Financial Institutions: Due Diligence and Weeding Out Risk When Servicing the Multi-Billion Dollar Cannabis Industry

– by Kelvin Dickenson

Can banks provide services to businesses in the marijuana industry? It’s complicated. 

Thirty-three U.S. states plus D.C., Guam and Puerto Rico have made the use of marijuana legal to varying degrees. But complicating matters for banks, cannabis is still classified as a Schedule 1 drug under the Controlled Substances Act, making it illegal to grow, sell, purchase or use under federal law.

Why It’s a Stretch for Banks to Work With MRBs 

Under the Bank Secrecy Act (BSA) of 1970, the Schedule 1 classification of marijuana prohibits financial institutions (FIs) from accepting money generated by the cannabis industry.  Within this context, providing services to marijuana-related businesses (MRBs) calls for heroic levels of stamina, patience, and bravery from banks.  This has had the effect of rendering it mostly a cash business, with MRB’s (Marijuana-Related Businesses) having few choices to bank the proceeds of their “legitimate” businesses.  This creates all the additional problems of crime and security that can be anticipated when large amounts of cash remain on-premises and unbanked.

If FIs do choose to service legally operating MRBs, they may need to file suspicious activity reports (SARs) for each transaction involving these businesses and will need to monitor accounts extremely closely. This may also extend to the suppliers that sell to MRB’s, depending of course on how involved that supplier is in the production chain – so the local power utility is not going to be a high risk, but that is likely not true for suppliers of equipment and services somewhat unique and essential to the cultivation of Marijuana. For banks that decide to assume such a risk, there are some key points to consider. Read on to learn the most important of these.

Servicing MRBs Requires Extensive Due Diligence By FIs 

The cannabis industry is a $9 billion per year business, so it is not surprising that some banks will determine that assuming the risk of servicing MRBs can be worthwhile if done responsibly. 

Under the 2014 Financial Crimes Enforcement Network (FinCEN) guidelines banks can service legal cannabis businesses by doing the following:

  • Checking with state authorities to verify that the business is properly registered and licensed. 
  • Carefully looking over the state license application and any legal documentation relevant to the business to make sure it’s all in order.
  • Gathering information about the business from state licensing and enforcement authorities.
  • Cultivating an in-depth understanding of typical activity in the cannabis industry, including customer demographics and types of products.
  • Continuously monitoring public sources for any information about the cannabis business—and any associated entities—that might expose your institution to risk.
  • Regularly updating information about the businesses you are working with to avoid exposing your institution to further risk.

Per FinCEN guidelines, it’s still necessary for banks to file SARs for all transactions involving cannabis businesses that they service. This is to ensure the federal government has a reasonable knowledge of all the businesses in the cannabis industry and where they do their banking.

Servicing MRBs in States Where Cannabis is Legal is Still Money Laundering

The House of Representatives recently approved measures that prevent the Department of Justice (DOJ) from overriding state marijuana laws. Unfortunately, these measures do not essentially alter the fact that banks providing services to cannabis businesses are enabling the federal crime of money laundering.

The federal requirement to file SARs for all transactions involving marijuana businesses creates extra work and expense that most banks would prefer to avoid by simply choosing not to work with cannabis firms at all. 

Background Checks of All Associated Entities and People is Critical

The legal marijuana business in the U.S. is relatively new but it is important to remember that the marijuana business is not, and many of the people operating an MRB will also not be new to the business! This means if your bank is doing business with MRBs it is critical to do extensive background checks to rule out deeper associations with criminal entities or individuals and connections to other criminal activities that could expose your institution to risk. Due Diligence will almost exclusively require site visits and ongoing, rigorous monitoring.

Banks Must Know Who They Are Doing Business With 

Financial institutions are responsible for knowing exactly with whom they are doing business. They also bear responsibility for understanding the parameters of the law when working with businesses in the cannabis industry. 

Since any risk incurred therein is the responsibility of FIs, most banks avoid costly fines and legal issues by refusing to service marijuana firms, rather than shoulder that burden.

This in itself can be difficult, as not all MRB’s will declare this activity overtly and banks will not be able to practice “willful blindness” in operating accounts where some reasonable clues exist that it may, in fact, be an MRB (e.g. a firm called “happy farms” located in a state that allows the cultivation of cannabis).   Fortunately, a number of specialized data providers have developed databases of MRB’s that can be incorporated into a banks regular onboarding/KYC and due diligence processes.

U.S. Narcotics Laws Don’t Apply Abroad

At last, a bit of good news. In October of 2018 Canada became the first major world economy to make recreational marijuana legal. 

Since narcotic laws in the U.S. don’t apply to legal activities abroad, it does not violate the Controlled Substances Act (CSA) or U.S. money-laundering laws for U.S. financial institutions to provide financial products and services to Canadian MRBs.

Change is Afoot

Despite the current difficulties faced by financial institutions wishing to work with MRBs, the recent measures approved by the House are the first step towards a future where banks will be legally able to work with businesses in this emerging multi-billion dollar industry. This is not only good news for banks and for the cannabis industry, but for job seekers who have much to gain from this “fastest growing job market in the country.”  

Kelvin Dickenson
Kelvin Dickenson in the President of Opus, the leading provider of KYC workflow and entity data management solutions. Prior to joining Opus in 2014, Kelvin held a number of leadership positions during 9 years at D&B and a combined 20 years at financial institutions in the US and UK. Kelvin has in-depth knowledge of regulatory compliance, counterparty risk management, Legal Entity ID solutions, Investment Risk Management, portfolio risk management, credit solutions, and global data management acquired during 30+ years of experience managing risk in financial services. He also a current member of Advisory Board at the Association of Certified Financial Crime Specialists.