A Comprehensive Guide to Cannabis and Compliance. By Dominic Suszek

Transcription

1 A Comprehensive Guide to Cannabis and Compliance By Dominic Suszek

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3 Foreword The growth of the cannabis industry has been well documented over the past several years, as a growing number of states continue their movements to adopt the legalized sale and usage of one of the most popular medicinal and recreational drugs in the United States. As of June 1st, 2017, Alaska, Colorado, California, Nevada, Oregon, Maine, Massachusetts, Washington, and Washington D.C. have passed legislation to legalize the drug s recreational use this in addition to 21 other states that have also legalized medical marijuana in some form. However, while many believed that the cannabis industry had the potential to be rather successful, few could have envisioned the boom that has been seen within this market over the past several years, as legal cannabis sales are set to top the $5 billion mark for the third straight year in Yet analysts believe that these margins will only continue to increase in the years to come, conceivably by as much as a whopping 30% annually. As investors and entrepreneurs who had previously been hesitant to venture into this high-risk market begin to see the potential for its high-reward, these numbers could hold steady for many years to come. Also factoring in to the historic rise of this industry are the continuous flow of new users to the marijuana market, both legal and illegal, as well as the diminishing negative stigma against the plant itself. While every successful industry must deal with distinctive pitfalls, those surrounding the marijuana industry are far more complex than others. As matters currently stand, marijuana businesses have a hard time to obtain banking services due to federal laws restricting banks and credit unions from taking marijuana funds. These limitations leave organizations within this industry some bringing in upwards of several million dollars a year to function on a cash-only basis, leaving them susceptible to frequent crime. While some local financial institutions have begun to serve operators within this industry following the recent guidance provided by the U.S. Justice Department, the risk remains high for dealing with companies operating in a drug-centered business, specifically due to its close ties to the illegal drug trade

4 and gang-related activity. With the regulatory climate governing U.S. financial institutions continues to advance, the scope of responsibilities that have fallen upon compliance departments are now greater than ever before. Compliancerelated tasks with a direct correlation to the cannabis industry would include vigilant client and transaction monitoring, as well as strict suspicious activity reporting requirements, each of which would demand a significant amount of time, money, and other resources to be performed adequately. While the benefits could be twofold for financial institutions and cannabis companies alike should there be cooperation between the two, the unknown factors surrounding such a partnership are too perilous to be ignored. This handbook, the latest in the meritorious series of comprehensive works written by author and CEO of Global RADAR, Dominic Suszek, is the premier source for information regarding the marijuana industry and all that it entails from the standpoint of those operating in the financial services sector. Suszek, an individual with over 30 years of experience operating in the financial spectrum and a pioneer in the now-thriving and essential anti-money laundering software community, conveys his banking experience in the form of industry insights and profound subject knowledge made evident from cover to cover. With unprecedented analysis of the relationship between financial service providers and the marijuana industry, Suszek travels into uncharted territory to deliver vital information and coverage of this rapidly evolving industry. Banking Marijuana is the first text of its kind to tackle a subject matter of this nature, and should be utilized as a potent tool by financial service providers to grow accustomed to an industry with the power to change banking procedures across the globe.

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6 Contents About the Author 9 About Global Radar 9 Introduction 11 Chapter 1 - Marijuana in the United States 15 Overview 15 Availability 15 State-Approved Marijuana 16 State-Approved Personal Use/Recreational Marijuana 16 State-Approved Cannabidiol (CBD) Medical Marijuana 18 Marijuana Resolutions on Native American Lands 19 Industrial Hemp 19 Increasing THC Potency of Marijuana 20 Chapter 2 - U.S. Marijuana Markets 23 Domestic Production 23

7 Transportation of Domestically-Produced Marijuana 25 Foreign Production 26 Transportation of Foreign-Produced Marijuana 26 Additional Challenges 28 Outlook 28 Chapter 3 -Federal Enforcement Guidelines 31 Department of Justice 31 Financial Crimes Enforcement Network 36 Chapter 4 -Providing Financial Services to Marijuana-Related Businesses 37 Chapter 5 -Filing Suspicious Activity Reports on Marijuana-Related Businesses 41 Chapter 6 - Currency Transaction Reports and Form Chapter 7 - Risk Factors 49 Chapter 8 - Risk Assessment 53

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9 About the Author Dominic Suszek is the founder and CEO of Global RADAR. With more than 25 years of hands-on experience in the evolving global regulatory landscape in the financial services sector, Mr. Suszek has gained invaluable knowledge of a complex and ever-changing industry that has merged technology, compliance and operations. As a senior executive involved in all aspects of operations, technology and regulatory compliance, with emphasis on cost reduction, and enhanced compliance through better data management and simplified processes, he has acquired extensive knowledge of business requirements and regulatory expectations from supervisory agencies worldwide. About Global RADAR Global RADAR is a software solution that assists all companies comply with Anti-Money Laundering and Counter Terrorism Financing (AML/CTF) Compliance and FATCA requirements. Developed by a team of compliance professionals and software engineers, Global RADAR is the first web-based compliance solution that provides a comprehensive approach to managing Customer Due Diligence, Enhanced Due Diligence, Risk Rating and Transaction Surveillance processes. For information about Global RADAR, please visit or call US AML.RISK ( ) or UK +44 (0) For complete protection for your organization wherever you are based in the world, info@globalradar.com. The contents of this booklet are intended to convey general information only and not to provide legal advice or opinions. The contents of this booklet should not be construed as, and should not be relied upon for, legal or tax advice in any circumstance or fact situation. The information presented on this booklet may not reflect the most current legal developments. Further, this website may contain technical inaccuracies or typographical errors. No action should be taken in reliance on the information contained on this booklet and we disclaim all liability in respect to actions taken or not taken based on any or all of the contents of this booklet to the fullest extent permitted by law. An attorney should be contacted for advice on specific legal issues. 9

