By: Bob Frimet, CAMS
Just got back from my first MJ conf. in Las Vegas and what a show it was! I have spent 26 year in the MSB space (money service business) doing everything from operations to compliance and now focus on AML compliance for many industries. This show brought back memories of the early days of payday lending…. It was the wild west… Go out and stake your claim and that many did. But this has a different feel to it… An energy I’ve not seen and almost like a mass exodus as if this industry was giving away money or something…. Perhaps that might be the case, with 10,000 plus in attendance.
But as a compliance guy, it also brought back some memories and gave me some cold sweats on how states ran to make the rules, then changed the rules and then changed them again. It brought back memories of when FinCEN was created for MSB’s, and most thought the Patriot Act was a special football move like the Hail Mary or Razzle Dazzle. Back then, folks didn’t know much about compliance and if they did, they had no clue how to follow it and in some cases, paid a hefty price as ignorance of the law Is no excuse
Fast forward… MJ space 2016…
Though I was blown away by the sheer volumes of people and exhibitors representing the space, there were certainly some takeaways…. The thing everyone needs in a space like this (cash) and no one wants to talk about…. COMPLIANCE.
Any serious party who wants to play in the cannabis space need compliance. Whether in the bank or the dispensary and several groups in between. I wanted to focus on 2 for purposes of this read, Banks and Dispensaries.
First and foremost, we all should know that under the Controlled Substances Act (“CSA”), its illegal under federal law to manufacture, distribute, or dispense marijuana. Persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law. We also know that many states have opened the doors to both medical and now recreational use and we all know that federal law trumps (no pun intended) state law.
There of course is the Cole Memo from August 2013. It comes off pretty clear:
Congress has determined that Marijuana is a dangerous drug and illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs and cartels.
One key element of the memo is preventing the revenue of sales from going to those groups. But how do you as a business prevent that or even have the first thought of how to do so?
So, as a business who might dispense the drug, what can one do to not only get banked but stay banked and help ensure that Mr. G-Man doesn’t come with a battering ram? Well, a great step is having solid policies and procedures to deter money laundering. What controls does the business have in place? Does the business have a written risk assessment? Does the business have any CIP or KYC in place or does it not even know what KYC and CIP mean?
There are some old sayings that come into play…. An ounce of prevention (or even 2 ounces) is better than a pound of cure. By adopting a strong set of policies and procedures, the business can shine! Look at what I can do Mr. Banker!
Not only providing some solid policy and procedure but following it is key. It is the belief of many that this space will soon have to comply with Title 31 and perhaps be labeled as an MSB of sorts. Getting one’s house in order now is better than getting one’s house blown over by a level 5 hurricane (AKA Uncle Sam) later.
1) Develop a written risk assessment! You can’t logically draft an AML program without knowing your risks? Who is your customer? What are your dollar limits? Where are you located? What controls do you have in place to mitigate your risks if any? These questions and many more need to be answered in writing
2) Develop an AML program that includes how you identify your customer, limits, controls, threshold form requirements (such as 8300’s) etc.
3) Develop a training program so your staff know the do’s and don’ts in spotting suspicious activity and threshold requirements, record keeping requirements, etc.
4) Test your program and have an independent review done at least I in the first six months out of the gate.
5) Sample your documents (not your product) and conduct internal monitoring so you know if there are any deficiencies or funny business going on before an audit finds it.
6) Share it with you bank!
Remember when your mother told you to take out the trash and you wanted to stand out so you cleaned your room too! She was so proud she gave you an extra allowance…. Well, your bank will be just like mom if you go the extra mile and I tell you that after dealing with bank discontinuance is no joke…. At some point, if you’re not banked now, you will be and you’ll want to keep that relationship strong.
Banks who wish to service the industry can and in some cases should bank the industry. It’s a viable industry and its financially sound. “bank de-risking” became the catch phrase of the past 5 years. Banks have a real opportunity to service this industry if they have their controls in place and reverse the tide.
Design a risk assessment applicable to the cannabis industry and ensure those all inherent risks are addressed.
Perform appropriate due diligence.to lo include all licenses and policies and procedures the business has in place to recognize its risks
Collect all appropriate licenses from the business
Establish the volumes of the business
Set controls in place to recognize those spikes in business and address whether by software controls or account reviews
Perform enhanced due diligence on all parties involved with the business regardless of percentages held
Conduct site visits
Ensure that the business receives independent reviews even if not required by law and self-monitors for financial related crimes or patterns.
Ensure the business is filing 8300’s if so required.
This space is still in its infancy. There is massive opportunity for those to provide the service they want to provide to the consumer, earn a little green and make their contribution to their local community. Banks can be the lynch pin in transitioning these businesses from the cash under the mattress types to true financial mainstream. It’s a win win for all and all one needs to start on the right track is remember the golden word…COMPLIANCE. Welcome to the new frontier!