Monitoring Marijuana:Past, Present and FuturePresented by RDC8.5.2020

Session 8

2

• Complete fun and exciting missions to earn points

• Multiple winners announced every day…grand prizes on Friday

• Checkout the game tracker to see who’s in the lead and photos of completed missions

• Download GooseChase appGame Code: ACFCS

Scavenger Hunt – Let’s Go on a Goose Chase

Exhibit Booths – Take a Virtual Walk

3

• Visit the exhibitors and enter the booths by clicking on their name (not logo)

• Gain access to 50+ free downloadable resources

• Learn about their solutions by attending a Product Demo session (on agenda)

More Resources – Yes, I Want More!

4

• Exclusive takeaway tools including presentations, recordings and more resources

• Go to your profile in Grip and scroll down to the ‘Exclusive Access’ field

• Click YES to gain access to the toolkit and receive sponsor communications

Go Social – Make Meaningful Connections

Chat privately and schedule video meetings on Grip

View your recommendations

Continue the conversation on social media

#fincrimevirtualweek

Boring but Important Things – Event Logistics

6

• Daily reminder emails to let you know what’s on tap

• Most sessions being recorded, available until August 14

• Certificates of participation • Attend 80% of the session• Fill out the survey – Triggers at end, available

throughout

Boring but Important Things – Troubleshooting

7

Audio/visual/other issues: • Try REFRESHING BROWSER as first step• If issues persist, close out and rejoin• Chrome or Firefox are best browsers

For customer support: • eventsupport@acfcs.org• 786-591-1346

Bonnie Liggett

Director, Data Content & Acquisition

Monitoring Marijuana:Past, Present, Future

The Past, Present, and Future

9

The conflict between state and federal marijuana laws has intensified recently as the number of states moving to legalization for medicinal and/or recreational use increases.

The federal prohibition on cannabis continues to influence a financial institution’s decision to bank with marijuana related businesses (MRBs).

Whatever path a financial institution chooses, it must invest in actions to enhance and maintain stringent AML/KYC policies and procedures.

What has changed in the last several years………

Past

Present

Future

The Past

Cannabis Milestones

11

Stricter possession laws

War on DrugsCounter-culture

Marijuana outlawed; Marijuana Tax Act

Controlled Substance Act

1990s Medicinal use of Marijuana in CA, AK, WA, OR

First recreational use – CO and WA

Rohrabacher-Farr Amendment blocks DOJ from prosecuting legal cannabis businesses; Farm Act

Legalization in CACole Memo creates hands-off policy for medical use

2019

1930s

1950s

1960s

1970s

1980s

1990s

2012

2013

2014

2016

2018

State vs. Federal Conflict – The Blunt Truth

12

• Banks must be able to prove provenance of the deposits or they may become liable for money laundering under federal law.

• Even though hemp was removed from the schedule 1 -controlled subtance list, industrial hemp producers are still subject to licensing and banks need to understand if they are engaging with a properly licensed business.

• Substantial costs and time are associated with filing suspicion activity reports (SARs) to mitigate risk.

• Financial institutions may suffer reputational risk if found to be doing business with a marijuana related business.

The rift between federal and state laws have left financial institutions trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action.

2014 Farm Bill

13

In February of 2014, President Obama signed the Federal Agriculture Reform and Risk Management Act of 2013into law (referred to as the 2014 Farm Bill). Section 7606, Legitimacy of Industrial Hemp Research, defined industrial hemp as distinct from marijuana and authorized institutions of higher education or state departments of agriculture in states that legalized hemp cultivation to regulate and conduct research and pilot programs.

33 states and Puerto Rico introduced pro-hemp legislation, and 24 states have defined industrial hemp as distinct from other strains of cannabis and removed barriers to its production.

No Good Alternatives

14

Due to high costs to implement AML/KYC programs and policies…

And no clear message from the federal government

Weighing the overall risks leads financial institutions to choose not to bank either marijuana or hemp proceeds

The Present

Sentiment is Changing

16

Dispensaries – Essential Services

▪ Numerous states classify marijuana as an essential commodity, allowing medical and recreational marijuana stores to remain open.

▪ Cash-based businesses are very personal with face-to-face interaction. Social distancing is being enforced in most states for consumers’ health and well-being, but this highlights the overarching impact of state vs. federal conflict. Without the ability to use credit cards it puts all persons handling cash at risk of contracting and/or spreading the virus.

17

The pandemic further highlights the need for federal and state lawmakers to come together to allow for legal banking so that banks and MRBs may protect their shared customers without risk of spreading viruses through the handling of cash.

