FINTRAC Issues Operational Alert Regarding Money Laundering From Illicit Cannabis Operations –

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On September 28, 2022, the Financial Transactions and Reports Analysis Center of Canada (“FINTRAC“), released its latest Operational Alert for Laundering of Proceeds from Illicit Cannabis (“Operational Alert“). The purpose of the Operational Alert is to support entities that report to FINTRAC in better identifying and reporting financial transactions related to the laundering of proceeds from illicit cannabis activities.

Background

The Cannabis Act, which came into force in October 2018, legalized and regulated the production, distribution, sale, and possession of cannabis across the country. Yet, 37% of respondents to the 2021 Canadian Cannabis Survey disclosed that some or all of their cannabis was purchased from illegal sources. Only federal cannabis license holders are permitted to grow cannabis for sale in order to ensure that all legal cannabis products satisfy the safety and quality control requirements of the Act.

The Operational Alert addresses a number of key characteristics of money laundering from illicit cannabis sales that are relevant to FINTRAC-regulated entities, and emphasizes the importance of having proper KYC procedures in place.

1. General Money Laundering Indicators

The following money laundering (“ML“) indicators related to illicit cannabis activities reflect the types and patterns of suspicious transactions.

(a) E-commerce Front Companies

E-commerce front companies span a wide range of industries, including beauty and wellness, food and beverage wholesalers, automotive, electronic repairs, marketing, advertising and consulting, and construction. The key characteristics of e-commerce front companies include:

  • little to no business-related transactions in the accounts;
  • ownership of the front companies by suspected distributors and producers, their associates, and other members of their networks;
  • multiple members of the network owning more than one business; and
  • funds being transferred between these businesses and personal accounts with no clear purpose.

(b) ML through Virtual Currencies

FINTRAC observed that some ML methods included the use of virtual currencies (“VC’s“). This may take the form of VC dealers transferring funds into bank accounts and referencing terms such as “weed” and “pot”. The funds are then rapidly depleted from bank accounts to various VC dealers.

(c) Use of Nominees

Suspicious activities may involve the use of a nominee, which is a party that is authorized to open accounts and conduct transactions on behalf of a person or entity. The nominee may receive funds to their bank accounts from businesses or individuals suspected of operating an online dispensary. The nominee then transfers the funds to a personal account held by the signing authority of the entity, or uses a joint account with individuals engaged in illicit cannabis sales.

(d) Account Closure and Reopening at Another Financial Institution

Within a short period of time following a business account closure, a new account is opened or used at a different financial institution. Once the account is closed, a seemingly unrelated third-party individual begins receiving email money transfers (“EMT’s“) with the same unlicensed dispensary name or email.

2. Online Unlicensed Dispensaries

Certain suspicious transactional activity is consistent with the online sale and distribution of illicit cannabis operations:

  • Excessive volumes of incoming EMTs from unrelated third parties (suspected retail purchasers) constitute the main deposit activity into personal or business accounts;
  • Excessive purchases at packaging and mail service businesses to facilitate the shipment of packaged product to clients;
  • Remittance information referring to “weed” or “pot” and/or an unregistered online dispensary, often containing a series of numbers consistent with an order;
  • Customers send EMTs to the attention of various business email addresses or phone numbers that are subsequently accepted into their bank account to which a different email address and/or phone number is associated; and
  • Networks of numbered companies operating suspected pass-through accounts for an unlicensed dispensaries may be identified by shared EMT contact information and linked financial flows (despite being listed in different industries), as well as the age/status of the authorized signatories, who are often younger individuals with listed occupations as students, employed in the service/entertainment industries, or unemployed.

3. Cultivation, Processing and Preparation of Illicit Cannabis

Some of the following are key red flags in identifying ML for purposes of producing illicit cannabis:

  • Excessive and atypical utility bills such that the bill is above the expected amount given the client’s occupation and address:
  • Cash payments to satisfy utility bills;
  • Multiple individuals making payments into one hydro account;
  • Large purchases made to businesses selling goods known to be used by the cannabis industry (ie garden, hardware, and lighting stores); and
  • Large purchases towards candy or kitchen stores (potentially indicating the production of illicit cannabis edible goods).

4. How to Implement the Operational Alert and Determine When to Report Transactions to FINTRAC?

Reporting entities must have reasonable grounds to suspect that a transaction, or attempted transaction, is related to the commission or attempted commission of ML illicit cannabis sales before submitting a suspicious transaction report to FINTRAC. To make this determination, entities must consider the facts, context, and specific ML indicators of a given transaction. Indicators should not be treated in isolation, but rather combined with KYC information to better understand the context.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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