Experienced compliance professionals know that as more states legalize the use and commercialization of marijuana, the risk of unwittingly banking marijuana is increasing. Consequently, more financial institutions (FIs) are beginning to experiment with some “quick and easy,” yet measurably ineffective, ways to identify their bank’s risk exposure related to marijuana-related business (MRB) customers. One of these methods is to screen for MRBs using “keywords”. However, CRB Monitor analysis shows that keyword searches fall short of due diligence requirements for marijuana or cannabis compliance.
Assessing Risk with Regulatory Compliance in Mind
Whether a financial institution (FI) is intentionally offering MRB banking services or not, it is prudent to accurately assess the risk of every customer relationship within the organization, especially in light of Bank Secrecy Act/Anti-Money laundering (BSA/AML) regulations. Adequate and effective customer identification programs should include proactive screening for MRBs to ensure satisfactory compliance with BSA/AML regulatory requirements.
FIs are required to conduct comprehensive due diligence to appropriately identify and assess a customer’s risk level, regardless of whether the client self reports as operating in a high-risk industry. And because marijuana is still illegal at the federal level, Suspicious Activity Reports (SARs) must be filed for any transaction related to MRBs. As more states legalize marijuana, the industry continues to grow nationally both in terms of the number of entities as well as revenues generated, making it increasingly likely that FIs have MRBs operating within their service areas.
Taking Aim at MRB Compliance Screening
In order to identify MRBs among existing customers, FIs may choose to regularly screen customer databases or ledgers for business names and ultimate beneficial owners (UBOs) that contain keywords that are typically associated with marijuana. Words such as “pot,” “weed,” or “cannabis” may be common search terms during these types of screenings. However, after an analysis of common keyword search terms against CRB Monitor’s database of over 42,000 Tier 1 (aka Direct) MRBs, it is clear that MRBs rarely have business names that include such obvious associations to cannabis.
An Off-Target Approach to Cannabis Compliance
Our analysis began by identifying 19 common marijuana-related keywords:
|1. Green||11. THC|
|2. Cannabis||12. Chronic|
|3. Bud||13. CBD|
|4. Herb||14. Ganja|
|5. Pot||15. Mary Jane|
|6. Weed||16. Reefer|
|7. 420||17. Dope|
|8. Grass||18. Blunt|
|9. Marijuana||19. Cannabidiol|
These keywords are then compared with CRB Monitor’s entire database of over 42,000 direct MRBs.
- “Green” is the most common keyword used, with 6.7 percent of Tier 1 MRBs having the word in their business name. However, there are also approximately 180,000 active companies operating across the world that also use “Green” in their name according to OpenCorporates.com data, thus utilizing such a generic and overly-broad keyword would presumably lead to an avalanche of false positives.
- “Cannabis” is the next most common term used, with 4.6 percent of Tier 1 MRBs using it in their names.
- Overall, 82 percent of all MRBs within the database do NOT use any of the 19 keywords identified above.
Focus Your Sights on a Better Screening Approach
Considering the high potential for both false positives and false negatives, searching for keywords is clearly an ineffective method used to screen for MRBs and may even be viewed as a weak risk management practice by regulators. FIs should establish more robust and accurate controls for successfully identifying cannabis-related risks by screening for actual known MRB names, rather than relying upon inadequate, if not misleading, keyword searches. By screening against known MRB names and UBOs, management and directors can begin making strategic decisions based upon comprehensive, accurate and up-to-date information that ultimately enables FIs to target risk head on.
Is your compliance program backed by comprehensive data on the cannabis industry? Do you have access to reliable information about MRBs to determine your firm’s level of risk exposure? Read more on our blog: You Don’t Know Pot: 5 Fundamentals to Understanding, Identifying, and Monitoring for CRBs. Or visit our website to request more information and get in touch with our team.
The information provided herein presents general information and should not be relied on as legal advice. If you have specific questions regarding a fact, please consult with competent legal counsel about the facts and laws that apply.