Originally published on CUInsight.org.
This is the fifth in a series of articles covering the generation of non-interest income in cash intensive businesses with an emphasis on Marijuana Related Businesses (MRB’s). The first article discussed evaluating if entering this vertical is appropriate for your specific institution. The second article focused on the regulatory guidance that surrounds providing financial services to MRB’s. The third article discussed establishing appropriate policies and procedures within the institution surrounding the banking of MRB’s. The fourth article began discussions on implementation and operations. This article will be a continuation of implementation and operations.
So your institution has completed its risk and volume limit analysis, board and policy approvals, training and education, transparency with regulators, and the appropriateness of entering into this market. You have conducted all of the necessary research and may have even engaged with a law firm for review of your program. Your institution has now determined it is ready to board its first account. The sales and marketing efforts for the MRB space are minimal compared to the banking of other verticals. I recommend being selective and cautious as opposed to cavalier in seeking your MRB clients. It is not necessary nor desirable to place advertisements that you are now taking on clients in this space. If you have done your research, you already have an idea of a pool of candidates to target your marketing efforts.
You will find that customer documentation can be overwhelming. Your enhanced due diligence for these clients is significant, and will include a number of documents from a variety of sources. Many of these documents need to be tracked and updated on a periodic basis. To keep this process efficient and accurate, I highly recommend using technology built for this purpose, such as Hypur, which was developed to streamline application and document management for MRB’s. Trying to store and organize documentation manually or in Excel spreadsheets will not only be cumbersome, but will probably not win much praise with your regulator upon examination. It is important that files are complete with the appropriate audit trail of the approval and review of applications and documents.
In the previous article, I introduced Estimated Activity, Anticipated Activity, and Actual activity. It is important to track and document these volumes to detect unusual activity. Utilize technology to monitor these types of activities, and set policy and procedural actions to take in the event that your clients deviate from baseline or anticipated activity. To help prevent the inbound laundering of money, you should receive transactional information from the point of interaction. You must ensure that money deposited into your institution is from a bona fide, state-legal transaction and not funds generated from organized crime or other outside sources. Remember that both debits and credits need to be tracked; where the money goes is just as important as where it came from. Establish strict case management procedures to document and track all unusual activity and baseline deviation.
Legacy Cash: I am often asked questions about this subject. Legacy cash is cash that was earned or generated prior to your customer opening an account at your institution. In practice, I have seen institutions that accept legacy cash, and those that do not. On this matter, I recommend to err on the side of caution, and not accept legacy cash as a general rule. The exception to my general rule would be to have an independent accounting firm conduct a full forensics on the legacy cash to ensure that its source was from state-legal activity. You do not want to be found laundering illicit funds through your institution.
Covenants: Establish a set of covenants that your client must agree to adhere to prior to opening up their account. These should include things such as volume limits, rules on providing documentation that is either recurrent or that requires updating, notification of changes to management or beneficial ownership, non-disclosure agreements, and other rules you deem necessary to properly bank these clients. Your covenants should not contain any rules that could be construed as attempting to circumvent BSA reporting requirements, such as requiring deposits to be less than $10,000.
Credit Cards: As of this writing, purchases of cannabis using credit and debit card are prohibited by all major card networks. I have seen retail establishments that accept card transactions, but under scrutiny have found that those accounts have been opened under false pretenses such as being a nursery, medical facility, flower shop, consulting business or some other incorrect MC/VISA MCC code. Until the major card networks officially permit such transactions, it would be wise to make sure your financial institution is not acquiring branded card transactions while it remains prohibited, and ensure that you are not allowing incoming settlements for merchants that might be using an outside or third-party processor for a prohibited merchant account.
Reputational Risk: In your risk analysis, reputation is a subject that you should have already addressed. Keep in mind that you need to monitor your client’s reputation as well. Were your clients found in violation of a state law? Did they lose their license for selling product to a minor? Use technology to assist you in this process and utilize case management for tracking and audit purposes.
Whitelisting: Establish white lists for acceptable behaviors and transactions. Conduct due diligence on significant vendors and payees to your clients and obtain supporting documentation on items that require additional due diligence, especially on an ongoing basis. Keep in mind that a business or individual who earns revenue from a marijuana related business now becomes a marijuana related business themselves. The personal accounts of owners and employees of an MRB would fall into this category.
Site Visits: Your policies and procedures in conjunction with your client’s risk rating will determine the frequency of site visits. These are physical on-site examinations that you conduct on a periodic basis to help determine compliance. Some institutions conduct these monthly, some quarterly, semi-annually, annually, or a combination thereof. You may conduct these visits yourself, or you can contract with a third party for this service. If using a third party for your site visits, ensure that there are not any conflicts of interest in conducting their audits and that they are truly independent from the MRB.
I receive a number of phone calls from bankers looking for the magic template or silver bullet to successfully bank MRB’s. Unfortunately, one size does not fit all and every institution entering the space must conduct their own research and due diligence specific to their institution. With that being said, entering into the MRB space and other cash intensive markets can be done in a responsible, sustainable, and profitable manner. Keys to your success are having a holistic strategy and approach, obtaining subject matter expertise in these markets, and leveraging a technology platform like Hypur that is specifically built for these markets.
Hypur has spent the past several years developing technology for C2B/B2B/E-Commerce electronic payments, diligence, compliance, and management solutions for cash intensive businesses. These are emerging markets that need and require transparency, and through careful planning and due diligence we will help to effectively bring legitimacy and reduce money laundering in state-legal cannabis markets.
Although this series of articles was not intended to be an exhaustive guide for the banking of MRB’s, the goal was to touch on significant items to consider regarding the space. Please share these articles with your colleagues and feel free to contact Hypur or myself regarding the subject matter or Hypur’s suite of products and services.