Your Client is Involved in the Cannabis Industry. Now what?

By Edwin Hogans, KYC Senior Expert, St Louis office & Vaughn Swartz, Executive Vice President, Home Rabobank Group

Cannabis including marijuana[1] and hemp[2], continues to be a hot topic and presents a challenge for many risk and compliance professionals of financial institutions. Federal and state law differences present a distinct regulatory risk to be managed. According to 2020 U.S. Census Bureau [3]apportionment numbers, more than 145 million Americans now live in a state that has legalized marijuana. And according to Cowen analyst Vivien Azer, The U.S. marijuana industry is estimated to generate $85 billion in sales by 2030[4].  With these statistics alone, it shouldn’t come as a surprise when you find out that your customer is in or looking to enter the cannabis industry.

As an agricultural lender, we have clients that entered the cannabis industry only to find that the market is fairly saturated causing stored inventory to go unsold.  Additionally, state and federal regulatory requirements including compliance-related costs have caused several clients to exit the cannabis market after their first crop cycle. These situations become particularly challenging when clients decide to grow marijuana specifically on land used as collateral by our financial institution considering marijuana is federally illegal.

While not financing the cannabis activity directly the potential for cannabis-derived proceeds to be used for loan repayments is present. This prompts additional monitoring and governance by our compliance, risk, and legal team members to address and mitigate the associated risks through our Customer Due Diligence (CDD) processes.

It’s important to distinguish between marijuana and hemp to ensure a proper risk and CDD assessment is conducted. While hemp is no longer considered a controlled substance as outlined in the 2018 Farm Bill, financial institutions should have processes in place to obtain basic identifying information about hemp-related businesses through the application of the financial institution’s customer identification programs and risk-based CDD processes. Though legal within 18 states for recreational use and 36 allow for medical use, marijuana is a Schedule I substance under the Controlled Substances Act, making it federally illegal.

So how do you determine if your financial institution can manage and address the risk associated with a customer involved in the cannabis industry?

Considerations:

  • Consider the current regulatory status of your financial institution i.e. is your Anti-Money Laundering program under scrutiny by your regulator?
    • Compliance and risk professionals should take a deep dive into the status of their compliance program including regulatory exam and internal audit findings to help gauge your institution’s current risk and regulatory environment. Additionally, assess if doing business with clients in the cannabis industry would increase your institution’s overall risk profile, and does the increased risk fall within your institution’s risk threshold?
  • Does your financial institution have the governance and infrastructure in place to monitor and mitigate the risks associated with clients doing business in the cannabis industry?
    • Due diligence should be performed to determine if your institution has the systems i.e. risk rating model and transaction monitoring capabilities to properly assess and detect a potential increase in suspicious activity resulting from any associated cannabis transactions. FinCEN still requires marijuana limited [5] suspicious activity report (SAR)even when there is no implication of the Cole Memo priorities violations or violation of state law.
  • It’s important to understand your financial institution’s risk appetite to do business with a client involved in the cannabis industry from an ethical, reputational, and legal perspective.
    • Compliance and risk professionals should assess if the cannabis industry or clients associated with this industry fall into their financial institution’s target market and if onboarding these clients align with their institution’s ethical values.

Regardless of whether your financial institution is looking to directly finance, take deposits, or simply become aware of a client involved in the cannabis industry, you should take a proactive approach to ensure your institution is prepared. The cannabis industry is growing so don’t wait until a client is knocking on your door to start analyzing the impact on your financial institution.  Follow your risk and control framework and ensure senior management is informed and knowledgeable on the associated risks early and often.

[1]Marijuana – is a mind-altering (psychoactive) drug, produced by the Cannabis sativa plant. Marijuana has over 480 constituents. THC (delta9-tetrahydrocannabinol) is believed to be the main ingredient that produces the psychoactive effect.

[2]Hemp – the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (THC) concentration of not more than 0.3 percent on a dry weight basis.

[3]https://www.census.gov/data/tables/2020/dec/2020-apportionment-data.html

[4]https://www.cowen.com/insights/themes-2020/cannabis/

[5]A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” SAR. The content of this SAR should be limited to the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified. Financial institutions should use the term “MARIJUANA LIMITED” in the narrative section.

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