cannabis banking update compliant banking of mrb deposits€¦ · in 1637 king george ordered the...

Cannabis Banking Update

Compliant Banking of MRB Deposits

Copyright 2018, FSS-Jade, Confidential All Rights Reserved - www.jade.com 1/27/2020 1

Goal of Presentation

Provide a history and current

state of the industry regarding

cannabis.

The classification of legality

today, and

legalization/prohibition in the

future.

Provide some understanding of

the difference between

medical cannabis, and

recreational cannabis.

Respond to questions regarding

SWOT and Bank Wide Risk

regarding providing services in

the MRB space.

What is the risk and what is the

reward in this space, and is it

measurable and something a

bank should consider.

1/27/2020Copyright 2018, FSS-Jade, Confidential All Rights Reserved - www.jade.com 2

Medical Cannabis

Started the change in thinking

regarding prohibition in this

area.

Clearly, this is not the same product we understood from the 60’s, 70’s, and 80’s anymore. Public opinion has changed with the latest polls representing 84% of the population agrees with medical cannabis as a legal drug. 47 states now have varying levels and restrictions pertaining to legal cannabis.


The “Science”

of Cannabis

There are over 100

“cannabinoids” or classes of

chemical compounds found

in Cannabis Sativa. Most

talked about are two.

❖ Tetrahydrocannabinol (THC)-

Primary psychoactive

hallucinogenic cannabinoid.

❖ Cannabidiol (CBD) – other

major cannabinoid:

Analgesic, Anti-

inflammatory, and anti-

anxiety properties “without

the psychoactive effects”.

Cannabis Sativa is the species of the plan.



11 States have fully legalized. 33 States have full medical programs.

Only 4 states have fully restricted Still a federal crime – Cont. Sub. Act.


TAXES Continued

Public Attitudes Toward Medical cannabis

❑ A 2014 CBS News poll found that 86% of Americans believe

individuals should be able to receive cannabis as a medical

treatment option.

❑ The federal government continues to classify cannabis as

“Schedule I” among the most dangerous substances such

as Heroin, and LSD with “no currently accepted medical

use” ( a specific element of Schedule One drug

classification”

❑ Of note, Codeine-Oxycodone is Schedule III, IV, or IV, and

Cocaine is Schedule II, due to use for nose surgery.


The Issue - U.S. Federal Law

In 1637 King George ordered the growing and export of cannabis in the colonies. Major import/export until 1899.

In the United States, federal prohibitions outlawing cannabis were first imposed by congress under the cannabis Tax Act of 1937.

This was later reaffirmed by the congress as a Schedule I Substance under the Controlled Substance Act in 1970.

The Controlled Substance Act asserts that cannabis is equal to Heroin and LSD meeting all three of the following: (1) a high potential for abuse, (2) no currently accepted medical use or benefits, (3) a lack of safety for the use under medical supervision.

By contrast Cocaine, and Methamphetamine are classified as Schedule II drugs and can be prescribed by a doctor. Codeine can be prescribed from Schedules III through V (the most lenient).


Cannabis Today

Copyright 2018, FSS-Jade, Confidential All Rights Reserved - www.jade.com

Despite the century-long prohibition

of the plant, cannabis is one of the

most investigated therapeutically

active substances in history.

To date, there are over 20,000

positive medical use published

studies or reviews in the scientific

literature, nearly half of which were

published within the last five years

according to PubMed Central, the US

government repository for peer-

reviewed scientific research.

This increased growth in studies is

due to the growing number of

physicians advocating cannabis for a

wide range of illness issues.

1/27/2020 9

Rethinking Pain Management


The General State Qualifying Medical

Conditions.1. Acquired Immunodeficiency Syndrome

(AIDS)

2. Alzheimer’s disease

3. Lou Gehrig’s disease (ALS) **

4. Arnold-Chiari malformation and syringomyelia

5. Cachexia/wasting syndrome

6. Cancer

7. Childhood Autism **

8. Chronic inflammatory demyelinating polyneuropathy

9. Crohn’s disease

10. CRPS (Complex Regional Pain Syndrome Type I)

11. CRPS (Complex Regional Pain Syndrome Type II)

12. Dystonia

13. Fibromyalgia (severe)

14. Fibrous dysplasia

15. Glaucoma

16. Hepatitis C

17. Human Immunodeficiency Virus (HIV)

18. Hydrocephalus

19. Hydromyelia

20. Interstitial cystitis

21. Lupus

22. Multiple sclerosis

23. Muscular dystrophy


General State Qualifying Medical

Conditions, “continued”.

24. Myasthenia gravis

25. Myoclonus

26. Nail-patella syndrome

27. Neurofibromatosis

28. Parkinson’s disease

29. Post-concussion syndrome

30. Post-Traumatic Stress Disorder (PTSD)

31. Reflex sympathetic dystrophy

32. Residual limb pain

33. Rheumatoid arthritis (RA)

34. Seizures (including those characteristic of epilepsy)

35. Sjogren’s syndrome

36. Spinal cord disease (including but not limited to arachnoiditis, Tarlov cysts, hydromyelia & syringomelia)

37. Spinal cord injury with objective neurological indication of intractable spasticity

38. Spinocerebellar ataxia (SCA)

39. Syringomyelia

40. Tarlov cysts

41. Tourette syndrome

42. Traumatic brain injury (TBI)


Federal Enforcement

**Mixed Messages**•Still a Schedule I Drug under Controlled Substances Act in 2017

•In 2009, the Department of Justice issued a memorandum (The Cole Memo) in concert with FinCEN:

•Confirmed that state laws have no effect on cannabis’s illegal status under Federal Law

•Directs U.S. Attorneys to utilize their resources prudently, and to use discretion in prosecuting those using medical cannabis in compliance with their State’s Laws.

