Commercial cannabis businesses do a significant amount of business with the licensed and unlicensed cannabis supply chains.
Cannabis product is moved through the licensed supply chain, and most other products and services do not require a licensed supply chain vendor; for example, software and technology, business services, consumption tools, and staffing solutions.
Understanding the beneficial ownership of unlicensed vendors you do business with improves transparency and provides understanding into whether the company is being misused to disguise illicit activities and funds.
Risk Factors
Most jurisdictions intend to prevent revenue from the sale of cannabis from benefitting criminal enterprises, gangs, and cartels. Most jurisdictions focus on the beneficial ownership of the licensed operators to manage this risk.
Legal entities can be used to facilitate the illicit cannabis market, money laundering, and other crimes because their true ownership can be concealed. This could allow third-parties access to sensitive cannabis operations, employees, or cannabis product that increases the commercial cannabis business’s exposure to illicit cannabis market risk.
The collection of beneficial ownership information about legal entity vendors can reduce the commercial cannabis business’s exposure to illicit cannabis market activity by exposing criminals who use legal entity structures to conceal their illicit activity and assets. Requiring higher-risk vendors seeking relationships with a commercial cannabis business to disclose identifying information, such as legal name, date of birth, and physical address of the natural persons who own or control them, will make such vendors more transparent, and thus less attractive to criminals and those who assist them.
Licensed commercial cannabis businesses can be subject to a range of reputational, administrative, and criminal risks if they sustain a relationship with a company linked to criminal enterprises, gangs, and cartels.
Red Flags
The following should be considered red flags regarding beneficial owners of unlicensed vendors
- The vendor is unable to provide recorded company formation documents
- The vendor provides expired formation documents
- The vendor’s ownership structure is overly complex
- Contradictory or incorrect information is uncovered when completing due diligence (e.g. the documentation provided is in conflict with information found through a public database search)
- The vendor’s contract has no logical economic purpose
- The vendor is unwilling to provide beneficial ownership information down to natural persons
Risk Mitigation
Risk mitigation for unlicensed vendors with unknown beneficial owners falls into two control activities: vendor management and ethics and whistleblowing.
Vendor Management Risk Mitigation
Commercial cannabis businesses should establish or enhance control activities for effective vendor management.
- Formalize control activities for vendor management that establish procedures to assess unlicensed vendors, conduct initial due diligence, and conduct ongoing monitoring. These may include the following:
- Establish policies and risk-based procedures for ongoing due diligence reviews of vendors based on the potential aggregate value of the relationship to:
- Determine when the business will collect beneficial ownership information such as legal name, date of birth, and physical address to conduct public record research
- Evaluate vendors based on adverse public news or complaints of their beneficial owners
- Implement risk-based procedures for the termination of vendors that fall outside of the risk tolerance based on their beneficial ownership
- Establish policies and risk-based procedures for ongoing due diligence reviews of vendors based on the potential aggregate value of the relationship to:
- Require contract terms and conditions based on the risk associated with specific unlicensed vendors
- Increase termination options based on changes to beneficial ownership
- Require notification of changes in beneficial ownership or control
Ethics and Whistleblowing Risk Mitigation
Commercial cannabis businesses should establish or enhance training for effective ethics and whistleblowing control activities.
- Provide employees training on how to detect and report unusual activity associated with unlicensed vendors
- Provide employees training on ethics and whistleblowing reporting procedures