This is the fourth in a five-part series of articles on Banking Marijuana Related Businesses (MRBs). This installment focuses on MRB transaction monitoring.
Financial institutions should have procedures in place to detect unusual and suspect transactions for all accounts.
Monitoring deposits at the aggregate level is sufficient for most accounts.
For accounts deemed higher risk, including cash-intensive and highly-regulated industries, financial institutions need to go a step further and determine the source of the funds.
To verify the source of MRB deposits we recommend financial institutions take an additional step and determine the source of the funds at the transaction level.
MRB Transaction Monitoring
When banking MRBs you need to ensure funds deposited into your institution are from bona fide, state-legal marijuana sales.
Since all states have laws governing what constitutes a legal marijuana sale you need to determine if a sale was permissible under state law.
Doing this requires monitoring MRB sales at the transaction level. This is obviously much more difficult than just monitoring deposits at the aggregate level.
Why transaction level monitoring is needed
Examples of state-imposed marijuana transaction restrictions include:
- Consumer age (recreational cannabis sale)
- Valid medical card holder (medical cannabis sale)
- Maximum amount purchased during a period of time (resident and non-resident)
- Sale occurred at an address of a licensed marijuana business
Comparing a cash deposit from an MRB to their anticipated activity does very little to help you determine if those funds were received from a bona fide sale that meets the criteria above.
Determining the source of funds after a deposit has been accepted or when you receive monthly/quarterly/annual sales data from a client is too late and can put the safety and soundness of your financial institution at risk.
In cash-intensive and highly-regulated markets, like the legal cannabis, we recommend a pro-active compliance approach utilizing as close to real-time data as possible to prevent suspect transactions from entering your institution.
What Activity Should be Monitored
Your MRB banking policy should include procedures to detect unusual and suspicious transactions for both credits (receipts) and debits (disbursements).
Where the money goes is just as important as where it came from.
We recommend dividing sales activity into three categories:
- Estimated Activity – reported by the client
- Anticipated Activity – derived from baseline analysis and estimated activity
- Actual Activity – reported by the client on a regular basis
You should track the source of deposits (e.g., sales, investment, loan, etc.). Sales deposits should approximate revenue and supporting documentation should be reviewed for other deposits.
You should monitor disbursements for unusual transactions. Utilizing lists of “whitelisted” vendors for recurring operating expenses (rent, utilities, etc.) is a common way to help you focus on higher risk disbursements.
Baselines and Trends
To better identify unusual and suspect transactions, you need to establish baselines and trends to determine anticipated activity.
We recommend establishing tight thresholds (“triggers”) around your anticipated activity levels even though this can result in a large number of transactions that need investigating.
Activity outside of thresholds should be red flagged for further review.
You should establish procedural actions to take related to investigations of red flagged transactions. You should also establish strict case management procedures for documenting and tracking all unusual activity and baseline deviations.
Detecting, reviewing and documenting red-flagged transactions can be very labor-intensive and we encourage financial institutions to automate the process to reduce the likelihood of errors.
Establishing Baselines in a New Industry
If your institution is new to banking MRBs you won’t have results from current accounts to establish baselines for new accounts. Further complicating establishing baselines is that the legal cannabis industry is growing rapidly so data that is only one-year old is probably out of date.
Luckily, there is a lot of publicly available information, including:
Sales data from your state
Most states with legalized adult use (recreational) or medical marijuana maintain detailed historical sales data. This information is typically available on the website of the state agency responsible for overseeing your state’s cannabis program, your state’s department of revenue or your state’s department of health.
Other states’ information
If legal marijuana sales is relatively new in your state sales will probably grow rapidly so other states with more established programs can be a great resource for estimating anticipated activity.
Be sure to choose a state with a program similar to yours (e.g., medical vs. recreational, and for medical states with a similar number of medical marijuana card holders and qualifying conditions).
Several research companies publish sales data and trends for the legal cannabis market. These companies include ArcView Market Research and New Frontier Data and Headset provides sales data trends at the product level for the marijuana industry.
You should also utilize information provided by the client. Information like their expected sales, the size of their store (to calculate sales/sq. ft.) and the location of their operation (low traffic rural location, high traffic downtown location, high tourist area, etc.).
With the rapid growth of legal marijuana sales and the lack of operating history for many MRBs, using a combination of information provided by the account holder, information from states and industry data is recommended.
You will likely need to adjust anticipated sales volume frequently which, based on your policies, may require various levels of approval or adjustment of policies.
The Importance of Technology
Regulators are placing increasing importance on financial institutions utilizing technology during the entire client lifecycle. However, even the newest banking technology platforms weren’t designed to meet the unique regulatory requirements of industries like cannabis.
As a result, financial institutions must develop procedures to pick-up where their core and BSA/AML systems leave off. This often means a lot of spreadsheets, paper and manual processes – not what regulators want to see.
Technology is Not an Option
Without technology, banking MRBs is hard to scale – the labor costs quickly erode profits – and difficult to satisfy regulators.
Increasingly, our financial institution customers are designing their policies around our technology. They also often provide our scope of services to their regulator prior taking MRB or MSB accounts or in response to a request by a regulator to implement technology to address deficiencies.
Our products provide financial institutions with technology-based solutions to help them bridge the gap between their primary technology platforms and regulatory needs of cash-intensive and highly-regulated accounts like MSBs and MRBs.
Our products use point-of-interaction data to help financial institutions make better decisions and prevent suspicious transactions before they enter their institution while reducing expensive and error prone manual processes.
Hypur Comply, our cannabis banking software product, enables financial institutions to receive real-time invoice level sales data from their clients’ point-of-sale and accounting systems.
Using robust unusual transaction detection logic, Hypur Comply identifies transactions outside anticipated levels and notifies the FI – before the transaction is deposited.
Automating transaction monitoring allows thresholds to be set tighter and for multiple criteria further reducing the chances that suspicious transactions go undetected.
Hypur Comply also has integrated case management tools to document the research and resolution of red flagged transactions.
Hypur Commerce, our electronic marijuana payments product prevents non-permissible sales based on multiple factors including geo-location, consumer identity, transaction size and transaction volume.
The other articles in this 5-part series on banking MRBs are:
Part 2 – Banking MRBs – Regulatory Guidance
Part 5 – Banking MRBs – Technology Solutions