Anti-Money Laundering Compliance Update: FinCEN Issues Guidance For Financial Institutions Providing Services To Marijuana-Related Businesses

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On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued its guidance “BSA Expectations Regarding Marijuana-Related Businesses” in an effort to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses. The guidance was issued in response to the growing number of states which have legalized the use of marijuana (recreational and/or medicinal) recent Department of Justice statements regarding marijuana enforcement priorities, and the uncertainty financial institutions in the United States face in providing financial services to this burgeoning industry.

Introduction

As we have previously reported, despite the growing number of States that have sanctioned the use of marijuana in various forms, the federal government has continued its efforts to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, here, here, and here.). In addition to direct criminal prosecution for drug trafficking, dispensaries face additional legal barriers which make operation difficult. One such barrier dispensaries face is finding banks, credit card companies, and payment processors to process the proceeds of marijuana sales. As we have previously explained, because the sale of marijuana remains prohibited under federal law, banks are placed in a position where they would be required to report any banking transactions involving proceeds from marijuana dispensaries. Moreover, banks face the realistic possibility of criminal penalties for assisting in money laundering should they knowingly accept and process finds from dispensaries. As a result of these risks and possible penalties, banks have simply refused to do business with marijuana dispensaries.

Financial Institutions’ responsibilities under the BSA

Pursuant to the BSA, 31 U.S.C. §§ 5311-5330, financial institutions are required to create certain reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. For example, financial institutions are required to file with FinCEN suspicious activity reports (“SARs”) reporting any suspicious transaction relevant to a possible violation of law or regulation. More specifically, federal law requires that a financial institution file a SAR if the financial institution “knows, suspects, or has reason to suspect” that an attempted or fully conducted transaction: 1) involves funds derived from illegal activities or is an attempt to disguise or hide such funds; 2) is designed to evade the requirements of the BSA and its implementing regulations; or 3) lacks an apparent lawful or business purpose. See 31 C.F.R. § 1020.320.

As it relates to the proceeds derived from the sale of marijuana, FinCEN explained in its Guidance Document as follows:

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.

(emphasis added).

FinCEN’s guidance makes clear that a financial institution’s obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. Thus, in an effort to explain how a financial institution can provide services to marijuana-related businesses while maintaining its responsibilities under the BSA, FinCEN issued this latest guidance.

Financial Institutions are required to engage in “thorough due diligence” prior to accepting marijuana-related businesses as clients.

FinCEN’s guidance makes clear that prior to providing financial services to a marijuana-related business, a financial institution must conduct a thorough customer due diligence. The guidance notes that this due diligence should include: 1) verifying that the business is licensed and registered with state authorities; 2) a review of the state license application and supporting documentation to operate as a marijuana business; 3) requesting available information about the prospective customer from state licensing and enforcement authorities; 4) obtaining an understanding of the nature of the business including the types of products sold and the customers to be served (recreational v. medical user); 5) monitoring of publicly available sources for adverse information about the potential business customer; and 6) monitoring for suspicious activity, including whether the business implicates one of the DOJ enforcement priorities or violates state law. In addition, FinCEN advises that financial institutions should periodically refresh their due diligence information once a business commences banking.

Financial Institutions  new marijuana-related businesses SAR filing responsibilities.

FinCEN’s “BSA Expectations” guidance should be read in conjunction with August 29, 2013 and subsequent February 14, 2014 DOJ memorandums issued by Deputy Attorney General James M. Cole to federal prosecutors regarding DOJ’s enforcement priorities with respect to marijuana. The “Cole Memo” lists out eight priorities that will guide the DOJ in its enforcement of the Controlled Substances Act against marijuana-related conduct. A copy of the DOJ’s August 29, 2013 memorandum can be read here. It is against this backdrop and with these priorities in mind that FinCEN drafted its guidance. FinCEN explains that the new guidance furthers the objectives of the BSA “by assisting financial institutions in determining how to file a SAR that facilitates law enforcement’s access to information pertinent to a [enforcement] priority.”

In describing a financial institution’s SAR filing responsibilities, FinCEN has established three categories: 1) “Marijuana Limited” SAR filings; 2) “Marijuana Priority” SAR filings; and 3) “Marijuana Termination” SAR filings.

In its Guidance, FinCEN explains that financial institutions should file a “Marijuana Limited” SAR when the institution reasonable believes, based on its due diligence, that the potential marijuana-related business customer does not implicate one of the DOJ Memo priorities or violate state law. It is important to note that this SAR filing should state “the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business,” and that no additional suspicious activity has been identified.

