A panel of experts who presented at the Association of Certified Anti-Money Laundering Specialists (ACAMS) Virtual Las Vegas Conference in September 2020 analyzed some of the most pertinent issues facing banks and financial institutions (FIs) as they consider the complexities associated with banking marijuana-related businesses (MRBs). The experts looked at how MRBs offer opportunity, but also present a range of compliance risks.
- Experts on a panel discussion at an ACAMS virtual conference explore why banking marijuana-related businesses offer tremendous opportunity alongside significant risk.
- It is crucial to understand the varied approaches of banks and FIs about how they formulate their marijuana-related policies and procedures.
- How can sound policies help firms to effectively identify, manage, and mitigate the risks of doing business with MRBs?
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Marijuana-related businesses offer tremendous opportunity alongside significant risk, leaving banks and FIs facing the dilemma of whether or not to bank MRBs.
The closure of countless businesses in the wake of COVID-19 has been well-documented, but numerous MRBs have continued to trade, with many actually reporting growth over this period. Available evidence suggests that MRBs can and do perform well in a crisis, and have the ability to sustain themselves in bad times.
This makes MRBs a highly attractive prospect, but they nonetheless remain cash-intensive, and innately higher risk. Furthermore, firms must remain cognizant of dynamic and evolving regulatory requirements. Failure to adequately comply with MRB-related regulations can quickly lead to hefty fines and reputational fallout.
Watch Cannabis Banking: AML/KYC Compliance in Banking Marijuana-Related Businesses. The panel of experts at the ACAMS virtual conference included: Steve Kemmerling, Founder & CEO, CRB Monitor; Sundie Seefried, CEO, Partner Colorado Credit Union; and Jim Richards, Founder, RegTech Consulting LLC; Refinitiv’s Holly Sais Philippi was the moderator.
A dynamic landscape and a lack of standardization
U.S. state marijuana programs vary widely. Marijuana remains illegal in certain states, whereas 33 states have legalized medical marijuana and 11 states and Washington, DC, have legalized marijuana for recreational use for adults over 21.
However, under U.S. Federal law it still remains illegal, exacerbating the complexities facing banks and FIs.
These differing sets of rules and regulations create a state-by-state challenge, compounded by the fact that no single source of information exists. This has clear implications for the flow of funds between states.
In addition, banks and FIs have varied approaches to how they formulate their marijuana-related policies and procedures.
Some differentiate between Tier 1, 2 and 3 (direct and indirect) MRBs; some specifically ask marijuana-related questions on application documents; while others take a more holistic approach and screen for ultimate beneficial owners (UBOs) in both the holding and investment companies of MRBs.
This lack of a standardized approach is prevalent and extends to a lack of standardization among regulators. It will take time — very likely several years — for a uniform approach to be implemented.
In the interim, it is crucial that institutions do not underestimate the importance of preparing written policies, and of introducing clear procedures and controls pertaining to MRBs.
Importance of clear marijuana-related business policies
Given that there is a wide spectrum of marijuana-related businesses, it is important to recognize that there is also a broad spectrum of risk to consider.
When addressing this risk, policy will be your first line of defense in the event of prosecution. Importantly, banks and FIs should document everything they do. To be implemented effectively, policies must be clear, unambiguous and not too complex.
Things to remember when formulating MRB-related policies include:
- Words and definitions within MRB businesses are still evolving and need to be refined so that policies are built around clear definitions. In reality, many firms still confuse terminology and do not adequately differentiate between marijuana, hemp and CBD. In this instance, your choice of words matters, and inconsistencies must be eliminated.
- There is a dimension to policy around what products and services you are offering as well as to whom they are offered. For example, financing a photocopier for a Tier 1 MRB may constitute an acceptable risk level, but providing full banking to the same organization may not. This is where complexity creeps into policy formulation.
- Any party processing payments through your institution may be involved in or connected to an MRB. Ensuring that you know your customer and your customer’s customer is vital. For example, customers must check that licences are renewed and granted by the state every year. In addition, it is important to ensure that all fund-receiving institutions are compliant.
Data and tools for robust due diligence
Sound policies can help firms to effectively identify, manage and mitigate the risks of doing business with MRBs, and there should never be any temptation to proceed without first conducting adequate due diligence.
Robust due diligence in turn relies on accurate, complete data that can deliver detailed corporate intelligence and unravel complex corporate structures to reveal the ultimate beneficiaries of MRBs.
The right data, coupled with leading-edge tools can help banks and FIs to efficiently and effectively identify MRBs, understand potential risk, and pinpoint opportunities that fall within their risk parameters.
To address these challenges, Refinitiv partnered with best-in-class marijuana-related data vendor CRB Monitor to deliver a data set offering extensive coverage of the marijuana-related industry.