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11 Introduction Cannabis is arguably the fastest growing industry in the world. According to the Marijuana Business Factbook for , sales of legal recreational and medical marijuana in 2016 topped those of Viagra and Cialis, paid music streaming services, tequila and other established retail products. These figures are attracting new investors and players to a market that keeps evolving every day. According to the Substance Abuse and Mental Health Services Administration, marijuana 2 is the most widely used illicit drug in the United States. For example, per the 2013 National Survey on Drug Use and Health, an estimated 44 percent of Americans aged 12 and older reported they had tried marijuana, and an estimated 7.6 percent of Americans aged 12 and older reported having used marijuana in the past month. 3 Marijuana is still a controlled substance under federal law and is classified in the most restrictive of categories of controlled substances by the federal government. The Controlled Substances Act of 1970 (CSA) 4 places all federally controlled substances in one of five schedules, depending, among other things, on the drug s likelihood for abuse or dependence, and whether the drug has an accepted medical use. Marijuana is classified under Schedule I 5, the classification reserved for drugs that have been found by the federal government to have a high potential for abuse, no currently accepted medical use in treatment in the United States, and a lack of accepted safety for use under medical supervision 6. In contrast, the other schedules are for drugs of varying addictive properties, but found by the federal government to have a currently accepted medical use. Under the United Nations Single Convention on Narcotic Drugs (1961) 7, cannabis is listed in both Schedule I and Schedule IV, and participating countries are required to maintain, at the national level, certain controls over the production, manufacture, possession, and distribution of marijuana. The CSA does not allow Schedule I drugs to be dispensed with a prescription, 11

12 unlike drugs in the other schedules. Furthermore, the CSA provides federal sanctions for possession, manufacture, distribution, dispensing, or use of Schedule I substances, including marijuana, except in the context of a government-approved research project. Despite this massive growth, many marijuana businesses still have no access to traditional banking and financial services. This drought of financial services means a bulk of the industry is still operating on a cash-only basis. Banks and other providers of financial services struggle every day with demand from an untapped market while at the same time weighing their options and challenges to comply with federal regulations. 8 This book will provide information on the status of the marijuana business; challenges and dangers to financial institutions; and indicators on the future of this activity. 12

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15 CHAPTER 1 Marijuana in the United States Overview Marijuana is the most commonly used illicit drug in the United States, with an estimated 22.2 million current users in 2014 representing 8.4 percent of the U.S. population, according to The National Survey on Drug Use and Health (NSDUH) 9. This is an increase from 7.5 percent of the population the previous year. Marijuana use rates appear to have accelerated in states with personal use marijuana laws, according to NSDUH model-based prevalence estimates. Colorado and Washington have the highest use rates from this group, and both legalized personal use marijuana in Alaska, Oregon, and Washington DC legalized personal use marijuana in 2014 and current survey data does not reflect if legalization has made an impact on use rates in these areas. Florida may be the most recent state to join the club, with legislation being passed as recently as June 2017, that the governor has said he would sign. Recent and ongoing state legalization actions and shifting priorities are changing how many law enforcement agencies perceive marijuana as a threat. While marijuana remains illegal under federal law, many states have passed laws allowing the cultivation, manufacturing, retail, possession, and use of marijuana within their respective states. Availability Marijuana is available in all areas of the United States. According to the 2016 National Drug Threat Survey 10, eighty percent of responding agencies reported that marijuana availability was high in their jurisdictions, meaning marijuana is easily obtained at any time, and sixteen percent reported that marijuana availability was moderate. In addition, sixty one percent of respondents reported that marijuana availability had stayed the same, while thirty four percent 15

16 reported that availability had increased over the past year. Twenty-nine percent of respondents reported demand for marijuana had increased, while sixty two percent reported demand had remained the same. While this is slightly higher than cocaine and significantly lower than heroin, methamphetamine and controlled prescription drugs (CPDs), it should be noted that changing state laws are more likely the driving factor in the decreasing perception of marijuana as a threat than decreases in availability or diminished criminal activity. Marijuana is widely available in the Pacific and West Central regions and many criminal organizations operate in these areas; however, most respondents do not see marijuana as their greatest drug threat State-Approved Marijuana In 1973, states started to decriminalize marijuana. As of December 2016, twenty states and Washington DC had decriminalized marijuana. Decriminalization typically means a minor penalty or fine is imposed for possession of small personal use amounts of marijuana, but there is no jail sentence. In Missouri, Nevada, North Carolina and Ohio, the possession of personal use amounts of marijuana is a misdemeanor, and a conviction will not result in jail time. Missouri s law went into effect in January Implementation of Washington s Cannabis Patient Protection Act was set to take effect in July 2016, and implementation of the California Medical Marijuana Regulation and Safety Act is set to take effect in State-Approved Personal Use/Recreational Marijuana In 2012, Washington and Colorado approved laws for personal use marijuana, often referred to as recreational or retail marijuana. In 2014, Oregon, Alaska, and Washington DC followed suit and approved personal use marijuana. These jurisdictions allow their citizens to possess smaller, user-amounts of marijuana (two ounces or less in Washington DC and one ounce or less in the four other states). Regulations regarding user-amounts of marijuana infused edibles and marijuana concentrates vary by state as well. 16

17 29 States and DC with Legal Cannabis Laws WA OR NV CA ID AZ UT MT WY CO NM ND MN SD WI NY MI IA PA NE OH IL IN WV KS MO VA KY NC TN AR OK SC MS AL GA TX AR ME VT NH MA CT NJ RI DE DC AK FL HI Medical and Adult Use (9) Medical (21) Pending Legislation 2017 No Legislation AS OF Map provided by TGunther Group LLC 17

