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Is Your Cannabis Banking Audit Program Up to Snuff?

As new states pass cannabis legalization bills in increasingly rapid succession, financial institutions must take steps to ensure they are adhering to the regulatory compliance requirements for this industry.



Whether you have a cannabis banking program in place or are contemplating serving this industry, an area of critical importance often overlooked is the internal audit process.


Radhika Dholakia-Lipton, a 30-year banking industry veteran, founded the consulting firm RADD LLC to help financial institutions better mitigate risk and protect their brand’s reputation. Today, her firm specializes in internal auditing, compliance and regulatory consulting, policy and procedure development, risk management, services to support implementation of high-risk banking, and monitoring and testing of compliance systems.


RADD LLC has developed an enhanced BSA Audit program that includes cannabis-related businesses (CRBs), so I recently met with Radhika and her colleague, Frank Centofanti, a CAMS certified financial industry compliance professional, to discuss the requirements for building and implementing this type of program.



When it comes to cannabis banking, what should financial institutions do to ensure they remain compliant and pass their exams?



RADD LLC: Financial institutions should expand their current audit programs to do one of two things. If it has embarked explicitly on the strategy of banking CRBs, then that opens a whole new area of audit that must be performed because of all the federal, state, and local regulations. If it is still exploring the opportunity or has purposely decided not to have a cannabis banking program, its audit programs should still be expanded to make certain it is not unknowingly banking these businesses. All financial institutions need to perform periodic audits asking the right questions. If the bank or credit union is not familiar with the nuances of banking cannabis, it will not know what questions to ask. This blind spot can cause issues during a regulatory exam.



What are some of the biggest issues financial institutions should consider when building an audit program?



RADD LLC: There are three primary areas that financial institutions should have on their radar. First, they should understand how far-reaching cannabis banking is within the institution. For example, they might only be concerned about the BSA department, but in reality, it will also impact other departments, including IT, operations, finance, and even human resources. If the financial institution does not realize that it needs to develop an audit program that asks questions about all these departments, it will be missing quite a bit in the audit. Second, with laws and regulations continually in flux, financial institutions need to make sure someone is on top of all the rule changes and adjusts the audit program accordingly. Finally, knowledge – both at the staff and board level – is key. Financial institutions should have an in-depth knowledge about the rules and regulations for banking this industry, as well as a good understanding of the terminology and what it means.



How can technology help streamline compliance and the auditing process?



RADD LLC: Financial institutions need to create a transparent view of their business to allow auditors to look at transactions, assess the overall risk, and verify that it has followed the due diligence requirements. AML/BSA compliance monitoring solutions, like that offered by Shield Compliance, enable financial institutions to provide a high level of transparency into their cannabis banking programs. These systems are also important in terms of identifying risk and creating a process by which potential account issues can be escalated or dismissed. The better the automated monitoring system is, the better the financial institution will come out in an audit because it will not miss the types of transactions that need to be reviewed.


The November general election resulted in five states passing new cannabis legalizations measures, along with new projections that the U.S. legal cannabis market, now comprised of 35 states, could be worth more than $41 billion by 2025. We anticipate several more states will advance adult-use legalization in 2021, and Democratic control of the U.S. Senate is likely to further accelerate steps toward cannabis legalization at the federal level.



Partnering with experts who can assist with implementing compliance technologies, risk management policies, and operational processes required for banking this industry will help financial institutions create the foundation for an effective audit program and ultimately gain the financial benefits of cannabis banking.