July 16, 2020

The U.S. market acceptance of the legalized use of marijuana has reached a crucial tipping point, opening a portal to a new and fertile landscape of revenue for banks. At present, vast majority of Americans—93%—support the legalization of medical marijuana and 65% support recreational marijuana legalization for adult use.1

Efforts to monetize the evolving market appear to be following soaring public acceptance. Indeed, in states where cannabis is currently legal, medical and adult use sales are forecast to soar from $12.9 billion in 2019 to $26.3 billion in 2025. Federal legislation would create $86 billion in U.S. tax revenue between 2019 and 2025 on $253 billion in sales over that time period.2

As a result, financial institutions (FIs) are now being faced with a momentous decision: do we work with marijuana businesses or not? With 95% of Americans living in states with some level of legal cannabis markets3, this question has taken on particular urgency. While some FIs continue to maintain a strategy of de-risking the marijuana industry (even as several fintech companies are already serving it), others are carefully planning to position themselves to capture sizeable marijuana business revenues.

Those FIs that choose to move forward are tracking the fluid legal environment—particularly the Secure and Fair Enforcement (SAFE) Banking Act of 2019. The bill, passed by the U.S. House, proposes giving legitimate businesses acting in compliance with state cannabis laws access to the banking system. Currently, 34 states, the District of Columbia and various U.S. territories have legal framework that allows for either medical or recreational use of marijuana.4

Yet the possession, distribution or sale of marijuana products and any proceeds from cannabis-related activities remains illegal under federal law. Therein lies the conundrum: money that can be tracked back to state marijuana operations might be considered money laundering, exposing FIs to substantial legal, operational and regulatory risk. It is therefore incumbent on FIs that service a legal marijuana business to comply with Enhanced Due Diligence (EDD) practices with regard to maintaining high risk customers or accounts. And that can be costly, time-consuming and a heavily manual process.

Mitigate risk with extensive tools and risk intelligence

With so much potential on the table and the stakes of non-compliance so high, FIs need to be capable of effectively managing the inherent risk of the evolving U.S. marijuana industry. At the same time, they need to maintain the agility to quickly adapt to changing market and legal circumstances.

The current challenges are two-fold: first, it is essential to maintain compliance with current anti-money laundering laws. Second, the navigation of Suspicious Activity Report (SAR) filing requirements is complex.

More than ever, it is essential to gain access to extensive tools and intelligence to fortify screening, mitigate risk exposure with enhanced due diligence data and comply with Know Your Customer (KYC) and Customer Identification Program (CIP) compliance regulations.

Data is the key to a more accurate risk picture

As legal strictures continue to rapidly reshape the U.S. marijuana industry, access to comprehensive and continuously updated screening data of Marijuana Registered Businesses is a necessity. It is, without a doubt, the most feasible way to protect against exposure to risk and effectively prioritize banking opportunities. The screening data, delivered by proven identity verification tools, support efficient CIP workflows that include:

  • Detailed intelligence around business validity and stability
  • Information on Secretary of State filings and public record aging
  • Risk indicators that can identify shell companies—those without significant assets or operations—or shelf companies that have no activity
  • Comprehensive intelligence around business executives and legal events connected to the marijuana registered business

Let’s consider just one practical example of how accurate and comprehensive data can streamline regulatory compliance and protect your FI from missteps and potentially onerous fines. Suppose an FI is approached by a marijuana business that has secured its licenses and appears to be closely following state and local laws. At first glance, that company may seem like an accessible risk. But upon further analysis, enhanced KYC due diligence reveals that the company’s CEO was incarcerated in the past and that another key partner is really a non-U.S. citizen. Suddenly, a more precise picture of risk emerges.

Take advantage of solutions to boost your KYC and CIP processes

Fortunately, fully integrated compliance platforms exist, such as LexisNexis® Bridger Insight® XG, to reduce the complexity and boost the efficiency of KYC and CIP processes. Bridger Insight XG enables access to identity verification, screening, due diligence and fraud prevention services through a single point of entry. Combined with the unmatched watch list content of WorldCompliance™ Data, the industry’s most proven source of sanctions and enforcement data, a platform like this allows FIs to more confidently bank on the rapidly growing marijuana industry.

One more advantage of a fully integrated platform is that screening tools can be utilized within a compliance suite that contains screening tools, risk data and anti-money laundering (AML) data insights. With efficiencies and consolidation buzz terms circulating through the banking industry, most FIs are actively seeking to consolidate vendors, solutions, user credentials and interfaces under one umbrella—and this one can easily be administered and maintained. LexisNexis® Risk Solutions also offers a financial compliance professional services team to help FIs understand the current and proposed regulatory landscape. By knowing what the analysts are saying, those FIs on the brink of working with registered marijuana growers and distributors can gain much-needed insights so they can act quickly.

FIs will be faced with more uncertainty in the months ahead as they face the challenges of the legalization of marijuana at the state level. But at a time when marijuana companies are forced to deal primarily in cash—both an AML concern and a growth constraint—the pendulum is moving towards FIs banking on the burgeoning industry. Performing enhanced due diligence through unified compliance data will surely be the key to efficiency and success.

1. Westbrook, Elizabeth, “United States Recap: Senate Committee Holds Hearing on Cannabis Banking,” Mondaq Business Briefing, September 3, 2019
2. “ US cannabis market to reach $26B by 2025, study says,” North Bay Business Journal, January 29, 2019
3. Westbrook, Elizabeth, “United States Recap: Senate Committee Holds Hearing on Cannabis Banking,” Mondaq Business Briefing, September 3, 2019
4. ibid