•A.G. Jeff Sessions in January 2018, rescinded all DOJ guidance including the Cole Memo. Truly no banking impact, save perception

FinCEN followed with formal banking guidance in the same year.

That is our federal guidance at this time. State banking departments have authored various guidance in this area for state regulated banks which the FDIC has differed to.


Current Federal Positions

February 2017 – White House Press Secretary Sean Spicer says POTUS feels it should be a State issue.

May 2017 – POTUS Signs $1.1 Trillion Omnibus Spending Bill, with the Rohrabacher - Blumenauer Amendment — which disallows the DOJ and the DEA from using federal funds to prosecute medical cannabis businesses in states where medical cannabis is legal.

March 2019 – House of Rep. begins process of review Safe Banking Act, passed bi-partisan, now in the Senate moving through three committees. Indication is this will pass Senate and be signed by President. Govt. tracking indicates a 55% passage likely. Timing unclear.

(SAFE) Banking Act of 2019, H.R. 1595, allows cannabis-related businesses in states with existing regulatory structures to access the banking system. The legislation passed by a vote of 321 to 103.

The SAFE Banking Act of 2019 establishes a safe harbor for any legal depository institution that chooses to provide banking services to a cannabis-related legitimate business that holds and maintains a license from a state or local government to engage in manufacturing, growing, or producing cannabis, as well as any business that handles, sells, transports, displays or distributes cannabis or cannabis products.


Hopefully this has provided a

background regarding the state of

cannabis in general

Lets talk about Banking the

Cannabis Related Banking

Business Opportunities and

S.W.O.T.


The Solution – Bank utilization of internal policies combined with TPSP and Software Integration

Bank Oversight

“TPSP’s”

Seed to Sale

Point of Sale

Federal, City,

County Laws

BSA reporting.

MRB

Cash in Transit

EKYC


Banking ROI and Earnings Target Market

1 - https://www.forbes.com/sites/debraborchardt/2017/01/03/sales 6.7 Billion 2016 7-billion-in-2016

2 - cannabis Business Daily, Factok 2017

Estimated Sales 2016 $6.7B1

California Sales in a purely Medical cannabis

environment are estimated at $1.3B - $1.6B2

Industry is projected to exceed $20B1 by 2020 putting it on par with the Beer

industry. That is with the current states legalized.

DARK MONEY CONCERN


https://www.forbes.com/sites/debraborchardt/2017/01/03/sales

TPSP Specialized Compliance Program

Services Overseen by Bank

EDD - KYC and Due Diligence

front end on MRB

Critical Monitoring

Reconciliation, deposits to

impound tax account.

Red Flag Monitoring

and Reporting

Legal and Regulatory

Updates, and SAR format

for auto filing.


Documentary Verification

Company and Owner KYC

Performed by Bank or TPSP annually, at a

minimum

Non-documentary Verifications

LexisNexis Instant ID &

TINCheck

Performed by Bank or TPSP

Quarterly

Site Visitations

On site validation of all Federal, City, County, and State Laws

Performed by Bank or TPSP quarterly at a

minimum

Compliance Program KYC, Due Diligence

and Site Auditing


• Tracking movements in inventory to ensure all product available for sale has full seed to sale tracking against deposits.

Seed-to-Sale Reconciliation

• Tracking sales to inventory to ensure sales activity is consistent with existing inventory to norms.

POS Integration

• Reconciling the cash picked up from the armored carrier with sales activity for red flag rpt.

Cash-in-Transit

Compliance Program Reconciliation


BSA

•Enhanced Due Diligence / KYC Reporting

•Site surveys

•Document Storage / License Renewal Notification

•EKYC/Background Results

•Due Diligence Exceptions / Changes

AML

•Red Flags / Transaction Monitoring

•Cash to Sales Reporting

•Projected Sales to Actual Sales

•Peer Evaluations

•Sales to inventory

SAR / CTR

•Cash Velocity Monitoring

•Automated “cannabis Limited” SAR Filing data provided

•Reporting used to identify potential “cannabis Priority” SAR Filing

SAR’s and Red Flag Monitoring and

Reporting for Compliance


• Federal Laws

• State Laws

• County Laws

• City Laws

Automated daily monitoring for

changes

• FDIC, State Banking Regs.

• FinCEN 2014-G001Directive Guidance

Compliance Program

Legal and Regulatory Updates



1. Question One

Estimates indicate in excess of a billion dollars in cash

related to legal MRB sales is currently residing in home

vaults, buried, or makeshift structures to house retail

sales. Following passage of the Safe Banking Act a

major push will occur to move this money into new

banks who are newly engaged in MRB banking based

on the safe harbor. What is the solution(s) to Dark Money following passage of the Safe Banking Act?


Question 2.

What are the three most likely methods an

MRB would use to incorporate-comingle

Dark Money into a laundering pattern for deposits for lack of traceability?


Question 3.

FinCEN requirements within EDD for MRB banking state

that ownership or staffing of MRBs restricts anyone who

has been “suspected”, not convicted of a criminal act

involving cannabis or any controlled substance. How

would you screen for this in your EDD procedures for approval?

Given FinCEN requirements is the bank prohibited from an

employee who has any questioned background in cannabis

being involved in the MRB banking work? How would you view and treat this?


Question 4.

A standard risk/compliance element of concern in

enterprise wide risk modeling is the review of bank

insurance policies and any product impact on such

policies. A standard provision for all bank insurance

policies D&O, Liability, crime, IT, is a

caveat/exclusion that if the bank knowingly

participates in any product, service, or function

which violates a federal, or state law, the policy coverage is excluded. How would you address this?

cannabis banking update compliant banking of mrb deposits€¦ · in 1637 king george ordered the...

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