18 These jurisdictions, except for Washington, allow their citizens to personally grow marijuana. Alaska, Colorado, and Washington DC allow for up to six plants to be grown, and Oregon allows for up to four plants to be grown. Washington DC has not approved the retail sale of marijuana for personal use. In 2016 California, Nevada, Massachusetts, and Maine all passed voter initiatives to legalize adult recreational use of marijuana. There is a notable distinction in the state laws allowing residents to grow their own recreational plants. The laws in Oregon, Alaska, and Washington DC limit that plant number per household. Colorado law allows each adult resident to grow his/her six plants. If multiple adults live in a residence, multiples of six plants can be grown. Also, the Colorado law allows residents to assist others in growing marijuana. Thus, many residential grows have numerous plants with no regulation/verification by the state. Plant size can vary drastically. State-Approved Cannabidiol (CBD) Medical Marijuana In 2014, states started passing legislation regarding marijuana that is typically referred to as Limited Access or Cannabidiol (CBD)-only medical marijuana. CBD is a cannabinoid/chemical compound of marijuana. CBD marijuana, typically ingested in the form of oils, oil-filled capsules, and tinctures, is extracted from marijuana that contains low levels of THC and high levels of CBD. Many medical marijuana advocates and parents of children with epilepsy claim CBD helps control epileptic seizures, but at this time, there is only anecdotal evidence that CBD benefits those with seizure disorders. In addition to the twenty-five states with medical marijuana laws, seventeen other states have approved legislation regarding CBD-only marijuana, which means eighty percent of states have approved some form of medical marijuana. The majority of these seventeen states passed CBD-only laws, which permit small, controlled studies to be conducted at universities in these states. Some of these states have passed legislation that does not define or provide in-state methods of access to, or production of, CBD-only marijuana. 18

19 Marijuana Resolutions on Native American Lands Since late 2014, several Native American reservations have passed resolutions allowing for both personal use and medical marijuana. In September 2015, the Washington State Liquor and Cannabis Board (WSLCB) and the Suquamish Tribe on the Kitsap Peninsula signed the nation s first state-tribal marijuana compact. The compact governs the production, processing, purchase, and sale of marijuana on the Tribe s land. The agreement was made possible by legislation enacted during the 2015 legislative session. Within two weeks, the WSLCB signed its second marijuana compact with the Squaxin Island Tribe in Shelton. Most resolutions passed are by reservations located within state borders that have already approved medical, personal use, or hemp marijuana; however, in December 2014, the L Anse Reservation, located in Michigan, passed a resolution asking tribal members if they would favor the use and sale of medical and retail marijuana, but nothing further has been approved (Michigan only has state approved medical marijuana). In June 2015, the Flandreau Indian Reservation in South Dakota voted to establish a limited liability company (LLC) for marijuana cultivation with a projected start date of October 2015; however, they burned their crops in November 2015 due to fear of federal seizure (South Dakota doesn t approve medical, personal use or hemp). Industrial Hemp A provision of the U.S. Agricultural Act of 2014, which became law in February 2014, provided allowing growth or cultivation of industrial hemp for purposes of research conducted under an agricultural pilot program or other agricultural or academic research. This Act did not amend the Federal Food, Drug, and Cosmetic Act or the Controlled Substance Act 11. The new law, codified at 7 United States Code (U.S.C.) 5940, defines industrial hemp as a cannabis plant, or any part thereof, that contains no more than 0.3 percent THC. The law further provides that, notwithstanding the CSA or any other federal law, an institution of higher education or state departments of agriculture may grow or cultivate industrial hemp for the purpose of agricultural research if such activity is 19

20 allowed under the law of the state in which such institution of higher education or state department of agriculture is located, and the growing site is certified by, and registered with, the state department of agriculture. At least twentyseven states have laws in place related to industrial hemp. Increasing THC Potency of Marijuana While laboratory testing of marijuana has not become a mandate in state programs, with the exception of Nevada, getting product tested for THC and other microbials is a must. Laboratory analysis of marijuana seizures is an increasing burden on forensic laboratories. Prior to state-legalization of marijuana, federally-approved production of hemp programs, and increasing seizures of CBD or hemp, the quantities of THC and other cannabinoids in marijuana seizures were not important for criminal cases. Now, the quantity of THC present in marijuana, including marijuana concentrates and marijuana edibles, is becoming increasingly more important as more states approve medical, CBD-only medical and industrial hemp laws. Most federal, state, and local forensic laboratories only conduct qualitative testing. Conducting quantitative analysis on marijuana edibles presents different challenges than those presented by traditional leafy marijuana or marijuana concentrates. Qualitative analysis takes approximately 30 minutes per marijuana exhibit; however, quantitative testing can range from two to six hours per marijuana exhibit, provided the laboratory has the capability to conduct the tests. 20

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23 CHAPTER 2 U.S. Marijuana Markets There are three types of marijuana markets operating in the United States: illicit markets; state-approved medical marijuana markets; and state-approved personal use/recreational markets. Federally, these three markets are the same in that they are illicit; however, these markets operate differently and should be described independently. Illicit markets are supplied by illicit domestic produced marijuana, diverted domestic state approved marijuana, and foreign-produced marijuana trafficked into the United States. Illicit domestic-produced marijuana is cultivated by various types and sizes of organizations, which range from individuals growing a limited number of plants to supplement their income to organized groups that produce large quantities of marijuana to distribute across the United States to glean more profit. State-approved marijuana is diverted to the illicit market in several ways. Some individuals or groups operate under the guise of statelegality using valid or counterfeit state-approved medical recommendations. Instead of using the marijuana they purchase, they sell some or all of their marijuana to the illicit market. Some people purchase medical or personal use marijuana, and then resell it out of state to glean profit. State-approved medical and personal use markets are supplied by a growing number of state-approved producers and retail stores. State-approved marijuana markets are changing the dynamic for law enforcement across the United States. Each state has created unique laws, and many of these laws are in flux, creating a challenging environment for law enforcement. Domestic Production Domestic production is increasing, but eradication and seizures statistics will not accurately reflect this trend as law enforcement priorities and capabilities are also changing. Five years ago, there were no state-approved personal use 23

