Q&A – Cannabis & Financial Institutions: It’s Time to Update Your AML/KYC Procedures to Effectively Manage Risks & Opportunities

Steven Kemmerling
Founder & CEO, CRB Monitor

Below are audience questions and our presenter’s answers from the FinScan webinar, “Cannabis & Financial Institutions: It’s Time to Update Your AML/KYC Procedures to Effectively Manage Risks & Opportunities”.

Click here if you would like to watch the webinar.

Legal disclaimer: The information contained in this question and answer is the professional opinion of the presenter and not that of Innovative Systems, Inc. and is provided to you for informational purposes only. The information is provided to you “AS IS” and does not constitute legal advice. Innovative does not provide legal advice and Innovative is not a law firm. Innovative makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information. You should not rely on this information without independent verification and consultation of your own legal counsel.

Why is a drug produced in the USA legal, but in Afghanistan it is illegal?

Different countries have different drug laws. For example, marijuana is federally illegal in the USA, but federally legal in Canada and Uruguay.

How can the USA, being a massive money laundering country, make laws to legalize the production of drugs under the so-called RBA, but other countries have no such privilege?

Marijuana remains federally illegal in the USA. Approximately 30 other countries have varying levels of marijuana legalization and/or decriminalization.

Where can we get a copy of the CRB Monitor’s CBD Decision Tree?

Please download our CRB Monitor CBD Consideration Tree.

Do you cover MRBs and the cannabis industry in Canada and elsewhere, or is your focus strictly USA?

CRB Monitor’s database currently covers the USA and Canada.

What is difference between “legal sort of” (hemp) and “it depends” (CBD)? For me, both are not clear. Being an MLRO, how can I be certain about my decision to do business with a customer who deals in any one, or both kinds, of cannabis?

Regarding hemp: The 2018 Farm Bill “legalized” hemp, but hemp cultivators have to be licensed by a state hemp regulator, if one exists.

Regarding CBD: Download the CBD Consideration Tree. Legality of CBD depends on numerous variables, including the source of the hemp, how the CBD is used (medicine, food/beverage, nutritional supplement, or cosmetic), and state-specific laws.

What is the correct formula to calculate ownership percentage in the case of a complex structure?

Generally, it’s the % of diluted equity, which can be a complicated calculation based upon a company’s capital structure.

How do you identify owners? Most registration lists only give a name. How do you know which John Smith is the owner?

Identification of UBOs varies from state-to-state. Typically, UBOs are identified via Marijuana License Application documents, Public Records Requests, and/or Corporate Registration documents (e.g., Secretary of State). We can only provide “reported” names, and Personally Identifiable Information (PII) is generally not provided in the public record, so we cannot differentiate between two “John Smiths”. In our database of over 40,000 UBOs, there are only two “John Smiths” (both have middle names and live in Colorado). This challenge exists with any watch list, but is not a good reason not to screen for this risk.

As some companies would want to fly under the radar, what is the logic behind how CRB Monitor positively identifies companies that should be added to your database, but have not self-reported that they are a CRB or MRB?

CRB Monitor generally cannot/would not capture true black market operators. We do have a few thousand unlicensed MRBs per Public Records Requests to regulators, based on “cease-and-desist” letters the agency sent the companies. Otherwise, our database is comprised of licensed MRBs, which are still technically breaking federal drug laws. Technically, other than one marijuana cultivator currently approved by the DEA to grow marijuana for research, there is no such thing as a federally legal marijuana-related business.

The USDA general counsel indicated that as of the passing of the 2018 Farm Bill, we should consider hemp descheduled and no longer associated with marijuana and the CSA classification. Absent state implementation, but given this statement by the USDA, shouldn’t hemp and its derivatives be considered in a separate legal status than marijuana? https://www.ams.usda.gov/content/legal-opinion-authorities-hemp-production

Yes. Hemp (cannabis with THC <= 0.3% THC) was removed from the definition of “marijuana”. They should definitely be thought of as separate and unique. Keep in mind, though, the very close genetic “proximity” between hemp and marijuana.

Would a bank client that is an authorized distributor of companies that sell lab equipment be flagged as an MRB?

CRB Monitor would generally categorize a company like this as Tier 2 (aka “indirect”). Note — we generally do categorize marijuana testing companies as Tier 1 (aka “direct”) because (a) they are generally licensed by states as such and (b) generally “touch the plant”. Tier 2 (Indirect) generally sells products and services to Tier 1, with a specific focus on the marijuana industry and substantial revenue from Tier 1. Download my white paper Defining Marijuana-Related Business.

We have been asked to draft an AML/CFT/Operations Manual for an offshore Medical Marijuana company. Where would we start?

This is a broad question and would require more information for me to be able to answer. I suggest that you start with your general counsel and examiners.

Can you provide the reference to the states with grandfathered 2014 Farm Bill pilot programs?


How should we implement transactional review policies to mitigate potential indirect risks, such as the mixing of funds from the marketing of marijuana with funds from another source?

You should screen for known marijuana-related businesses among existing customer relationships.

How can dynamic risk models be developed that allow you to bank customers who sell marijuana safely in the event of possible regulatory changes through CRB Monitor?

Screen for known marijuana-related businesses among existing customer relationships. Monitor marijuana license statuses (e.g., sudden changes in status to “revoked”, “suspended”, “terminated”, etc.). Monitor for negative news. Monitor for changes in beneficial ownership. Monitor for relationships with related businesses or beneficial owners operating marijuana businesses in other jurisdictions (e.g., a parent company that is a “multi-state operator” of direct marijuana businesses).

What is the overall impact on the financial industry with respect to the banking of marijuana businesses, specifically at the banking, insurance, etc. level?

I am not sure that I am qualified to respond to this question about “the overall impact on the financial industry with respect to the banking of marijuana businesses”. Marijuana-related proceeds, which by definition are still “illicit proceeds” since marijuana remains illegal, appear to clearly, systemically find their way into the financial system.

How are companies that offer services to marijuana businesses affected, and what is the impact on banking?

I think this question refers to “Tier 2/Tier 3” (aka “Indirect”) marijuana-related businesses. Whereas marijuana remains federally illegal, businesses that sell products and services to Tier 1/Direct marijuana businesses are potentially “aiding and abetting” an illegal activity, which itself is also illegal. Financial institutions should also be aware of these indirect MRBs, have reasonable methods to identify them, and have consistently applied policies and procedures for what to do when they are identified (e.g., exit the relationship, monitor closely, potentially file SAR depending on the details, etc.).

Can I see the list of subsidiaries of MedMen again?

(1) Go to their CSE profile: https://thecse.com/en/listings/life-sciences/medmen-enterprises-inc-class-b-subordinate-voting-shares
(2) Click on CSE Filings
(3) Go to Form 2A – Listing Statement 28/05/2018
(4) See pages 11 & 12
(5) Note — this document was dated MAY 28, 2018, so information may have changed since then.