As of August 2020

18

US states, territories, and DC

• 41 have legalized medical marijuana

• 29 have decriminalized or legalized possession

• 13 have legalized adult use

D = Decriminalized Blue = Recreational Green = Degrees of Medical Grey = Illegal

Industrial Hemp Production

19

Under the 2018 Farm Bill, hemp was removed from the Controlled Substances list and is now considered an agricultural product. This is broadening the markets for hemp derived CBD products.

More Conflict?

20

• 21 States have received approval from the USDA

or USDA will issue license

• 33 Tribes have received approval from the USDA

• 5 States are in various stages of review

• 1 State has not past legislation (Idaho)

• 23 states have said they will follow the 2014 pilot

rules during 2020 growing season and have

requested an extension of the 2014 laws through

the 2020 growing season.

If an agreement on an extension is not reached, those states operating under the 2014 licenses will be

at risk of producing hemp illegally, creating concern for banks doing business within those states .

Revenue – Industrial Hemp, Cannabis, CBD

21

2014 2015 2016 2017 2018 2019 2020 2021 2022

Development of Local Supply Chain

22

MRBs looking to diversify are choosing to build out their own supply chain, based on state licensing restrictions

Supply Chain Diversification

23

As the industry grows, so do the number of cannabis companies that are diversifying into all areas of the marijuana supply chain whether in state or across state boarders.

• Mergers & Acquisitions

• Brand Development• Globalization

Financial Institutions Serving the Underbanked

24

In the last two years, the percentage of banks actively banking (federally illegal and unregulated) marijuana related businesses (MRBs) has risen from 5% to more than 10%

Risk Mitigation Today

25

Banks are arming themselves with AML/KYC processes and policies:

▪ Know the law: know your state’s position vs. the federal government for THC, CBD and hemp businesses.

▪ Develop and maintain due diligence monitoring. Know Your Customer prior to onboarding through screening and other transactional technology automation.

▪ File SARs when doing business with any known MRB.

▪ Engage your regulators: discuss your plan with regulators.

▪ Develop a local relationship with the MRB. Visit sites to assess legitimacy.

▪ Use account analysis to establish monthly fees for heightened risk and offset increase in costs.

▪ Establish an exit plan if the federal government becomes more aggressive in targeting the banking community.

The Future – Diversification & Globalization

Globalization vs. Diversification

With the steady movement to legalize marijuana across the US and abroad, financial institutions are faced with not just the challenges that come with diversification, but the complexity of globalization.

27

Does diversification drive globalization or does globalization drive diversification?

Complexities of Diversification

28

Other companies are gearing up for the day when cannabis is as common as beer

▪ Spread risk across multiple investments

▪ Investing across the supply chain

▪ Increased profitability

Diversification – Beyond Flower

29

Even more explosive will be the expansion in CBD and hemp markets where you can already find CBD items lining shelves today. Over the next several years we will see certain brands emerge as products consolidate and gain traction in the consumer marketplace.

As cannabis use increases in acceptance and states continue to legalize, we will see a dramatic increase in the types of products that companies will offer. Below are just a few of those areas of diversification.

Local to National to Global

30

Mom & Pop Shop to

Corporate Conglomerate

31

Globalization EuropeFranceNetherlandsSpain

Latin AmericaMexico

OceaniaAustralia New Zealand

Several countries are poised to move toward legalization

Legal for any use

Legal as authorized by a physician

Illegal but decriminalized

Illegal but often unenforced

Illegal

Opportunity

32

Globalization + Diversification = Increased Risk?

33

As MRBs move to diversify and look for new markets abroad, banks are finding that monitoring and managing the different markets increases their costs as the complexities of globalization grows..

• Managing MRB Statewide• Monitoring Legislation• Tracking Global Market• Drilling into Ownership

Globalization is Closer Than You Think

With Canada fully legalized, the fast-approaching legalization of Mexico's cannabis industry and clear overseas expansion on the horizon - financial institutions need to be alerted to all global MRBs or potentally risk running afoul of US money laundering regulations.

Beyond US borders: with global coverage including Canada, Spain, Uruguay.

34

Due Diligence Tracking and Monitoring

Takeaways

35

We know the cannabis industry is here to stay and will continue to grow over the coming years. With continued misalignment of state and federal laws, the need for risk mitigation and comprehensive due diligence remains.

Whether Doing Business or Not Doing Business with MRBs Risk Based Approach

Best Practices for Financial Institutions• Adjust due diligence programs to fit risk

tolerances• Adopt stringent AML/KYC processes• Screen for MRBs and owners that “touch”

the cannabis• Track industrial hemp producers• Monitor North American legislation• Watch for global changing marijuana laws to

incorporate cross board diversification

info@rdc.com

Thank You!

Questions?