Banking Challenges in the Marijuana Industry: A Compliance Perspective

1. Banking and Marijuana

2. Financial Institutions have an obligation to comply with Federal Law:  The Bank Secrecy Act  The USA Patriot Act  Office of Foreign Asset Control, OFAC  Federal Anti-Money Laundering statutes

3. Conflict Created by the inherent juxtaposition of State legal Marijuana and a Schedule 1 controlled substance.  At a basic level, these are funds derived from a federally illegal activity.  I.E. Illicit funds and Money Laundering.  Banks have an obligation to report Suspicious Activity to the Government.

4. Suspicious Activity Reports  SAR must be filed for:  Criminal violations involving insider abuse in any amount.  Criminal violations aggregating $5,000 or more when a suspect can be identified.  Criminal violations aggregating $25,000 or more regardless of a potential suspect.  Transactions conducted or attempted by, at, or through the bank (or an affiliate) and aggregating $5,000 or more, if the bank or affiliate knows, suspects, or has reason to suspect that the transaction:  May involve potential money laundering or other illegal activity (e.g., terrorism financing).  Is designed to evade the BSA or its implementing regulations.  Has no business or apparent lawful purpose or is not the type of transaction that the particular customer would normally be expected to engage in, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.

5. Currency Transaction Report  Institutions must file Currency Transaction Reports for deposits or withdrawals of $10,000 or more in a given day.  Without access to direct banking relationships, many MRB’s will attempt to structure deposits through multiple accounts and many institutions, which in and of itself is a possible BSA violation.  Not a safe practice of lugging large cash amounts around and making suspicious ATM deposits.

6. BSA/Anti-Money-Laundering requirements inherent in banking  FinCEN guidance FIN-2014-G001 outlines how Financial Institutions may bank MRB’s and still maintain and fulfill their BSA obligations.  Consistent with Cole memo priorities.  However, not a get out of jail free card.

7. How to Bank MRB’s  Sound Banking practices include:  A thorough assessment of the risks of offering these services prior to engaging in the business  Ongoing assessments of legal/compliance risks  Customer Due Diligence and Enhanced Customer Due Diligence commensurate with the customer’s risk profile. (i.e. Medicinal, Recreational, Cultivator, Retailer, Service Provider)

8. CDD/EDD from FinCEN guidance:  Verifying appropriate state licensure status  Reviewing the license app and related docs submitted by the licensee to the state. (VT is secret now, without dispensary permission to share.) (Should be a pre-requisite in order to bank with us)  Requesting info from the state about the business and related parties  Developing an understanding of the normal and expected activity for the MRB include types of products/services and customers to be served, (med vs rec)  Ongoing monitoring for Suspicious Activity including the red flags in the guidance.  Refreshing all of this info on a regular basis commensurate with the acct. risk

9. Outcome  The Institution should consider whether a MRB implicates a Cole memo priority  As you might expect, CDD/EDD can be very time intensive and costly, but must be done.

10. Services  Deposits  Cash management  Funds transfer  Payment services

11. Services cont.  Credit/access to capital = more complex  More financial risk for the Financial Institution  Confiscation of collateral by Feds = higher risk  Limited experience to date  Unsecured credit pricing = higher costs  Finance business expansion, RE acquisition  Working capital

12. Risks  Public safety issues surrounding large quantities of cash. Armed guards, robbery, and burglary  Forcing people to become criminals by structuring and hiding deposits and transactions. I.E. actual money laundering  Lack of transparency hurts regulatory abilities, both federally and within VT.  MRBs need access to deposit services to pay bills, pay employees, pay taxes and function at their intended level  Financial institutions can be fined and employees can be held criminally liable for violating BSA obligations. Guidance can be rescinded and prosecutorial discretion can change

13. Alternatives to cash  Money Transmitters, though BSA/FinCEN guidance will still apply  Hawaii uses a cashless, closed loop system  Canpay (I think) allows certain customers to use debit cards. Has limitations being a closed loop system.  Bitcoin and other virtual currencies.

14. Secondary Concerns  Service providers also risk being shut off from financial services from certain risk adverse financial institutions  Equipment suppliers  Commercial real estate landlords  Accounting and legal firms who provide services to MRB’s

15. More Financial Institutions Needed  One institution should not be counted on to serve the whole market  Diversification reduces risk to Vermont market  In Canada, TD Bank is a large player in cannabis banking. Unknown if US subsidiary would enter the market

16. Insights for Regulation  In the end, there is little that a State Regulatory Framework can do to alleviate the inherent violations of Federal Law. Therefore, financial institutions will continue to face risks.  Consistent with the FinCEN guidance, the State framework can help if it ramps up legalization; provides a system of known, local owners; proper regulation; due diligence on approved entities; reporting, auditing and inspecting; and providing Financial Institutions access to information for due diligence perspective; Seed to sale tracking of all marijuana product.