event something in the relationship or the customer’s business turns sour.
5. Fees. While this might seem like a no-brainer, if the bank plans to charge the customer a compliance fee to help cover the increased costs of maintaining a cannabis banking program, this should be clearly and conspicuously disclosed.
6. Special limits or procedures. Cannabis accounts are good candidates for unique provisions to further mitigate the risk of fraud or illegal activity. For example, deposit caps, transaction thresholds, and tight controls on which customer personnel can initiate transactions or access online banking can limit fraud and money laundering risks. Whatever the bank chooses, it should be memorialized in the addendum.
7. Noncannabis activities. Some cannabis businesses may be engaged in business activities other than those directly related to cannabis (subject to applicable licensing restrictions). The bank should determine whether designated cannabis deposit accounts may also be used for noncannabis purposes, or whether the bank will require noncannabis transactions to be run through a separate account. Regardless of the decision, the policy should be reflected clearly in the addendum.
8. Available services. If the cannabis account will be required to utilize certain services (like a smart safe), state this upfront and include either the terms of those services or a cross reference to the appropriate service agreement to keep a clear paper trail. Similarly, before offering certain services to cannabis accounts, confirm that the bank’s agreements with third-party service providers allow for this — merchant processing is a key example here.
9. Transfer and assignment issues. Standard deposit account agreements typically contain a general prohibition on assigning ownership of the account without the bank’s written consent. However, for higher-risk accounts with enhanced diligence obligations, a more specific prohibition on transfer of the account is warranted—one that requires consent to transfer the account in connection with a merger, sale of substantially all of the assets of the customer, or a change in the customer’s majority ownership or control. The same goes for granting security interests on the account. Given the potential volatility of cannabis-related deposits, the customer should be obligated to seek the bank’s written consent prior to granting a security interest in the funds to any third party.
10. Remedies and termination provisions. The bank has a paramount duty to maintain safety and soundness. While standard deposit account agreements typically give the bank broad leeway to freeze or terminate deposit accounts, the unique risks associated with cannabis accounts warrant some more explicit terms. For example, the customer should know that the bank may need to comply with legal processes unique to cannabis investigations. Similarly, specific suspension and termination rights that are triggered in the event of any suspicion of noncompliance, illegal activity, or obstruction by the cannabis business can help shield a bank when taking actions that will frustrate or upset the customer.

In closing, remember that laws and regulatory expectations surrounding cannabis businesses vary by state and regulator, so there is no one-size-fits-all approach!