24 marijuana sales and medical sales have only recently begun in many states. In addition, an estimate of the percentage of foreign versus domestic marijuana supplying the United States does not exist for multiple reasons: (a) consumption estimates cannot determine the source of marijuana being consumed; (b) domestic state, local, and tribal law enforcement seizure data rarely provide origination information for national scale analysis; and (c) there is no signature program to determine the geographical origin of cannabis plants for specific marijuana seizures. Marijuana can be grown both outdoors and indoors. Indoor production is more difficult for law enforcement to discover and has the advantage of not having to rely on climate conditions or growing seasons. Criminal organizations of all sizes and types are involved in illegal marijuana cultivation throughout the United States. The establishment of new state-approved marijuana markets is also impacting the supply of marijuana in the United States. Drug traffickers, including Caucasian, Cuban, Asian and Eurasian organizations, have established themselves in state-approved marijuana markets for the purpose of producing marijuana for sale on the illicit market and out-ofstate. Some of this activity takes place under the guise of states licensed industry. Increasingly, much of this activity is conducted overtly through illegal residential grows, but is largely unenforced due to the ambiguity of the law, and restraints on law enforcement. Since the legalization of personal-use marijuana, there has been an influx of not only individuals, but organized groups of individuals who have relocated to Colorado for the sole purpose of producing marijuana to transport and sell in other markets. Many of these operations involve multiple homes and some of them involve dozens of homes, purchased or rented and converted into grow sites. Many of the individuals involved in this activity are long-time drug traffickers, and are frequently armed. Local police departments have noted that these organizations are often involved in other crimes, such as credit card skimming and financial fraud. Late last year, officials in a suburban county in the Denver area reported to DEA that most of their homicides and assault crimes were in some way linked to marijuana grows. 24

25 Electricity and water consumption are increasing in some localities due to increasing domestic cultivation from both state-approved and illicit grows. A 2012 study estimated the energy consumption for indoor cannabis production is around one percent of national electricity use, or $6 billion each year 12. This study also claims that one average kilogram of final marijuana product is associated with 4,600 kilograms of carbon dioxide emissions into the atmosphere. Open source reporting shows that more than 1,200 licensed growing facilities use roughly half of Colorado s new power demands and, last year, those facilities combined to use about the same amount of energy as 35,000 households. Most marijuana growing facilities make use of powerful, environmentally unfriendly lighting systems that allow growers to churn out fresh crops year-round. In fact, the heat from the lights is often so strong that growers also need high-power air conditioning systems to keep facility temperatures at temperate levels. With no industry-wide regulators, growers have no standards for energy efficient design in their facilities, which creates unnecessary energy waste. The marijuana industry s energy consumption is only going to become a bigger problem in the coming years. There is also growing concern from local health officials and the public with regard to how pesticides affect both wildlife and humans ultimately consuming the marijuana. Pesticides are used during the production of marijuana and are typically located at domestic grow sites. State-approved marijuana regulatory bodies are grappling with how to effectively control producers use of pesticides. As marijuana remains federally illegal, the Environmental Protection Agency (EPA) has not made a recommendation for the amount of, or tolerance for, specific pesticides in marijuana products intended for human consumption. Transportation of Domestically-Produced Marijuana Transportation of Domestically-produced marijuana intra-state is regulated in most states by local and county authorities, inter-state transportation is illegal unless approved through specific federal agencies. Domesticallyproduced marijuana is often transported in personally owned vehicles, rented vehicles, semi-trucks, tractor tailors, and buses via U.S. highways. Personal and 25

26 commercial planes are also used to transport shipments of marijuana. Marijuana is often shipped via commercial parcel services like the USPS, FedEx, and UPS. Concentrated forms of marijuana allow for easier trafficking through mail services due to reduced bulk. Concentrated forms can be flattened and placed in envelopes, or can be concealed in containers of different shapes. Foreign Production Marijuana is smuggled into the United States from Mexico in large volumes, and in smaller volumes from Canada and the Caribbean. Marijuana from Mexico is typically classified as commercial-grade or low-grade marijuana. The quality of marijuana produced in Mexico and the Caribbean is thought to be inferior to the marijuana produced in the United States and Canada; however, law enforcement reporting indicates that Mexican cartels are attempting to produce higher-quality marijuana to keep up with U.S. demand for high-quality marijuana. It is important to realize that many other countries (see Figure 1) have legalized marijuana as well, like the United States some are still federally illegal but have legal laws within countries within their domain. Surprisingly you do not see the Netherlands (home to Amsterdam) as it is still illegal in the country however it is not enforced. Many countries are spending millions of dollars a year in medical research regarding the marijuana plant. Transportation of Foreign-Produced Marijuana Large quantities of foreign-produced marijuana are smuggled into the United States via personally owned vehicles, commercial vehicles, buses, subterranean tunnels, small boats, unmanned aircraft systems (UAS), and walked across by backpackers. There was a 23.6 percent decline in the total weight of marijuana seized along the Southwest Border from 2013 to 2014 and an additional 3.7 percent decline from 2014 to 2015, even with increased seizure incidents, according to the U.S. Customs and Border Protection (CBP) data. Regardless of this decline, it should be noted that marijuana seizure incidents and total 26

