Most organizations have rather mature and effective transaction monitoring systems in place, but they may not be ready for these new types of businesses and their transaction patterns. For example, with a marijuana dispensary or retailer, many of their customers choose to pay in cash, which will result in large daily cash deposits (more on this later). Transaction monitoring systems will need to accommodate differences in behavior with this sort of business.
This means there must be a way of identifying, classifying, and risk-rating customers with marijuana-based businesses, and managing transaction monitoring rules and logic to match the risks. The guidance mentions the need to review patterns of activity indicative of a marijuana-based business that may be attempting to evade registration and controls—to help identify an operation that is performing both legal and illegal activities, for example. A strong CDD program is one key capability, but transaction monitoring can help identify such an organization for review and follow-up.
Similarly, there is concern among regulators and law enforcement about “comingling” legal and illicit funds in a marijuana-based business. For example, a legal medical marijuana dispensary could accept cash from an illegal recreational marijuana operation and generate false receipts to appear as if the funds were legally obtained.
Institutions should identify unusual patterns of activity, such as spikes in deposits, substantial deviations from past or anticipated volume, or transfers to individuals or businesses with no clear legitimate business relationship or purpose. Peer profiling can also be a valuable method, but many institutions will not see enough peers for a meaningful comparison. Suspicious activity monitoring risk thresholds should be substantially lower compared to other, lower-risk businesses.
Another example would be a legal marijuana grow operation that is also supplying illegal distributors. While the legal portion of the operation would be well-documented (e.g., invoices, electronic transfers), the illegal portion would be primarily in cash and undocumented. The cash could be placed through a collusive retailer accompanied by inflated invoices from the grower. While this is a very typical placement typology, it is complicated by the legal and illegal streams in the exact same business—it would be difficult to determine that the inflated or false invoices are not backed by actual production capacity, because they are. Unlike some other false invoicing schemes, the product/capacity is actually there.
Organizations will need to be even more diligent than usual in investigating and dispositioning suspicious activity alerts. Timely, complete, and well-documented follow-up of suspicious activity alerts is a general best practice but will be even more critical when serving marijuana-based businesses. In the next post, Legalized Marijuana, Part 4: Regulatory Filings, we look at managing the regulatory filings required when servicing marijuana businesses. This is the third post regarding marijuana-based businesses—don’t miss the first and second.