States across the United States are continuing to legalize cannabis, both adult and medical use, at an ever-increasing pace, presenting opportunities and challenges for those in the industry. As the industry grows and Congress signals its desire to create safe, legal avenues for banking, financial institutions find themselves looking for ways to take advantage of the opportunities this industry presents. This includes developing the proper safeguards and controls that allow them to do business in the industry while still adhering to the stringent and evolving regulations under the Financial Crimes Enforcement Network (FinCEN) and other regulatory agencies.
Our compliance professionals assist financial institutions in their development of a framework of compliance to satisfy regulators in this fast growing industry.
Risk Appetite Statement Review
Before amending or updating existing compliance frameworks, we review a financial institution’s standing risk appetite statement. Our former regulators and in-house compliance experts review this statement to determine whether the bank’s current framework makes room for the potential risk involved in banking cannabis customers. We then work with our clients to adjust their risk appetite statement, setting the stage to develop appropriate policies and procedures for cannabis customers and related businesses.
Compliance Framework Development
After evaluating the risk appetite statement and making adjustments where appropriate, we will work with the financial institution to design and implement policies and procedures that address the financial institution’s risk profile and related regulatory requirements. Because the sale and distribution of cannabis is still prohibited under federal law, financial institutions are required to file a suspicious activity report (SAR) for every transaction involving cannabis. Our assistance in developing robust policies and procedures will help banks identify when a SAR needs to be filed, as well as which of the three categories of the cannabis-specific SAR filings would be applicable. This compliance assistance includes guidance on handling transactions involving both first-tier (e.g., direct cannabis merchants) and second-tier (e.g., vendors and service providers) businesses.
To ensure that these policies and procedures are properly implemented within the financial institution’s day-to-day transaction monitoring workflows, we also provide training to compliance and risk staff. Through in-person or virtual training, we will guide teams on which SARs to file as well as how to identify the specific red flags and illicit activity warning signs associated with cannabis transactional activity.
Due to the evolving nature of the cannabis banking regulatory landscape, we also work with clients to develop appropriate messaging and correspondence with FinCEN and other related governing bodies to ensure that the bank’s compliance framework follows the most current regulations.
Under the current regulatory requirements, financial institutions that want to engage with cannabis-related businesses are incurring a significant increase in the volume of SAR filings and enhanced due diligence reviews, which can put a strain on already busy compliance teams. However, given the uncertainty of the cannabis market, many financial institutions may be hesitant to increase their staff at the outset. To alleviate these staffing concerns, we supply a team of veteran compliance professionals who are trained to assimilate directly into a financial institution’s existing compliance team. Our team assists with implementing proactive measures such as model validation, tuning, and testing– building out a financial institution’s existing technology to detect the specific patterns of activity associated with cannabis transactions. We also support our clients in handling increased customer onboarding and due diligence requirements, upticks in transaction monitoring, and SAR filings. We have the ability to provide resources that allow financial institutions to flexibly scale their business according to market fluctuations.
Financial institutions take appropriate KYC and due diligence precautions as well as monitor for fraud as part of the regular course of business. These tasks are only heightened in importance and volume when cannabis is involved. Our senior investigators, including many with law enforcement backgrounds, have in-depth experience detecting red flags and uncovering fraud issues, as well as identifying source of funds related to illegal activity.
Companies and individuals regularly engage K2 Integrity investigators and business intelligence specialists for due diligence solutions—critical information that sheds light and enables a more informed decision on both value and the associated risk. We deliver comprehensive background information on individuals and companies around the world. Our background investigations draw from a wide variety of sources, including public records available online and on-the-ground research. We comb through the information we gather to identify misrepresentations, misstatements, nondisclosures of material information, patterns of unethical behavior, and other indicators that could pose risks to our clients, and we present our findings in clearly constructed, issue-driven reports.