Addressing FinCEN Guidance: How to Spot Illicit Funds

All financial institutions (FIs) use account monitoring software to flag unusual or unlawful account activity, but few of them are sophisticated in how they monitor for cannabis-related business (CRB) activity. Account monitoring software works on the macro-level, looking at deposits and withdrawals after those funds have entered the FI. To prevent illicit funds from entering the financial system, account monitoring software must be able to examine the details of every individual CRB sales transaction so that FIs can make informed decisions about whether or not to accept funds associated with those sales.

That’s where Green Check comes in. We’re the only cannabis-specific exception monitoring software that can verify the source of funds at a transaction level by running each cannabis sale through our Compliance Rules Engine (CRE). The CRE analyzes the details of the sale and evaluates them against our comprehensive set of rules drawn from the rules and regulations of each state’s cannabis program and the red flags identified in the 2014 FinCEN guidance. We supplement these rules with a set of custom algorithms that alert an FI’s compliance staff to behaviors that warrant enhanced monitoring.

If none of the details associated with the sale violate the rules in the CRE then it is marked with a Green Check and those funds are eligible for deposit. If a sale violates state law or triggers one of FinCEN’s red flags, it is ineligible for deposit. If a sale meets all of the state requirements and federal guidance but activates one of our behavior-based triggers, it is eligible for deposit but is marked with a yellow flag to bring it to the attention of the person on the FI side reviewing the transactions.

What Kind of Rules Are There?
The rules can vary widely by state. Green Check localizes the rule set based on the address of the CRB, but there are two rules present across the board, purchase and age limits:

Purchase Limits: Most states limit the amount of cannabis product a person can purchase in a certain time period. Some states impose a per-purchase limit like California, where a patient in the medical program can purchase up to 8 ounces of flower a day, while others have a limit that must be tracked over multiple days. For example, in Connecticut, a patient can buy a maximum of 2.5 ounces of flower in a thirty-day period.

Age Limits: All states set a minimum age requirement for purchase, either 18 or 21 depending on the state, though most make certain exceptions for children suffering from particularly grievous conditions. For instance, a patient must be at least 18 years old to enroll in Massachusetts’ medical cannabis program, though case-by-case exceptions can be made for minors with life-threatening conditions after a rigorous approval process.

Eligibility: Keeping these fundamental rules in mind, Green Check does not verify a sale made to an underage patient or customer (barring specific exemptions) or a sale that violates a purchase limit. If a medical facility in California were to dispense 8.1 ounces of cannabis flower in one sale then that transaction would not be verified and the funds associated with it would not be eligible for deposit into an FI. This is easily done when checking daily purchase limits, but Green Check also tracks purchases associated with an individual’s anonymized purchase history over a period of time. In a state like Connecticut, that means that if a patient makes three, one-ounce purchases the first two would be verified but the third would not.

Assuming a sale passes the age and purchase limit checks (among many others), it is assessed against a matrix of behaviors designed to help an FI identify any potential red flags identified in the 2014 FinCEN Guidance. 

Suspicious Activity: Determining whether an activity is suspicious and warrants investigation on the part of the FI to ensure that a CRB customer isn’t engaged in illegal activity can’t be defined by a set of black and white, true/false rules. For instance, while there is nothing inherently illegal in making multiple cannabis purchases in one day as long as the patient remains under the legal threshold, historically multiple purchases in one day is associated with purchasing on behalf of someone other than the patient, possibly for resale on the black market, which is illegal.

What an FI chooses to do with this information is entirely up to them, but Green Check provides insights they need to demonstrate to their examiners and regulators that they are continually monitoring and evaluating the risk associated with providing banking services to the cannabis industry.

If a sale doesn’t violate state law or merit a notification of potentially suspicious activity, then the sale is verified and eligible for deposit.

To meet their compliance obligations, it is essential that an FI has an exception monitoring system in place to ensure that funds derived from illegal activities do not enter the financial system. As the ability to verify the source of funds associated with cannabis sales is crucial to this effort, FIs need a solution like Green Check to provide transaction-level insight that can verify every sale meets the requirements of the state’s legal cannabis program and the guidance provided by FinCEN.

Schedule a demo to learn more about how Green Check can help you efficiently and effectively examine the details of every individual CRB sales transaction so you can be equipped with the right data to make an informed decision about what funds come into your FI.