Generating profit & revenue in emerging cash intensive businesses (Part 2)

This is the second in a series of articles on generating non-interest revenue from cash intensive businesses with an emphasis on legal Marijuana Related Businesses (MRB’s). In the first article, I discussed evaluating if this vertical is appropriate for your specific institution. This installment focuses on the regulatory guidance related to providing financial services to MRB’s.

The ideal situation would be if the FFIEC published a comprehensive MRB Examination Handbook providing both guidance and best practices. An InfoBase search of the FFIEC for “marijuana” or “cannabis” produces few hits with the notable finding being that MRB’s are ineligible as a Phase II CTR Exemption. Additionally, there are numerous regulations either directly or indirectly influencing opening and operating of any account related to MRBs. In the absence of definitive guidance financial institutions must leverage new tools and technology in order to operate efficiently and generate revenue from high-risk, cash-intensive businesses.

The Cole Memorandum consists of two documents: Guidance Regarding Marijuana Enforcement and Guidance Regarding Marijuana Related Financial Crimes. The Guidance Regarding Marijuana Enforcement was issued by the Department of Justice (DOJ) on August 29, 2013 and it states they expect individual state and local governments to establish strong regulatory and enforcement policies and procedures regarding MRB’s to protect public safety, health, and other law enforcement interests. Additionally, the document lists enforcement priorities important to the federal government including preventing distribution to minors and preventing revenue from organized crime. The Guidance Regarding Marijuana on February 14, 2014 is similar to the guidance issued by the DOJ, but included an emphasis on BSA concerns.

Beyond The Cole Memorandum, the next document of importance is FinCEN’s FIN-2014-G001 dated February 14, 2014, which outlines BSA Expectations Regarding MRB’s which includes a risk assessment outline and specific due diligence requirements. This document cross references the Cole Memorandum in that a financial institution should consider whether an MRB implicates a Cole priority or violates state law. Additionally, it includes Suspicious Activity Report (SAR) filing requirements pertaining to MRB’s: Limited, Priority, and Termination – as long as an MRB account remains open, recurrent SAR filing requirements exist. The FinCEN SAR requirements apply to any account an institution knows, suspects, or has reason to suspect includes funds derived from illegal activity; and yes, the federal government considers MRB activity illegal despite state legality. A checking account opened for the dispensary owner – including those ancillary supporting businesses and individuals will trigger FinCEN SAR reporting requirements.

Risk Analysis: At the end of the day, banking really boils down to risk management and regulators have been placing increasing importance in taking a risk-based approach to both products offered and individual customer relationships. Financial institutions should adopt risk management practices commensurate with the level of risk and complexity of the activity. To satisfy this requirement, especially for MRB’s, financial institutions should strongly consider performing a risk analysis on the business and individuals, and a separate risk rating and score for their marijuana related involvement. Financial institutions should anticipate close regulatory scrutiny of their risk analysis regarding banking of the vertical, their MRB business accounts, and the individuals associated with the businesses.

Because of the importance of assessing and continually monitoring risk at multiple levels we designed Hypur Comply and Hypur Commerce to not only accommodate multiple risk ratings and scoring, but to help them generate transaction based revenue from these accounts – further enabling financial institutions to maintain both primary and secondary ratings and scores on businesses and the individuals involved.

Upon reviewing the somewhat limited regulatory guidance specific to banking MRB’s, your initial reaction may be less than comforting because although the DOJ has outlined their priorities, they still leave the door open for enforcement actions at their discretion. My mantra has always been permissible vs appropriate. However, with the right technology, banking MRB’s can bring success and revenue to your financial institution.

Andre Herrera

Andre Herrera

André G. Herrera is Chief Compliance Officer at Hypur, Inc. where he leads Hypur’s collaboration with financial institutions on compliance and regulatory issues. Andre’s broad experience in payment ... Web: Details