Throughout the time that a financial institution provides services to a marijuana-related business, the financial institution must file continuing activity reports which detail the amount of deposits, withdrawals, and transfers from the account since the previous SAR filing. (Guidance for filing timeframes for submitting a continuing activity report can be found at Question #16 of FinCEN’s Frequently Asked Questions Regarding the FinCEN Suspicious Activity Report.). However, FinCEN notes that should a financial institution’s continued due diligence reveal a potential violation of state law or implicate a DOJ Memo priority, the financial institution should file a “Marijuana Priority” SAR.

A “Marijuana Priority” SAR is only to be filed when a violation of state law is suspected or when the activities of a marijuana-related business may implicate DOJ Memo enforcement priorities. A Marijuana Priority SAR will be substantially more detailed should include: 1) identifying information of the subject and related parties; 2) addresses of the subject and related parties; 3) dates, amounts, and relevant details of the financial transactions involved; and 4) “details regarding the enforcement priorities that the financial institution believes have been implicated.”

In order to assist financial institutions in making the determination of whether to file a Marijuana Priority SAR, FinCEN’s Guidance includes two dozen “red flag” examples which may indicate a violation of state law or implicate DOJ Memo priorities. Such red flags include: that the business receives significantly more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates; that the business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law; a customer seeks to conceal or disguise involvement in a marijuana-related business activity; and that a business is unable to demonstrate the legitimate source of significant outside investments.

Additionally, financial institutions must be aware that these filing obligations also apply when the institution provides indirect services to a marijuana-related business such as providing services to a another domestic financial institution who in turn services marijuana-related businesses or to a non-financial customer who provides goods or services to a marijuana-related business (FinCEN uses the example of a commercial landlord who leases its property to a marijuana-related business). This naturally will require that financial institutions perform robust due diligence on all customers with potential indirect ties to marijuana-related businesses. However, FinCEN explains that “[i]n 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.”

The final category of SAR filings is the “Marijuana Termination” SAR. “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, it should file a SAR  and note in the narrative the basis for the termination.”

Analysis and Conclusion

FinCEN’s guidance may in fact be a good faith attempt by the federal government to ease financial institutions anxieties about providing services to marijuana-related businesses. However, the banking industry’s reaction has been lukewarm at best.

As explained by the Colorado Bankers Association:

After a series of red lights, we expected this guidance to be a yellow one. This isn’t close to that. At best, this amounts to ‘serve these customers at your own risk’ and it emphasizes all of the risks. This light is red.

Bankers had expected the guidance to relieve them of the threat of prosecution should the open accounts for marijuana businesses, but the guidance does not do that. Instead, it reiterates reasons for prosecution and is simply a modified reporting system for banks to use. It imposes a heavy burden on them to know and control their customers’ activities, and those of their customers. No bank can comply.

(emphasis added). A full copy of the Colorado Bankers Association Press Release can be read here.

Likewise, on February 14, 2014, the American Bankers Association commented as follows:

While we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks. As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.

These fears are well founded. The FinCEN Guidance is not a regulation, does not amend existing law, and does not have the force and effect of law. Instead, financial institutions which choose to engage in providing services to marijuana-related businesses do so with only the words of FinCEN and the DOJ that it will exercise its prosecutorial discretion and not indict institutions for money laundering violations.

Moreover, regardless of the FinCEN Guidance, marijuana-related businesses also face potential violations of a host of federal laws, ranging from drug trafficking and money laundering to violations of the FDCA and the internal revenue code, for engaging in activities which are otherwise legal under state law.

In reality, the inability to access the banking and financial services industry may be potentially disastrous to the legal marijuana industry. The only true solution for both financial institutions and the marijuana-related businesses which seek their services is a comprehensive overhaul of the manner by which federal law governs marijuana and the businesses engaged in the sale of marijuana. The starting point is the Controlled Substances Act, but changes must also be made to the Banking Code found in Title 12, the bank fraud and money laundering statutes found in Title 18, the Food, Drug, and Cosmetic Act at Title 21, and the Internal Revenue Code found at Title 26. (A comprehensive overview of the most recent proposed amendments to the federal code, the “Marijuana Businesses Access to Banking Act of 2013” can be found in our previous report.). So long as federal law classifies marijuana as a Class I drug and all who deal in it “drug traffickers,” no mere Guidance Document will create the practical changes necessary to allow federally regulated banks to service the burgeoning marijuana industry.