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BSA/AML Compliance for Marijuana Businesses

Post Categories: Blog

By: Dan Frechtling, SVP of Marketing and Chief Product Officer 


Numerous states — 23 and counting — have legalized distribution of medicinal and recreational marijuana. A growing number of cannabis businesses seek access to financial institutions (FIs). How should banks approach this opportunity?


Most FIs should have policies for marijuana businesses. Many banks distinguish by the two categories of marijuana firms, direct (growers and providers) and indirect (B2B such as supplies and leasing). The more enterprising banks form strategies for serving these businesses — including the ones they already have (and may not realize).


Marijuana legitimization builds

Legalizing the banking of marijuana businesses took a step forward when the US Senate Appropriations Committee passed legislation last summer allowed banks to serve marijuana dispensaries in states where they are legal. However, most major banks avoid marijuana businesses even where they are legal because of conflicting federal law.


In August 2013, DOJ Deputy Attorney General James M. Cole drafted a Memorandum — dubbed the “Cole Memo” — that helps reconcile the state and federal laws. A half-year later, FinCEN issued FIN-2014-G001, “BSA Expectations Regarding Marijuana-Related Businesses,” that references and reinforces Cole Memo priorities. While cannabis is a dangerous drug, federal prosecutors are to focus on the most egregious aspects. These include sale to minors, proceeds to gangs or cartels, diversion of cannabis to states where it is illegal, violent acts and the like. The implication is that “safer” activities will not draw as much scrutiny from US Attorneys.


Advice for banks

How can banks follow the law and provide needed services to this market? Jessica Caballero, former OCC regulator now at Banker’s Toolbox, says deciding to bank a marijuana business is a significant change to BSA/AML policies, especially for FIs in the jurisdictions that have legalized consumption.


The first responsibility is onboarding, including understanding expected activity. But a significant burden comes from SAR filings. FinCEN distinguishes three types of SARs for marijuana businesses:


  • Marijuana Limited. Banks file this when their due diligence suggests the business doesn’t conflict with state law or the Cole Memo. FIs should follow FinCEN guidance on filing continuing activity reports.
  • Marijuana Priority. Banks file this when due diligence suggests the business violates state law or the Cole Memo. Examples include unusual cash transactions and inability to provide documentation such as licensing.
  • Marijuana Termination. Banks file this when they exit a relationship with a marijuana business to stay compliant with AML policies. If they are aware of the business seeking services from another bank, they should share information with the US Treasury and with each other under USA PATRIOT Act Section 314(b).


Once banks file their first Limited or Priority SAR, they must continue filing every 90 days.


As noted above, the SARs rely on banks’ due diligence activities. To that end, FinCEN also provides guidance on the kinds of due diligence FIs should provide. These include adverse information, negative news and reputation information. The due diligence should be updated periodically:




Watchouts and warnings

According to FinCEN, certain data points constitute “red flags” that additional due diligence is needed. These include indications that the business engages in interstate activity, is located on or close to federal property or schools, is unable to produce license documentation, or otherwise may be acting as a front. In addition, negative reputation signals are indicators, as noted below:


Red Flags


The Minneapolis Fed offers two warnings when assessing marijuana businesses. The first is that banks must watch for changes in state laws, which are evolving rapidly. The second is that banks should be alert to “inadvertently providing services to marijuana-related businesses.” Words like hydroponics and seeds can be euphemisms for cannabis businesses. Further, firms may disguise their business names and descriptions to hide the actual operations. These disguises can be unmasked through web-crawling, processing technologies and business classification services such as those offered by G2 Web Services.


If you want to offer financial services to cannabis businesses, or other higher risk categories, G2 provides information essential to your due diligence and monitoring. If you wish to avoid this market, G2 uncovers marijuana-related businesses you didn’t know you had — either in your portfolio or your processors’ portfolios. Find out how we can help you make the right business decisions for your FI.


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