Understanding FinTech and Trade Based Money Laundering in the Cannabis Space
By Kirk Barry, Clarion Compliance
Current solutions in the FinTech arena are merely minimally effective in identifying money laundering situations in the marijuana, CBD, and hemp space. A disruptive approach must be an early identifier to avoid the problems associated with discovering a long-standing money laundering client. Solutions that monitor the POS are easily worked around for the determined trade-based money laundering (TBML) actor. Effective SaaS solutions will both detect and monitor using AI, coupled with an inspection service to address self-reporting problems.
Current SaaS monitors the transaction at the point of sale and likely compares that to periodic financial information from the client. Although this approach is “typical,” it is not effective. Al Capone used legitimate businesses as a front to launder his money. Your solution must reach back behind the point of sale to identify TBML tactics. Today’s TBML actor is sophisticated enough to know you monitor transactions. They scrub their transactions and make sure their books match their transactional history. I see solution providers build a purported “better transactional monitoring solution,” but, this approach fails. You must understand the problem before you can design a system to address it. Don’t accel at defining TBML or anti-money laundering, rather know exactly “what” is happening. Only then can you build an effective solution that both identifies and deters.
Here are a couple of examples of TBML tactics in the marijuana dispensary business and its suppliers. Dispensary owners purchase some of their products on the black market through unlicensed suppliers. The dispensary under-reports its purchase and sells that product to the customer, or in some vertical cases, buys on the black market and over reports its harvest data. The POS transaction will be reported correctly, and the company’s financial statements match the POS data. The TBML actor has successfully laundered its money while your solution was in place. Your SaaS monitors the transaction information, and it all matches. Your bank is satisfied. You built and sold a product, not a solution. You delivered what is typical in the industry, not what identifies TBML and protects the buyer of your SaaS.
It is necessary to understand the various schemes that occur in the cannabis space. These schemes differ from state to state and country to country. Having cannabis TBML experts in your wheelhouse is critical to a best in class solution that will solve actual problems and maintain its relevancy in the marketplace. Focus your solution on the black market, diversion, TBML, product-based laundering schemes, fraud, counterfeit, and legacy cash issues. Be willing to admit those areas where your solution is less than effective and needs augmenting or a different approach. Slick marketing alone will not stand up against a good argument from your competition regarding a “less than” solution. Take a hard look at the TBML process. Being able to identify diversion activities before the POS is critical to a best in class solution.