Much has happened in the past couple of months regarding the relationship between financial institutions and Marijuana Related Businesses, or MRBs. In this article, we discuss three major developments, all of which share a complex connection. First, the National Credit Union Administration (“NCUA”) recently brought its first enforcement action against a credit union for anti-money laundering (“AML”) non-compliance while serving MRBs. Second, two cannabis industry executives have been convicted of bank fraud for allegedly tricking banks and other financial institutions into unwittingly offering financial services to their MRB. Third, and despite this drumbeat of MRB enforcement, Congress again introduced, with bipartisan support, the SAFE Banking Act, which seeks to normalize cannabis banking by prohibiting federal bank regulators from taking certain measures against financial institutions serving MRBs.
NCUA Imposes First Cannabis Banking Sanction
In the first such enforcement action, the NCUA recently sanctioned Live Life Federal Credit Union (“Live Life”), a small Michigan-based credit union, for alleged breaches of compliance involving its cannabis banking services. Importantly, the enforcement measure does not penalize Live Life for its services to cannabis customers in itself, but rather to do so without complying with the guidelines of the Financial Crimes Enforcement Network (“FinCEN”). This application approach is consistent with the fact that the President of the NCUA previously declared that the NCUA will not sanction federally chartered credit unions for collaborating with state-legal MRBs.
the Stipulation and consent to cease and desist order (“Order”), issued February 19, 2021, requires Live Life:
- Implement an automated system to effectively monitor and identify all transactions for suspicious activity;
- Engage a third party to roll back MRB activity to determine the existence of suspicious activity justifying the filing of a Suspicious Activity Report (“SAR”), and file all SARs recommended by third ;.
- Immediately develop and implement a system to ensure that all Foreign Currency Transaction Reports (“CTR”) are filed accurately; and
- Stop opening new MRB accounts and suspend transaction activity on existing Business Services Money or MSB accounts.
Like us reported, bank MRBs, while potentially lucrative, require a lot of heavy work on the compliance side. However, prior to this coercive measure, Live Life allegedly relied on manual compliance processes to monitor its 150 MRB clients. This ordinance emphasizes that manual compliance processes are unlikely to be adequate for the task and defines the functions that regulators expect automated systems for monitoring compliance and suspicious activity to include to support compliance. banks and credit unions FinCEN requirements for MRBs. These functions are, at a minimum:
- Reconciliation of MRB point of sale, METRC or accounting system data against member deposits;
- Continuous monitoring of adverse public information affecting MRBs;
- Timely verification of changes in the status of the permit, including notification of a lapse in a state MRB permit ”;
- Systematic monitoring of unusual automated clearing house activity or transfers for MRB accounts; and
- Watch for FinCEN “red flags” described in FIN-2014-G001, “BSA Expectations for Marijuana-Related Businesses”, which you can find here.
As we blogged previously, FinCEN said there were approximately 684 banks and MRB bank credit unions in the United States as of December 31, 2020. These 684 banks and credit unions, as well as any other financial institutions considering bank MRBs, should take note of this ordinance and use as a regulatory roadmap.
Cannabis industry executives convicted of defrauding banks to provide financial services
Automated and well-functioning compliance systems are taking on increased importance in light of recent efforts to incentivize banks to process transactions for an MRB. On March 24, 2021, two businessmen were convicted of conspiracy to commit bank fraud in the Southern District of New York for helping Eaze, a marijuana sales app, process more than $ 150 million. of credit and debit card transactions without banks and other financial institutions. detect that the transactions involved sales of marijuana. The defendants, Hamid Akhavan and Ruben Weigand, reportedly implemented an elaborate plan to build a series of bogus websites and third-party companies, all of which enabled Eaze to receive illegal payments at the federal level between 2016 and 2019. Akhavan and Weigand were released on bail with a pending sentence currently scheduled for June 25, 2021.
According to Press release issued by the United States Attorney’s Office, the alleged scheme in part:
. . . . involved the deception of virtually all participants in the payment processing network, including the issuing banks in the United States (the “issuing banks”) and [credit card companies]. The main method used by AKHAVAN, WEIGAND and other co-conspirators to deceive the issuing banks involved the purchase and use of shell companies which were used to cover up marijuana transactions through the use of bogus merchants (the “bogus merchants”). “). Shell companies have been used to open offshore bank accounts with merchant acquiring banks and to initiate credit card charges for marijuana purchases made through the Company. AKHAVAN and WEIGAND worked with other co-conspirators to create these fake merchant accounts – including bogus online merchants allegedly selling dog products, diving gear, soft drinks, green tea, and creams for the dog. face – and have established [credit card] merchants dealing with accounts with one or more offshore acquiring banks. They then arranged for more than a dozen fictitious merchants to be used by the company to process purchases of debit and credit card marijuana products. Many of the Phony Merchants claimed to be UK-based, but, despite being based outside of the US, claimed to maintain US-based customer service numbers.
To facilitate the program, web pages have been created and deployed to give legitimacy to Phony Merchants. The Phony Merchants usually had web pages suggesting that they were involved in the sale of legitimate products, such as soft drinks, face creams, dog products, and diving gear. Yet these companies were in fact used to facilitate the approval and processing of marijuana transactions. The defendants’ plan even involved bogus visits to these websites to make it appear that the websites had real customers and were operating legitimate online businesses.
During the trial, a former CEO of Eaze who pleaded guilty and cooperated with the government would have testified that he believed that the transactions would not be processed if the banks had known about the true nature of the transactions because, according to the witness, most of the big banks still refuse to work with the MRBs because marijuana is still illegal in under federal drug laws.
Congress re-presents the SAFE Banking Act
In March 2021, the SAFE (Secure and Fair Enforcement) banking law was reintroduced to the US House and Senate with bipartisan support. As we have blogged, the SAFE banking law seeks to normalize cannabis banking and would ban federal banking regulators from:
- Terminate or limit deposit insurance or equity insurance of a financial institution for the provision of financial services to an MRB;
- Prohibit or discourage a financial institution from offering financial services to an MRB;
- Penalize a depository institution or service provider for authorizing, processing, clearing, settling, billing, transferring, reconciling or collecting payments for an MRB for payments made by any means;
- Recommend, induce or encourage a financial institution not to offer financial services to an account holder solely because the account holder is affiliated with an MRB; and
- Take adverse or corrective monitoring action on a loan made to a person because the person owns an MRB or owns real estate or equipment leased or sold to an MRB.
More importantly, the bill would eliminate the risk of liability and forfeiture for deposit-taking institutions, service providers and insurers (as well as their officers, directors and employees) who provide loans or other services to MRBs. . In addition, the Federal Financial Institutions Review Board should develop review guidelines and procedures for financial institutions that serve state legal MRBs. Such uniform guidance would help ensure that all financial institutions could offer services to MRBs under substantially similar regulatory expectations. The bill would also require government studies regarding the diversity in the marijuana industry and the effectiveness of suspicious activity reports for MRBs and service providers.
While the political fortunes of the SAFE Banking Act remain unclear to say the least, its passage would certainly significantly reduce the risks faced by financial institutions serving MRBs and the likelihood of financial institutions engaging in the type of alleged behavior that gave rise to it. to the enforcement actions described in this Publish. However, given the risk inherent in MRBs, increased monitoring of AML by financial institutions would still be necessary even if the SAFE Banking Act were to be adopted.