Addressing FinCEN Guidance: How to Monitor for Illicit Cannabis Funds

Andreea Chidu
|
October 15, 2019

Financial institutions that have chosen to bank cannabis-related businesses (CRBs) must comply with strict requirements and are subject to heightened regulatory scrutiny. In order to build cannabis banking programs that can withstand this regulatory scrutiny, these financial institutions turn to guidance published specifically for serving CRBs. Among the most prominent is FinCEN’s 2014 guidance, BSA Expectations Regarding Marijuana-Related Businesses

Notably, FinCEN’s guidance clearly outlines that any financial institution that chooses to bank CRBs needs to monitor the account for illicit funds:


“A financial institution is required to file a SAR if, consistent with FinCEN regulations, the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity…”


While conducting thorough initial and ongoing enhanced due diligence is necessary to determine that a CRB is fully licensed and operating in accordance with state cannabis laws, it is necessary to note that even licensed, compliant cannabis businesses can generate illicit funds. 


As cited in FinCEN’s guidance, your financial institution must identify any funds that have been derived from illegal sales. Further, your institution should have the proper controls in place to ensure that these illicit funds, if present, do not make their way into the financial system by way of deposits made to a CRB’s account. The most effective way to verify that only legal funds are deposited to the institution is to monitor a CRB’s sales activity to ensure that every sales transaction is fully compliant with state and local cannabis regulations. 


What does a compliant CRB sale look like?

A compliant cannabis sale is one that meets all of the regulatory requirements set forth in the state’s cannabis program. In addition to licensing and operating requirements, these regulations outline requirements directly related to a single sales transaction. If a sale does not satisfy all of these requirements, the funds derived from the sale are illicit since they are technically derived from illegal activity. It is important that your financial institution identify these funds so that the proper action can be taken to report the activity and to prevent the funds from entering the institution.


How can I identify illicit funds effectively?

Every state with a cannabis program has different regulations around what is defined as a compliant cannabis sale - albeit many similarities are found between them - however, the key to effectively monitoring and identifying funds derived from non-compliant sales in any state is to analyze sales activity against your state’s specific regulations using relevant data points from each sale. These are some data points that you should consider when reviewing a CRB’s sales for compliance:


Customer Data. Every state has minimum age requirements that dictate who can and cannot purchase marijuana products, both medically and recreationally. Medical patients and recreational customers also are often subject to purchase limits, meaning they cannot purchase more than a specified amount within a certain timeframe. In some cases, medical patients are required to present a medical marijuana license, and in others they are required to present a prescription to prove that they can legally purchase medical marijuana products. 


Product Data. States often impose limits on the level of THC - the main psychoactive compound in marijuana - in different types of cannabis products. These limits usually differ between medical products and recreational products. Similarly, there are specific product types that are restricted to certain types of customers and others that are wholly banned to be sold by certain CRB licenses. Different product types include smokable, edible, and topical goods. CRBs are also responsible for ensuring that they do not sell any product that has been recalled or inadequately tested.    


Transaction Details. Most states restrict CRB sales activity to specific hours of the day. For example, a dispensary may only be allowed to make sales between the hours of 9am and 6pm. Another detail that must be verified is the various state and local taxes that are required on each purchase of cannabis product. These taxes become increasingly complex in states with both medical and recreational cannabis programs, as these purchases are often taxed separately. 


It is the CRB’s responsibility to abide by these regulations and to capture the relevant information at the time of sale to prove to their state regulators that they are operating a compliant business. While you do not need to play the role of a regulatory, as a financial institution serving these CRBs, it is imperative that you review this information in order to verify each sales’ compliance and identify any illicit funds as set forth in the FinCEN guidance. 


Where can I find this information and how do I get it?

Most CRBs use software such as point of sale (POS) or seed to sale (S2S) systems. POS systems are used by retail CRBs to capture and track their sales and inventory data. S2S is traceability technology that CRBs use to capture information about their cannabis products as they move through every stage of the supply chain and is often used to report to the state’s track-and-trace system. Because these systems are used to capture information about each sale at the time of the transaction, they contain the most relevant data needed to monitor and analyze a sale’s compliance with state regulations. 


How does Green Check help?

Reviewing thousands of sales transactions can sound like an ambitious and unattainable undertaking, but it is a critical one if you want your financial institution’s cannabis program to comply with FinCEN’s guidance and withstand regulatory scrutiny. Manual efforts alone are a tedious and error-prone process. To effectively, reliably, and consistently verify your CRBs’ sales for compliance, forward-thinking institutions leverage technology and automation. 


Green Check’s software integrates directly with CRBs’ POS and S2S systems giving your financial institution the ability to automatically capture the data you need to monitor sales without manually requesting documents from your cannabis businesses. Green Check’s Compliance Rules Engine verifies each sale against every rule outlined in the state’s cannabis program - such as the examples mentioned above - and flags any sale that is not fully compliant. This is an instant process, and the results are delivered directly to you and your team through the platform. You can review these sales in Green Check before any dollars are deposited at your institution.


With Green Check, you can allocate your team’s time and resources not to manually reviewing sales files but instead to taking the appropriate action if and when you are presented with illicit funds in accordance with your institution’s policies and procedures.


Schedule a demo to learn more about how Green Check can help you efficiently and effectively monitor CRB sales data for illicit funds. 

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