27 Figure 1- Provided by TGunther Group ( Colombia Netherlands South Africa India Jamaica Spain Philippines Colombia Israel Romania Turkey Australia Italy Germany France Guam Czech Republic Uruguay Macedonia Mexico Poland Chile Puerto Rico 27

28 weight are drastically larger than for cocaine, heroin, and methamphetamine combined Additional Challenges Due to varying state laws, as well as an abundance of media attention surrounding claims of possible medical benefits, the public has been introduced to contradictory and often inaccurate information regarding the legality and benefits of marijuana use. This has made enforcement and prosecution for marijuana-related offenses more difficult, especially in states that have approved marijuana legalization. State-legalization measures also have had several observable effects, including increases in marijuana use, increases in domestically-produced marijuana, shifts in demand for higher-quality marijuana, increases in seizures of marijuana concentrates, increases in the number of THC extraction laboratories, and declines in the overall amount of Mexico-sourced marijuana seized at the Southwest Border. With recent marijuana legalization actions, some Asian criminal organizations are overtly operating their marijuana grows and adhering to local regulations under the guise of supplying marijuana dispensaries. The resulting marijuana is instead illegally diverted to the Midwest and East Coast, where it is much more profitable on the black market. Outlook Domestic use of marijuana will remain high and is likely to increase. Domestic production and trafficking of marijuana will likely increase as more states adopt relaxed marijuana laws. Individuals and criminal organizations will exploit state-legality in these localities to produce and traffic their product to the illicit market, particularly to states without state-approved marijuana. Mexicoproduced marijuana will continue to be trafficked into the United States in bulk quantities and will likely increase in quality to compete with domesticallyproduced marijuana. 28

29 Fragmented and developing medical and personal use laws among the states will continue to create uncertainty and increasingly complex issues for the public, law enforcement, banking systems, and medical professionals. Marijuana will remain a part of domestic and international political discussions for the foreseeable future.

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31 CHAPTER 3 Federal Enforcement Guidelines Department of Justice As previously indicated, the federal government continues to make clear that marijuana remains an illegal drug under the Controlled Substances Act (CSA) and that federal prosecutors will continue to aggressively enforce this statute. The federal posture also specifies that no state law can go over federal legislation. The Department of Justice (DOJ) is responsible for enforcing the CSA and developing policies and strategies to do so. Within DOJ, two components have primary responsibility for enforcing the CSA. The Drug Enforcement Agency (DEA) is the primary federal law enforcement agency responsible for conducting criminal investigations of potential violations of the CSA. In addition, U.S. Attorneys are the chief federal law enforcement officers in federal judicial districts responsible for, among other things, prosecution of criminal cases brought by the federal government and prosecution of civil cases in which the United States is a party. As part of their marijuana enforcement efforts, DEA and the U.S. Attorneys collaborate, often with state and local law enforcement, to conduct criminal investigations and prosecutions, civil and criminal forfeiture, seizures, and eradications of cannabis plants. In October 2009 (Ogden Memo 13 ) and June 2011 (Cole Memo 14 ) the Department of Justice (DOJ) issued guidance to federal prosecutors concerning marijuana enforcement under the CSA. This guidance was updated in August 2013 (Cole Memo Update 15 ) in light of state ballot initiatives that legalized under state laws the possession of small amounts of marijuana and provided for the regulation of marijuana production, processing and sale. The guidance issued by the DOJ applies to all federal enforcement activity, including civil enforcement and criminal investigations and prosecutions, concerning marijuana in all states. The federal government policy, as directed by the DOJ, indicates that marijuana 31

32 is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs and cartels. The DOJ guidance published in identified eight (8) enforcement areas that federal prosecutors should prioritize when dealing with these cases: Prevent distribution of marijuana to minors Prevent marijuana revenue from funding criminal enterprises, gangs or cartels Prevent marijuana from moving out of states where it is legal Prevent use of state-legal marijuana sales as a cover for illegal activity Prevent violence and use of firearms in growing or distributing marijuana Prevent drugged driving or exacerbation of other adverse public health consequences associated with marijuana use Prevent growing marijuana on public lands Prevent marijuana possession or use on federal property These are the same enforcement priorities that have traditionally driven the DOJ s efforts in this area. The guidance described examples of circumstances where the federal government may seek to challenge the regulatory system implemented by a state to control the production, processing, and sale of marijuana because it was likely to threaten federal enforcement priorities. DOJ indicated that the guidance rested on its expectation that states and local governments that have legalized marijuana would implement strong and effective regulatory and enforcement systems to address the threat that those state laws could pose to these priorities. The DOJ guidance 17 was updated on February 2014 to provide additional resources regarding financial crimes involving marijuana. The updated guidance was published to specifically address what, if any, impact it would have on certain financial crimes for which marijuana-related conduct is a predicate. According to the updated guidance, the provisions of the money laundering 32

