New Haven Register (Sunday) (New Haven, CT)
Startup links pot, financial businesses
New Haven’s Green Check Verified fills a need
NEW HAVEN — Marijuana growers and dispensaries can only sell their products for cash and need a financial institution where the money can be deposited.
Small state-chartered banks and credit unions are always on the lookout for new accounts to expand their businesses.
Both industries are composed of highly regulated, complex organizations, and their relationship is complicated by the fact that cannabis is listed on the federal level as a Schedule I illegal drug, along with cocaine, heroin and LSD.
But a startup company, Green Check Verified, based — for now — at 5 Science Park, is offering a way for marijuana
companies and banks and credit unions to conduct business together in a secure, high-tech environment.
“We have these people on both sides, the cannabis industry and the financial industry, and they’ve not been able to communicate effectively,” said Paul Dunford, director of customer experience for Green Check Verified. “This is about bringing them together using technology.”
The technology is key, because both the cannabis and financial companies will use the same cloud-based platform and must comply with a myriad of laws, regulations and rules that vary from state to state. So, as founder and president Kevin Hart said, “we’ve been in stealth mode here” since September 2015, filing for three patents, designing the platform and planning to “expand the team and the thinking, and that’s all before we wrote the first line of code.”
In July 2017, the company incorporated in Delaware and Connecticut and in December signed up its first customers — two dispensaries and a financial institution — as it launched a pilot program, Hart said. He is in “active conversations” with companies in 13 states, which happens to be the number of employees Green Check has on its payroll.
Interstate commerce in cannabis is illegal, which is why marijuana dispensaries and growers can’t use credit cards and why Green Check is only working with state-chartered banks and credit unions, not federally chartered banks such as Bank of America or Wells Fargo.
Dunford said the companies are allowed to conduct business within states because of an amendment in the fiscal 2015 federal budget, which prohibited federal enforcement of the Controlled Substances Act in states that have a medical marijuana program. “In the federal budgets you cannot use federal funds to prosecute these businesses in states where it’s legal,” Dunford said.
In 2013, an Obama administration ruling, called the Cole Memo, named for then-Deputy Attorney General James Cole, had covered any state-approved marijuana program. Both rulings said federal prosecutors should only focus on sales to minors, those involving criminal activity and on sales from a state where cannabis is legal to one where it is not.
Then-Attorney General Jeff Sessions rescinded the Cole Memo in January 2018, but Hart said it “was merely guidance; it’s not law,” and that President Donald Trump has come out in favor of medical marijuana. While Sessions had opposed recreational marijuana for adults, Hart said that position “caused a lot of rhetoric and a lot of hysteria” but nothing ever came of it.
“Interstate commerce is illegal but everything that happens within the states is legal,” he said. “It is a misconception that it is illegal and that has been an unfortunate hard stop for people in the financial services industry.” In fact, the Financial Crime Enforcement Network, a division of the U.S. Treasury Department, has issued guidelines about banking in the cannabis industry, Hart said.
“There are more protections in place,” Dunford said. “No one person at this point could turn the clock back but people don’t know that.”
Solving the problem of cash
The real issue for marijuana businesses is how to deal with the large amounts of cash from customers. Banks, at the same time, want to make sure their transactions are legal and that the cannabis businesses are operating within the law. The challenge is to “establish a true and trusted relationship between those two entities,” Hart said.
“It’s a fascinating problem set because, on one side, you have these local community financial institutions [that] are struggling to find new deposits,” said Mike Kennedy, director of product strategy. “From the bank’s perspective, you have this $10 billion industry that’s largely unbanked or underbanked and that solves their problem.
“From the cannabis industry side, you have these businesses that are relatively young, and they have operational challenges and are being forced to run multimillion-dollar businesses without access to the financial system,” he said. “The financial institutions are under obligation to manage their own risk exposure. They are responsible for preventing instances of fraud, money laundering and other illegal activity from occurring within the financial system.”
It’s a big problem, Hart said. “Nobody can walk into a bank with bags of cash today and say, ‘I want to open an account.’ Banks will ask them a lot of questions and turn them away,” he said.
At Green Check Verified, “We’re solving the cash problem,” Hart said. “Instead of them showing up with the bag of cash,” the bank will know in advance “how each sale was verified and how those sales have complied to up-to-date rules and regulations.”
Kennedy added the bank staff will know “that there was a corresponding amount of compliant cannabis sales that correspond with that deposit.”
Because both sides of the transaction are using Green Check Verified, in which each sale is recorded, including the type of marijuana sold, the amount and other details, the cannabis business can say, in effect, “You don’t have to trust us. You have compliant visibility into that sale,” Dunford said.
From the banks’ and credit unions’ point of view, “They need low-cost deposit dollars,” Hart said. “Credit unions, community banks — they struggle with bigbank competition. Credit unions have the charter of working within the communities that they serve. This gives them the opportunity.
“This is a big reason why we were endorsed by the Credit Union League of Connecticut for their member unions to enter the cannabis business,” he said. “We call it a welcome dependency.”
Hart said he is “in conversation” with one credit union in Connecticut, but that its executive wasn’t ready to divulge its identity. He’s also talked with legislators, the state departments of Consumer Protection, Revenue Services and Banking and the lieutenant governor’s office, he said.
More states legalizing marijuana
Medical marijuana is legal in 33 states and the District of Columbia, and recreational weed (what Hart calls “adult marijuana”) is legal in 10 states and D.C., according to Governing magazine. Hart said five more are poised to legalize cannabis.
