Enhancing the Enhanced Customer Due Diligence

Enhancing the enhanced customer due diligence


Most bankers are remarkably familiar with customer due diligence; however, banks that allow higher-risk customers (casinos, jewelers, MSBs, etc.) are familiar with enhanced customer due diligence. Furthermore, banks that have successfully implemented a cannabis banking program understand that there is an ENHANCED, enhanced customer due diligence.

An integral part of knowing your cannabis customer is knowing the industry and knowing the regulatory and legislative outlook regarding the industry.


The FDIC and FFEIC on Due Diligence

Currently, there is no mandate from Congress allowing for federal safe banking guidance for the cannabis industry. However, there is some guidance from FinCEN and the FFEIC BSA/AML manual defines customer due diligence and enhanced due diligence.

Recently, FDIC’s Chairwoman McWilliams has been quoted to say that that she thought bankers would be “OK” with regulators if they conduct due diligence that ensures licensed entities comply with state regulations and follow the 2014 FinCEN guidelines, including the filing of suspicious activity reports (SARs).



In March of 2019, NCUA Chairman Hood stated that credit unions would not be sanctioned for providing financial services to cannabis related businesses in an interview with Credit Union Times.

In 2019, the NAFCU released a fifteen page “Marijuana Banking” brief which provides a legislative outlook and regulatory landscape including the NCUA, Treasury, SBA, USDA and the FDA. The NAFCU also released a few FAQs for credit unions on banking marijuana related businesses. This document addresses the costs associated with banking cannabis related businesses. It considers compliance costs, legal costs, educational costs, logistical costs and reputational costs.



In FinCEN guidance FIN-2014-G001, financial institutions are reminded that, “…the decision to open, close, or refuse any particular account or relationship should be made by each financial institution…” and “Thorough customer due diligence is a critical aspect of making this assessment.” This guidance also goes on to list seven essential steps in the due diligence process and lists eleven red flags, but it also states that this list is not, …”an exhaustive list.” So outside of the eleven red flags provided by FinCEN how would a financial institution know if their cannabis customer is violating local, state or federal laws or implicating one of the Cole Memo priorities? The answer is in knowing your customer along the local, state and federal laws.

On July 22, 2019, a joint statement was released titled Risk-Focused Bank Secrecy Act/Ant-Money Laundering Supervision. This statement reminds financial institutions that, “As federal banking agencies have previously stated, banks are encourage to manage customer relationships and mitigate risks based on customer relationships rather than declining to provide banking services to entire categories of customers.”

I should also mention that a financial institution isn’t just responsible for conducting EDD on the primary owners of their cannabis related businesses, they also need to know all beneficial owners and key management.

Recently, FinCEN released a few FAQs regarding customer due diligence and they also release a quarterly Marijuana Banking Update.


What About Hemp?

Industrial hemp may have been made federally legal (removed from the Controlled Substance Act) by the 2018 Farm Bill; however, not every State has allowed for legal industrial hemp (although this is rapidly changing). It’s important to know your State’s specific plan.

There is some helpful guidance for banking industrial hemp customers. In December of 2019, there was a joint statement released titled Providing Financial Services to Customers Engaged in Hemp-Related Businesses, and on June 29, 2020, FinCEN release additional guidance regarding due diligence requirements under BSA for hemp related business customers. And recently, the USDA released guidance on servicing direct and guaranteed loans with hemp producers.

In June of this year, the NCUA released interim guidance regarding the hemp industry, and in August of 2019, the NCUA released guidance on servicing hemp businesses, but it has not released specific guidance for marijuana businesses.

It is important to note that although industrial hemp is federally legal, these customers are still considered high-risk, and therefore, the customer due diligence must still be enhanced. Here is a link to my blog to learn more about hemp.



The Conference of State Bank Supervisors provides an up to date insight in their living Cannabis Job Aid. This encompassing document provides a hemp job aid, marijuana job aid, state by state cannabis policies, territory cannabis policies, Indian Tribe hemp status, and reference documents.

This is a great resource for the implementation of a cannabis banking program and for ongoing monitoring. The CSBS also references several documents already mentioned is this article along with the FFIEC’s BSA/AML Examination Manual, which defines and outlines enhanced customer due diligence.


Let’s Not Forget About the Cole Memo

And with most guidance, the eight Cole Memo priorities are typically included. Even though it has been rescinded, FinCEN guidance FIN-2014-G001 has not been rescinded and it defines these priorities.

Ensuring that a cannabis related business is not implicating any of the Cole Memo priorities is an integral part of the initial and ongoing customer due diligence.


California’s Department of Business Oversight

HDCS’s clients are not just in California; however, this report released in October of last year gives some insight not only on enhanced customer due diligence but on cannabis banking programs in general.


Enhanced Customer Due Diligence starts with Knowing Your Customer

In a cannabis banking program, cannabis related businesses must provide full transparency. There is no privacy in cannabis banking, there must be full disclosure. The bank’s personnel must know the owners, beneficial owners, managers, employees, and typical day-to-day operations and how those daily operations compare to similar businesses. How does the BSA officer obtain this information?

It starts with a thorough site visit audit. A site visit audit is the cornerstone of proper enhanced due diligence within a financial institution’s cannabis banking program. You must familiarize yourself with local cannabis laws. Is this customer in hemp or marijuana? Is this customer a cultivator? A producer? A microbusiness? A dispensary? A testing facility? Is this a vertically integrated company? Each type of business has its own specific regulations that it must comply with to maintain a license, to maintain a legal status.

Once you know the laws for each specific business, you will need to create a checklist. Some items can be checked off before you even walk onto the property. Some information should be located through the local cannabis regulatory website before your site visit. You should also determine how often you and your staff will conduct these audits.

Once you have gathered everything via internet, it is time to visit your potential new customer. And bring your camera, regulators love pictures.


Labor Intensive and Expensive? We Have an Affordable Solution.

“Risk comes from not knowing what you are doing.” ~ Warren Buffett


At HDCS, one of the many things that separates us from our competitors is that we have an affordable solution for vetting your cannabis customers created by bankers for bankers.

We already know the local and state laws and guidance.

We have created thorough Site Visit Audits that you and your team can utilize.

We also have training programs for you and your staff along with training for the cannabis related business.

We would be happy to meet with you to understand your objectives and risk appetite and share our view of the best practices involved in establishing a safe and profitable cannabis banking program. Use this link to schedule a video conference at a time that is convenient for you and your team, or email me directly at b.postar@hdcompliance.com. Let us give you a tour of our data portal and demonstrate what a risk-focused and profitable cannabis banking program could look like for your financial institution.


Becky Postar
HDCS, Inc. / Director of Product and Business Development

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