In the commercial cannabis industry, a vendor includes other commercial cannabis businesses and ancillary cannabis businesses.
Establishing a relationship with a financial institution willing to allow cash deposits and withdrawals is difficult for both commercial and ancillary cannabis businesses. Even if one commercial cannabis business has a financial institution relationship, there may be other commercial cannabis business vendors down the supply chain that do not have those relationships. As a result, commercial cannabis businesses may find themselves transacting material amounts in cash.
Financial institutions are required to implement robust anti-money laundering control activities that are matured by the financial industry. When a commercial cannabis business operates with less access to financial institutions, it may rely on anti-money laundering control activities that are less mature. As such, the commercial cannabis business may unintentionally violate money laundering laws.
Risk Factors
Transactions involving cash are at a higher risk of being exploited by money launderers. The volume of transactions, the value of the transaction, or the number of intermediaries involved in the transaction increase the money laundering risks. When managing a higher volume of cash transactions, there are more opportunities for money launderers to become engaged and exploit a transaction. High-value cash transactions are used by money launderers to obscure money laundering activity by the sender or receiver. The greater the number of intermediaries involved in a transaction increases opportunity for money launders to subvert the process for money laundering schemes.
Commercial cannabis businesses are generally required by law or regulation to have reasonable control activities to assure they don’t assist in money laundering, whether or not with knowledge.
The following should be considered red flags with regard to cash-based vendors:
- Requests payments go to an unrelated individual(s) or entity
- Requests an unusual or uncustomary way to handle the transaction
- Unusual lack of concern regarding transaction costs
- Secretive or evasive about the reason the transaction must be paid or received in cash
- Refusal to provide beneficial ownership and control information
- Prices for products and services are inconsistently low compared to others in the same business
Risk Mitigation
Risk mitigation for cash-based vendor risks fall into three key control activities: cash management, vendor risk management, and ethics and whistleblowing. The following are a sample of risk mitigations that should be considered:
Vendor Management Risk Mitigation
Commercial cannabis businesses should establish or enhance control activities, risk assessment, training, and assurance for vendor risk management.
- Formalize control activities for vendor risk management that establishes procedures to assess the risk of vendors that request cash payment, conduct initial due diligence, and conduct ongoing monitoring; these may include:
- Implement due diligence procedures that identify and rate cash-based vendors based on risk criteria
- Establish the expected cash payments by size and frequency throughout the contract or twelve-month period
- Implement risk-based procedures to evaluate the cash-based vendor’s controls for cash management
- Conduct periodic monitoring of cash-based vendors using business defined risk metrics
- Implementing risk-based procedures for the termination of the cash-based vendor relationships that fall outside of the risk tolerance
- Implement risk-based procedures to require competitive bidding for material contracts that will be settled in cash and determine if pricing is appropriate based on other bids
- Require contract terms and conditions based on the risk associated with a cash-based vendor
- Provide for the right to audit
- Increase termination options
- Require notification of changes in ownership or control
- Provide risk-based training for vendor risk management employees to detect and report unusual vendor cash payments
- Conduct periodic monitoring of cash management procedures to assure cash payments are appropriately conducted
Ethics and Whistleblowing Risk Mitigation
Commercial cannabis businesses should establish or enhance training for effective ethics and whistleblowing control activities.
- Provide cash management employee training to detect and report unusual cash-based vendor activity
- Provide cash-based vendors training on ethics and whistleblowing reporting procedures
