3 Tips for Financial Institutions When Using a Risk-Based Approach to Onboard Commercial Cannabis Businesses
“Banking a commercial cannabis business is no more dangerous than banking a liquor store.” Head of Compliance Chris Gunias at Higher Risk Deposit Compliance Solutions (HDCS).
Adding the commercial cannabis segment to your financial institution’s portfolio can be overwhelming. For many financial services professionals, banking cannabis can seem dangerous because marijuana is still a Schedule 1 controlled substance in the U.S. Dealing with funds coming directly from these transactions could be considered money laundering and expose the financial institution to legal, regulatory, compliance, and reputation risk. The ever-changing and extremely complex regulatory environment makes providing financial services to commercial cannabis businesses difficult. But Chris isn’t wrong!
Just like working with cash intensive businesses, it takes the right control activities at the right time to show that your financial institution has implemented reasonable anti-money laundering processes. These control activities start with evaluating the commercial cannabis business’s risks.
Onboarding commercial cannabis businesses so that your financial institution doesn’t have to take on unknown risks is similar to onboarding other high-risk businesses; consider these three tips.
Tip 1. Use your Risk Assessment to Create a Client Risk Rating
Focus on the risks at the commercial cannabis business level. Do you have a risk assessment for your commercial cannabis businesses or for the industry?
If you rate the risk for all cash intensive businesses the same way, it is harder to differentiate the risks between a convenience store and a casino during due diligence. Similarly, it’s important to focus on the specific risks of the commercial cannabis sector that you are serving. Look at the five high risks for commercial cannabis by commercial cannabis business sector to determine which risks are actually present in your financial institution’s commercial cannabis businesses segment. Use this analysis to develop a client risk assessment specific to commercial cannabis businesses you intend to bank.
Once you have developed your risk assessment, use it to create a client risk rating in your customer due diligence to focus on the risks as they appear in this client segment.
Tip 2. Apply the Client Risk Rating to Customer Due Diligence
No two businesses are the same. Integrate the client risk rating into your customer due diligence to tailor your enhanced due diligence to a specific client. Robust customer due diligence is the answer to understanding a commercial cannabis client’s risk. Understanding how the information you gather indicates their money laundering, organized crime, supply chain, compliance, and operational risk profile gives you the context to focus your review on the highest inherent risks.
Using your client risk rating to determine what enhanced information you gather reduces your costs and the customer friction without increasing your risk.
Tip 3. Identify Standard Controls in your Customer Due Diligence
As you identify higher inherent risks, ask for evidence of standard control activities. This is a relationship! A commercial cannabis client that is willing to demonstrate evidence of control activities is protecting themselves and their financial institution. A financial institution that asks the right questions is likely to offer more robust banking services to a commercial cannabis client.
Identifying standard control expectations for your commercial cannabis client takes the guess work out for everyone, saving you time and resources.
Additional resources for financial institutions are here.