Connecticut, which permits medical marijuana and recently doubled the number of dispensaries to 18, will take up recreational cannabis in the upcoming session, with Gov.-elect Ned Lamont’s and many legislators’ support. “It appears that they will have the votes,” Hart said.
Kennedy said regulations get more complicated when a state legalizes recreational marijuana in
addition to a medical cannabis program. “It’s like bowling with the bumpers up and then putting them down,” he said. It becomes “a more complex regulatory environment.” One big difference is that medical marijuana is not taxed while recreational pot is.
“You have to be able to segregate those tax dollars,” Kennedy said. Consumption rules change as well. “In every state we’ve seen so far, a medical program has higher consumption limits than an adult program,” Dunford said. Green Check’s platform “can tell you what your limit is. It can tell you if you’re approaching your limit.”
With marijuana sold as smokable flowers, oils and edible brownies, “You may not know that those three things add up to more than 2.5 grams [ounces] because of how the product is packaged,” Hart said. “The system will help them identify that.” Connecticut allows a patient 2.5 ounces of medical marijuana per month.
If all dispensaries were using Green Check’s system, the state could relax its rule that requires patients to choose one dispensary in order to keep them from buying more than the limit. Each dispensary would have access to the same information, much like all CVS pharmacies having your prescription information.
With each state having its own laws, possession limits and other regulations, the bank would want to know that the dispensary was adhering to each before it accepted a deposit. Laws and regulations “change, and they carry pretty substantial risk if you fall outside of them,” Kennedy said.
Green Check ensures compliance in each jurisdiction. “Compliance is expensive,” Hart said. “It’s difficult. Tech can actually lessen those burdens dramatically.”
It will also help states like Connecticut that hope to raise revenue by taxing marijuana. Hart said that in California, for example, “they rolled these programs out with the expectation that they can collect tax dollars and they never can collect the tax dollars because the businesses aren’t banked.” A small-town tax collector is “not set up to take duffel bags of cash, which they have to do now,” Kennedy said.
It’s also dangerous for the dispensary to keep large amounts of cash on hand. In November, Southern Connecticut Wellness Center, a dispensary in Milford, had its safe stolen. “Two people broke in and didn’t steal any product. They stole the money,” Kennedy said.
Hart said the company is talking with marijuana dispensaries and that he’ll approach growers in the future. Other companies “solve a small sliver of the problem,” he said. “To date we are the only company — and other people have attested to this — that have taken the approach of working within the banking industry, not around it.”
Drawing talent from New Haven
Green Check is making efforts to support New Haven and hire from the area. Hart attended Southern Connecticut State University, and Kennedy graduated from there, and they have just hired a Southern grad, Jessica Boe, whom they took on last year as a paid intern. They have brought on another intern and are working with a junior computer science student, Tiffanie Edwards, who is using mock transaction data from Green Check to work on her honors thesis.
“I owe my four decades of computer software career to Southern,” Hart said. “The New Haven community has been really great. There’s a very vibrant tech community in New Haven.” One company, Checkmate Digital, helped design the platform, he said.
Boe said she had interviewed at another company at Science Park but didn’t get the job. “I got an email from Kevin a couple days later,” she said. “The next day, I got the job as a software intern.”
Originally from Wellsville in southwestern New York state, Boe has lived in Connecticut for seven years and worked at Green Check before she graduated from Southern. “I was taking six classes my last semester and they [the Green Check staff ] were wonderful,” Boe said. They “basically said, ‘Come in when you can.’ They were great.”
She said she’s working on automation testing, which has to do with a web app filling out forms by itself. “I love Green Check. I love all the people that I work with. They’re all very positive and funny,” she said.
Edwards, who is from Bridgeport, is going to be “using machine-learning techniques to cluster or categorize the data. What I decide to cluster them by is up to me,” she said.
A form of artificial intelligence, “machine learning is using neural networks from a computer that work like human neural networks,” Edwards said. “It has to have a set topic that it’s learning. Once it learns the topic it will be able to perform many decisions on its own, based on that learned topic.”
Lisa Lancor, chairwoman of Southern’s Computer Science Department, said she began reaching out to New Haven companies because “there was this disconnect that I thought was definitely solvable.”
On one hand, she was being told “there wasn’t any tech talent in Connecticut in the New Haven area and I was hearing from my students that there [weren’t] any jobs in Connecticut and they were leaving the state.” The problem was that Connecticut companies were asking for three years’ experience or more. Companies in New York, Boston and Silicon Valley, California, were taking new graduates.
She calls the internship program a “four-win”: the student has experience to put on a résumé, Lancor gets feedback on how to modify her program, the companies tend to hire the interns, and “it’s good for Connecticut. We’re keeping the talent in the state,” she said.
She said there is a “national crisis of women in computers” and minorities also are underrepresented. She said Hart was “very excited about the diversity of students that we have at Southern” and that when Green Check took on Boe as an intern “they loved her right away. They were very impressed with the skill set she had and her last day of finals they gave her a full-time offer.”
Hart said the company’s growth plans means they’ll be leaving 5 Science Park, off Winchester Avenue, for new quarters. “We’ve been here for four years and, sadly, we’re moving,” he said.
He said Green Check is positioning itself “at the largest part of the funnel of opportunity. The cannabis industry is viewed as the largest-growing consumer goods sector nationally. We want to be at the front of that in little old New Haven, Connecticut.”