33 statutes, the unlicensed money remitter statute, and the Bank Secrecy Act (BSA) remain in effect with respect to marijuana-related conduct. Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the money laundering statutes 18, the unlicensed money transmitter statute 19 and the BSA. Sections 1956 and 1957 of Title 18 make it a criminal offense to engage in certain financial and monetary transactions with the proceeds of a specified unlawful activity, including proceeds from marijuana-related violations of the CSA. Transactions by or through a money transmitting business involving funds derived from marijuana-related conduct can also serve as a predicate for prosecution under 18 U.S.C Additionally, financial institutions that conduct transactions with money generated by marijuana-related conduct could face criminal liability under the BSA for, among other things, failing to identify or report financial transactions that involved the proceeds of marijuana-related violations of the CSA 20. Notably for these purposes, prosecution under these offenses based on transactions involving marijuana proceeds does not require an underlying marijuana-related conviction under federal or state law. As noted in the 2013 guidance, the DOJ was committed to using its limited investigative and prosecutorial resources to address the most significant marijuana-related cases in an effective and consistent way. Investigations and prosecutions of the offenses enumerated above based upon marijuana-related activity were subject to the same consideration and prioritization. Therefore, in determining whether to charge individuals or institutions with any of these offenses based on marijuana-related violations of the CSA, prosecutors were to apply the eight enforcement priorities described above. For example, if a financial institution or individual provides banking services to a marijuanarelated business knowing that the business is diverting marijuana from a state where marijuana sales are regulated to ones where such sales are illegal under state law, or is being used by a criminal organization to conduct financial transactions for its criminal goals, such as the concealment of funds derived from other illegal activity or the use of marijuana proceeds to support other illegal activity, prosecution for violations of 18 U.S.C. 1956, 1957, 1960 or the 33

34 BSA might be appropriate. Similarly, if the financial institution or individual is willfully blind to such activity by, for example, failing to conduct appropriate due diligence of the customers activities, such prosecution might be appropriate. Conversely, if a financial institution or individual offers services to a marijuanarelated business whose activities do not implicate any of the eight priority factors, prosecution for these offenses may not be appropriate. The 2013 guidance rested on the expectation that states that have enacted laws authorizing marijuana-related conduct will implement clear, strong and effective regulatory and enforcement systems in order to minimize the threat posed to federal enforcement priorities. Consequently, financial institutions and individuals choosing to service marijuana-related businesses that are not compliant with such state regulatory and enforcement systems, or that operate in states lacking a clear and robust regulatory scheme, are more likely to risk entanglement with conduct that implicates the eight federal enforcement priorities 21. In addition, because financial institutions are in a position to facilitate transactions by marijuana-related businesses that could implicate one or more of the priority factors, the 2014 guidance requires that financial institutions must continue to apply appropriate risk-based anti-money laundering policies, procedures, and controls sufficient to address the risks posed by these customers, including by conducting customer due diligence designed to identify conduct that relates to any of the eight priority factors. Moreover, as the Department s and Financial Crimes Enforcement Network s (FinCEN) guidance are designed to complement each other, it is essential that financial institutions adhere to FinCEN s guidance 22. As with the DOJ s previous statements on this subject, this guidance is intended solely as a guide to the exercise of investigative and prosecutorial discretion. This memorandum does not alter in any way the DOJ s authority to enforce federal law, including federal laws relating to marijuana, regardless of state law. Neither this guidance nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA, the money laundering and unlicensed money transmitter statutes, or the BSA, including the obligation of financial institutions to conduct customer 34

35 due diligence. Even in jurisdictions with strong and effective regulatory systems, evidence that particular conduct of a person or entity threatens federal priorities will subject that person or entity to federal enforcement action, based on the circumstances. Financial Crimes Enforcement Network The Financial Crimes Enforcement Network (FinCEN) issued guidance on February 2014 to clarify the Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services to marijuana-related businesses. FinCEN issued this guidance in light of state initiatives to legalize certain marijuanarelated activity and related guidance by the U.S. Department of Justice ( DOJ ) concerning marijuana-related enforcement priorities. This FinCEN guidance tried to clarify how financial institutions can provide services to marijuanarelated businesses consistent with their BSA obligations, and align the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. FinCEN s enforcement priorities in connection with this guidance would focus on matters of systemic or significant failures, and not isolated lapses in technical compliance. According to the press release, this FinCEN guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses. The jury is still out on this expectation. The main challenge for financial institutions is the ability to monitor legal marijuana companies and their adherence to the guidelines stated in the guidance document. 35

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37 CHAPTER 4 Providing Financial Services The FinCEN guidance clarified how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations. In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution. These factors may include its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment. According to FinCEN, when assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes: (a) verifying with the appropriate state authorities whether the business is duly licensed and registered; (b) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (c) requesting from state licensing and enforcement authorities available information about the business and related parties; (d) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (e) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (f) additional monitoring for suspicious activity, including any of the red flags described in this guidance; and (g) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained about such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available. 37

38 As part of its customer due diligence, a financial institution should consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a marijuana-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement s priorities. A financial institution that decides to provide financial services to a marijuana-related business would be required to file suspicious activity reports (SARs) as described below. 38

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41 CHAPTER 5 Filing Suspicious Activity Reports The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. A financial institution is required to file a SAR if, consistent with FinCEN regulations, the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA, or (iii) lacks a business or apparent lawful purpose 24. Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN s suspicious activity reporting requirements and related thresholds. One of the BSA s purposes is to require financial institutions to file reports that are highly useful in criminal investigations and proceedings. FinCEN has indicated that the guidance below furthers this objective by assisting financial institutions in determining how to file a SAR that facilitates law enforcement s access to information pertinent to a priority. Marijuana Limited SAR Filings A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a Marijuana Limited SAR. The content of this SAR should be limited to the following information: (a) identifying information of the subject and related parties; (b) addresses of the subject and related parties; (c) the fact that the 41

