By Heather Campbell, Certified Internal Auditor
We have received multiple questions regarding banking a Marijuana Related Business (MRB) and we know there are several articles out there on it already; however, we wanted to just weed through a few of the details for you.
Let’s start with our perspective of an MRB. We suggest an MRB is similar to a Money Service Business (MSB), minus the legality at a federal level.
What comes to mind is the conversations taking place back in 2015 about “de-risking” and the lack of banking for MSBs. Not providing service to a certain “type” of customer or “de-risking” was being frowned upon because this was causing these types of businesses to take their money underground and away from reporting opportunities.
Guidance suggested banks to just update the risk assessment to reflect the risks associated with this “type” of customer. Specific guidance states Institutions are expected to assess the risks posed by an individual customer on a case-by-case basis and to implement controls to manage the relationship commensurate with the risks associated with each customer (FIL-5-2015, January 28, 2015). The thought is to bank these customers by figuring out the risk and having procedures in place to monitor for the identified risk. We think this applies to MRB’s too.
Current Guidance on MRB’s
While there is not much current direction on how to bank an MRB, there is previous guidance the bank can follow including ‘FIN-2014-G001- BSA Expectations Regarding Marijuana Related Businesses’ and the Department of Justice Cole Memo, both dated February 2014.
While the Cole Memo was rescinded in January 2018, it is still a good resource. This guidance provided prosecutors and law enforcement with a framework of issues to focus on, and subsequently activities banks should confirm their potential MRB customers avoid.
Each bank would need to verify the MRB is aware of and following these priorities outlined in the Cole Memo:
- Preventing distribution to minors.
- Keeping proceeds out of the hands of gangs and cartels.
- Stopping marijuana from crossing state lines.
- Not letting marijuana be used as a cover for other illegal activities.
- Preventing violence and the use of firearms in cultivation and distribution of marijuana.
- Preventing drugged driving and other adverse health consequences.
- Not allowing marijuana to be grown on public lands.
- Preventing possession or use on public property.
For further information, review the Cole Memo here.
Customer Due Diligence (CDD) is also required. Per FIN-2014-G001, CDD should include the following on MRBs:
- Verify the business is duly licensed and registered, per the appropriate state authority.
- Review/obtain the license or application and related documentation submitted to the state to obtain the MRB license.
- Request available information from the state licensing and enforcement authorities .
- Develop and understand the normal activity for the business, including types of products to be sold and type of customers to be served.
- Ongoing monitoring of publicly available sources for adverse information about the MRB and related parties.
- Ongoing monitoring for suspicious activity, including any red flags.
- Refreshing information obtained as part of CDD on a periodic basis and commensurate with the risk.
What needs to be done if your bank chooses to provide services to an MRB?
Suggestions for Getting Started:
- Conduct an internal risk assessment to determine what tier of MRB the bank is willing to provide services for.
- Tier 1 – the business actually “touches” marijuana at any point from seed to sale (wholesaler, processor, dispensary, etc.)
- Tier 2 – the business provides products and services primarily to a Tier 1 business (suppliers, security firms, consultants, etc.)
- Tier 3 – the business provides products and services to a Tier 1 business incidentally, but this is not the main focus of the business (professional services, landlords, financial services, etc.)
- Have MRB policy and procedures in place prior to opening an account.
- Develop an application to be completed by the potential MRB customer, executed under penalties of perjury.
- Develop a list of documentation you must receive prior to evaluating the application (state MRB license and supporting documentation).
- Have the customer agree to provide updated documentation by the annual anniversary date the account is opened and as requested by the bank as a condition of maintaining an account.
- Develop a fee schedule for MRB accounts. The bank may not need to use MRB in the description (fees could be transaction based, monthly, or a combination of both.)
Do What is Required:
Suspicious Activity Reports (SARs) are required to be filed using the title of the SAR in the narrative.
- Marijuana Limited SAR – for an MRB the bank reasonably believes does not implicate any of the eight Cole Priorities and does not violate state law.
- Marijuana Priority SAR – for an MRB the bank reasonably believes has implicated any of the eight Cole Priorities and/or violates state law.
- Marijuana Termination SAR – for an MRB the bank has determined to terminate the relationship in order to maintain an effective anti-money laundering program.
Red flag monitoring to distinguish priority SARs. A listing of the Red Flags can be found in FIN-2014-G001.
Insights on Currency Transaction Reports (CTR) and MRBs
One question we have had is: “Can a previously-exempted customer, such as a convenience store, still be exempt from filing a CTR if it starts selling marijuana related items” We believe a previously-exempted customer could continue to be exempt assuming the sale of cannabis does not account for more than 50% of gross revenue.
Phase II exemptions are based on the following criteria:
- Non-listed business
- Five or more transactions per year
- Account has been opened for two months; or less after a risk-based analysis
- No more than 50% of gross revenues derived from ineligible activity
- Per the BSA/AML Examination Manual:
- There are several ineligible businesses, but the one related to this question is: An ineligible business is defined as a business engaged primarily in one or more of the following specified activities: Engaging in any other activity that may, from time to time, be specified by FinCEN, such as marijuana-related businesses.
- A business that engages in multiple business activities may qualify for an exemption as a non-listed business as long as no more than 50 percent of its gross revenues per year91Questions often arise in determining the “gross revenue” of gaming activities, such as lottery sales. FinCEN has ruled that for the purpose of determining if a business derives more than 50 percent of its gross revenue from gaming, the term gross revenue is intended to encompass the amount of money that a business actually earns from a particular activity, rather than the sales volume of such activity conducted by the business. For example, if a business engages in lottery sales, the “gross revenue” from this activity would be the amount of money that the business actually earns from lottery sales, rather than the amount of money that the business takes in on behalf of the state lottery system. Refer to FinCEN Ruling 2002-1, at the FinCEN Web site are derived from one or more of the ineligible business activities listed in the rule.
- Per FIN-2009-G001 dated 4/27/2009
- …However, a customer that engages in multiple business activities may qualify for an exemption as a non-listed business provided that no more than 50 percent of its annual gross revenues are derived from one or more ineligible business activities…
- …in those instances where it is less clear whether a non-listed business customer derives no more than 50 percent of its annual gross revenues from ineligible activities, a bank should obtain such additional supporting materials and information that would allow it to make a reasonable determination that it may appropriately exempt that customer from currency transaction reporting….
Remember, the exemption is based on the account and not just the customer. So there may be a way to have marijuana transactions processed through a different account.
Per FIN-2009-G003 dated 8/31/2009 Question: The definition of a Phase II “exempt person” in 31 CFR § 103.22(d)(2)(vi) and (vii) includes the phrase “only with respect to transactions conducted through its exemptible accounts.” Does this mean that certain transactions of Phase II exempt customers require the filing of a CTR? Answer: Yes.
However, don’t foster or become part of an account structuring process to avoid reporting. Identify the risks, implement the appropriate controls, do the reporting necessary; and keep your eyes out for regulatory guidance on this hot topic.
For more information on Phase II exemptions, visit: https://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_019.htmk