Marijuana Laws Create Compliance Quandary for U.S. Broker-Dealers
05 Nov 2019

A patchwork of state and federal laws governing the use and sale of marijuana is creating compliance challenges for U.S. firms that manage accounts for investors and trade securities for them.

Uncertainty about how to navigate the evolving legal landscape has prompted some brokerages to bar existing clients from trading securities of marijuana businesses, or even turn away prospective clients who have investments in the industry, brokers say.

Eleven U.S. states have legalized the recreational use of marijuana for adults and 22 more allow it to treat certain medical conditions with prescriptions, leading to a crop of new marijuana businesses in those states. But the use, sale or possession of marijuana is illegal under federal law in the U.S.

Canada’s legalization of recreational marijuana sales last year established the country as the leading financial market for the industry, and most cannabis stocks are listed on Canadian exchanges. U.S. investors aren’t prohibited from investing in marijuana securities, but brokerages remain reluctant to trade them while the drug remains illegal under U.S. federal law.

Brokerages also are avoiding or keeping closer tabs on investors whose income is derived from marijuana businesses—even if they are buying or selling shares of companies that have no connection to the pot industry.

U.S. financial institutions, including broker-dealers, are required to follow anti-money-laundering regulations and are forbidden from making transactions involving proceeds from federally prohibited businesses.

Some brokerages are taking a cautious interpretation of that requirement when handling marijuana-related securities and payments and when managing accounts for investors involved in the industry.

Firms worry that they might be accused of facilitating the transfer of proceeds of a crime if they deal with marijuana-related businesses, securities or clients who profit from them, said Alma Angotti, an anti-money-laundering consultant at Navigant Consulting Inc.

The firms, which are regulated by agencies such as the Securities and Exchange Commission and the Financial Industry Regulatory Authority, the self-regulatory organization for securities firms, are trying to determine how deeply they need to dig to vet new clients’ sources of income to ensure that none is derived from marijuana-related businesses, Ms. Angotti said.

For instance, a property manager in Colorado—where adults are allowed to sell and use marijuana—could be earning income from a legitimate marijuana dispensary renting space in a mall. Brokerages are trying to figure out whether such a client would create compliance issues.

By Mengqi Sun, The Wall Street Journal, 4 November 2019

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