42 filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (d) the fact that no additional suspicious activity has been identified. Financial institutions should use the term MARIJUANA LIMITED in the narrative section. A financial institution should follow FinCEN s existing guidance on the timing of filing continuing activity reports for the same activity initially reported on a Marijuana Limited SAR. The continuing activity report may contain the same limited content as the initial SAR, plus details about the amount of deposits, withdrawals, and transfers in the account since the last SAR. However, if, in the course of conducting customer due diligence (including ongoing monitoring for red flags), the financial institution detects changes in activity that potentially implicate one of the Cole Memo priorities or violate state law, the financial institution should file a Marijuana Priority SAR. Marijuana Priority SAR Filings A financial institution filing a SAR on a marijuana-related business that it reasonably believes, based on its customer due diligence, implicates one of the Cole Memo priorities or violates state law should file a Marijuana Priority SAR. The content of this SAR should include comprehensive detail in accordance with existing regulations and guidance. Details particularly relevant to law enforcement in this context include (a) identifying information of the subject and related parties; (b) addresses of the subject and related parties; (c) details regarding the enforcement priorities the financial institution believes have been implicated; and (d) dates, amounts, and other relevant details of financial transactions involved in the suspicious activity. Financial institutions should use the term MARIJUANA PRIORITY in the narrative section to help law enforcement distinguish these SARs. FinCEN recognizes that a financial institution filing a SAR on a marijuanarelated business may not always be well-positioned to determine whether the business implicates one of the Cole Memo priorities or violates state law, and 42

43 thus which terms would be most appropriate to include (i.e., Marijuana Limited or Marijuana Priority ). For example, a financial institution could be providing services to another domestic financial institution that, in turn, provides financial services to a marijuana-related business. Similarly, a financial institution could be providing services to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between Marijuana Limited and Marijuana Priority. Whether the financial institution decides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances. In making this decision, the institution should consider the Cole Memo priorities, to the extent applicable. FinCEN released the Marijuana Banking Update 25 in March Marijuana Termination SAR Filings If a financial institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program, FinCEN notes that the financial institution should file a SAR and note in the narrative the basis for the termination. Financial institutions should use the term MARIJUANA TERMINATION in the narrative section. To the extent the financial institution becomes aware that the marijuanarelated business seeks to move to a second financial institution, FinCEN urges the first institution to use Section 314(b) voluntary information sharing (if it qualifies) to alert the second financial institution of potential illegal activity 26. Red Flags to Distinguish Priority SARs As part of its guidance, FinCEN also provided examples of situations or red flags that financial institutions should consider when assessing a customer 43

44 relationship and transactional activity. The following red flags may be indicative that a marijuana-related business may be engaged in activity that implicates one of the Cole Memo priorities or violates state law. These red flags indicate only possible signs of such activity, and also do not constitute an exhaustive list. It is thus important to view any red flag(s) in the context of other indicators and facts, such as the financial institution s knowledge about the underlying parties obtained through its customer due diligence. Further, the presence of any of these red flags in a given transaction or business arrangement may indicate a need for additional due diligence, which could include seeking information from other involved financial institutions under Section 314(b). These red flags are based primarily upon schemes and typologies described in SARs or identified by our law enforcement and regulatory partners, and may be updated in future guidance. A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law. Relevant indicia could include: The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates. The business receives substantially more revenue than its local competitors or than might be expected given the population demographics. The business is depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for federal and state tax purposes. The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law, as opposed to revenue derived from (i) the sale of other illicit drugs, (ii) the sale of marijuana not in compliance with state law, or (iii) other illegal activity. The business makes cash deposits or withdrawals over a short period of time that are excessive relative to local competitors or 44

45 the expected activity of the business. Deposits apparently structured to avoid Currency Transaction Report ( CTR ) requirements. Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals. Deposits by third parties with no apparent connection to the accountholder. Excessive commingling of funds with the personal account of the business s owner(s) or manager(s), or with accounts of seemingly unrelated businesses. Individuals conducting transactions for the business appear to be acting on behalf of other, undisclosed parties of interest. Financial statements provided by the business to the financial institution are inconsistent with actual account activity. A surge in activity by third parties offering goods or services to marijuana-related businesses, such as equipment suppliers or shipping servicers. The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law. The business is unable to demonstrate the legitimate source of significant outside investments. A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a consulting, holding, or management company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana. Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity. The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws 45

46 or regulations. A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries. The owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located. A marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property. A marijuana-related business s proximity to a school is not compliant with state law. A marijuana-related business purporting to be a non-profit is engaged in commercial activity inconsistent with that classification, or is making excessive payments to its manager(s) or employee(s). 46

47 CHAPTER 6 Currency Transaction Reports and Form 8300 s Financial institutions and other persons subject to FinCEN s regulations must report currency transactions in connection with marijuana-related businesses the same as they would in any other context, consistent with existing regulations and with the same thresholds that apply. For example, banks and money services businesses would need to file CTRs on the receipt or withdrawal by any person of more than $10,000 in cash per day. Similarly, any person or entity engaged in a non-financial trade or business would need to report transactions in which they receive more than $10,000 in cash and other monetary instruments for the purchase of goods or services on FinCEN Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). A business engaged in marijuana-related activity may not be treated as a non-listed business under 31 C.F.R (e)(8), and therefore, is not eligible for consideration for an exemption with respect to a bank s CTR obligations under 31 C.F.R (b)(6). 47

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49 CHAPTER 7 Risk Factors The current regulatory setting for marijuana-related businesses makes it extremely difficult for financial institutions to address their compliance requirements. As previously noted, the marijuana business involves multiple parties that perform supplementary services not necessarily addressed in the state laws but covered by stringent federal regulations. For example, a state licensed marijuana business may use a private courier to distribute its products. The courier is not in the marijuana business but the income received from these services may subject the courier to federal enforcement. By the same token, the landlord of the marijuana business may be subject to forfeiture of its property if its lessor is indicted under federal law. Some trends that are anticipated for the marijuana business market that may affect a financial institution risk assessment include: Industry Consolidation and Brand Emergence: Due to legal and financial risks associated with cannabis being illegal at the federal level, many state-legal pot businesses have been able to successfully operate at smaller scales for some time. But as deep-pocketed investors enter the legal pot landscape and competition grows, smaller operations are more likely to merge or fold into larger companies. As the investment community becomes increasingly eager to finance cannabis brands, the market will grow at a faster pace and will likely see national brand leaders begin to emerge. This consolidation presents new risks for financial institutions as a customer may be an investor in one of these businesses; customers may have other financial arrangements with businesses in other states or jurisdictions; and/or companies may invest in these new markets under new subsidiaries. 49

