The cannabis industry presents unique challenges for financial institutions due to the federally illegal status of marijuana businesses (MRBs) in many countries. However, with careful risk management strategies in place, banks can effectively serve this growing market while remaining compliant with regulatory requirements.
Understanding Market Dynamics and Revenue Sources
One key aspect of risk management in cannabis banking is understanding the markets served by MRBs and their percentage of revenue derived from federally illegal proceeds. Financial institutions must conduct thorough due diligence to ensure compliance with anti-money laundering (AML) regulations and to mitigate the risk of facilitating illicit activities.
Identifying Owners and Key Personnel
Another critical step in risk management is identifying the owners and key personnel of MRBs and conducting comprehensive background checks on them. This helps financial institutions assess the integrity and reputation of the individuals involved in these businesses and detect any potential red flags that may indicate involvement in illicit activities.
Monitoring Source of Funds
Understanding the source of funds is essential for risk management in cannabis banking. Financial institutions should conduct ongoing monitoring to verify that the funds deposited by MRBs are legitimate and comply with state regulations. This may involve scrutinizing transaction patterns, conducting site visits to MRB facilities, and engaging in open dialogue with MRB clients to ensure transparency and compliance.
Enhanced Due Diligence (EDD) and Ongoing Monitoring
EDD and ongoing monitoring are critical components of risk management for cannabis banking. Given the higher risk associated with MRBs due to their cash-intensive nature and lack of regulatory oversight, financial institutions should conduct extensive due diligence on these businesses. This may include conducting more in-depth background checks, site visits, and ongoing monitoring to verify compliance with state laws and detect any suspicious activity.
Fee Considerations
Financial institutions serving the cannabis industry may need to charge higher fees to offset the additional compliance burden associated with serving MRBs. However, it’s essential to ensure that these fees are fair and not discriminatory. Fees should be periodically reviewed to remain mutually beneficial to both parties and encourage MRBs to bring their cash into the financial system.
Suspicious Activity Reporting
Financial institutions serving the cannabis industry should have robust policies and procedures in place for reporting suspicious activity, including filing Suspicious Activity Reports (SARs) when necessary. Employees should be trained to identify and report any suspicious activity related to MRBs, including transactions inconsistent with their business activities or involving large amounts of cash.
The effective risk management is essential for financial institutions serving the cannabis industry. By understanding market dynamics, conducting thorough due diligence, monitoring the source of funds, implementing EDD and ongoing monitoring, and setting fair fees, banks can navigate the complexities of cannabis banking while mitigating risks and remaining compliant with regulatory requirements.