50 Ancillary Business Boom: As the legal cannabis market expands in 2017, so too will the market for ancillary products and services. In fact, the growth of businesses that deal with cannabis industry and consumer needs, but don t necessarily touch the plant, may surge far past that of cannabis proper. For example, cannabis-related businesses may need farmers, private security, courier, custom lighting and temperature rooms. Other ancillary businesses that are popping around include special hotels, restaurants and lounges where customers can use these products 27. Ancillary cannabis startups are popping up across America mainly for two reasons: (a) they re generally less risky than growing and distributing pot from a legal standpoint; and (b) traditional businesses, such as banks, still don t want to touch those who directly touch the controversial plant New Types of Frauds: The Securities Exchange Commission (SEC) has seen an increase in the number of investor complaints regarding marijuana-related investments. The SEC has issued temporary trading suspensions for the common stock of different companies that claim their operations relate to the marijuana industry. The SEC suspended trading in these companies because of questions regarding the accuracy of publicly-available information about these companies operations. Some of the trading suspensions were also based on potential illegal activity (unlawful sales of securities and market manipulation). 28 Fraudsters often exploit the latest innovation, technology, and product or growth industry in this case, marijuana to lure investors with the promise of high returns. Also, for marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company s management, products, services, and finances. When publicly-available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors. 50

51 Impact on Local Governments: The revenue from these businesses is bringing tax revenue to local jurisdictions tax offices, usually in large cash payments. The risks associated with the unexpected and sometime continuous large influx of cash is a matter that government entities and financial institutions need to address. So, for financial institutions, it is not a matter of deciding whether to service the marijuana business segment; it is a matter of how much risk the institution is willing to accept as part of doing business. Any decision to service this market should be thoroughly consulted with the institution s legal counsel. In addition, federal regulatory agencies have indicated that this decision should also be consulted with the institution s regulatory examiners. 51

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53 CHAPTER 8 Risk Assessment The following recommendations should be considered when deciding whether to provide financial services to this business segment: Determine the legal, reputational, compliance, financial and geographical risks associated with this business segment. Determine whether the financial institution s geographic market(s) is located in any of the jurisdictions that currently permit some form of marijuana business and what are the requirements for these businesses. Determine if the financial institution has the necessary resources and infrastructure to ensure that all applicable requirements for these businesses is tracked and keep updated in the institution s records. Determine the availability of public information and independent verification of licenses granted and their status. The available information should consider how the institution will be notified if an investigation has been initiated, a license has not been renewed or has been revoked. Determine how the financial institution will constantly ensure that the customer complies with the federal enforcement priorities detailed in the Cole Memo. Determine the extent of supporting documentation, due diligence and enhanced measures are to be taken to address these customer relationships. Determine whether current or new customers present a risk of being involved in providing ancillary or supplemental services to marijuana 53

54 businesses. This analysis should include payment processors like credit/ debit card companies. Determine whether the current policies and procedures are appropriate for the increased risk presented by these customers. Any decision to service this business segment should be documented in the Board Minutes, and policies and procedures updated as necessary. Additional specialized training may also be necessary to the institution s personnel. Determine whether current monitoring systems may be sufficient or strong enough to capture this activity or if additional investments will be needed to address this business segment. 54

55 1 The report could be accessed on this website: 2 Marijuana refers to the dried leaves, flowers, stems, and seeds from the cannabis plant, which contains the psychoactive or mind-altering chemical delta-9-tetrahydrocannabinol (THC), as well as other related compounds. Marijuana can be smoked or consumed in food or drinks, such as marijuana-infused brownies, cookies, peanut butter, candy and soda. 3 Funded by the Substance Abuse and Mental Health Services Administration, the National Survey on Drug Use and Health provides information on the use of illicit drugs, alcohol, and tobacco among noninstitutionalized Americans aged 12 and older U.S.C. 801 et seq 5 21 U.S.C. 812(c), Schedule I (c)(10) 6 21 U.S.C. 812(b)(1) U.S.C. 823(f), 841, See USDA Statement of Principles on Industrial Hemp, 81 FR This guidance is also known as the Cole Memo U.S.C and U.S.C See, e.g., 31 U.S.C. 5318(g) 17 For example, financial institutions should recognize that a marijuana-related business operating in a state that has not legalized marijuana would likely result in the proceeds going to a criminal organization. 18 Under FinCEN s guidance, for instance, a marijuana-related business that is not appropriately licensed or is operating in violation of state law presents red flags that would justify the filing of a Marijuana Priority SAR See, e.g., 31 CFR Financial institutions shall file with FinCEN, to the extent and in the manner required, a report of any suspicious transaction relevant to a possible violation of law or regulation. A financial institution may also file with FinCEN a SAR with respect to any suspicious transaction that it believes is relevant to the possible violation of any law or regulation but whose reporting is not required by FinCEN regulations. 21 See Section 314(b) Fact Sheet for more information. The Information Sharing Between Financial Institutions: Section 314(b) Fact Sheet is available at 22 Most recently, California s insurance commissioner is calling on insurance companies to provide coverage to cannabis firms in the state. ( 23 The SEC website has additional information on suspended companies (

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