On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued guidance aimed at clarifying Bank Secrecy Act expectations for financial institutions interested in providing services to marijuana-related businesses (“FinCEN Guidance”).  The FinCEN Guidance came on the heels of related guidance from the Department of Justice to its federal prosecutors regarding marijuana related financial crimes. Both agencies are attempting to address the “Catch-22” that results from the legalization of marijuana by the states while marijuana remains illegal under federal drug laws. Is this recent guidance a sufficient safe harbor for financial institutions seeking to fulfill the undeniable demand for banking in the cannabis industry? In other words, is this the “10-foot pole” that will provide the financial institutions with the necessary comfort to play in the space, even if from the sidelines?

As of January 1, 2014 the state of Colorado allows the regulated cultivation and sale of marijuana to persons 21 years and older, pursuant to Colorado’s Amendment 64. In Washington, voters approved the legalization of state- licensed cultivation, production, distribution and retail sale of marijuana in 2012 after decriminalizing the prescribed use of marijuana for medical purposes in 1998. Currently, the Washington State Liquor Control Board is conducting the initial licensing process with expectations that regulated sales will commence by mid-summer 2014. Perhaps decriminalization was the easiest feat for legalization advocates.  After the vote, many challenges remain including those related to implementation, licensing and, perhaps most importantly, the federal Controlled Substances Act (“CSA”). The CSA, enacted in 1970 as Part F of the Comprehensive Drug Abuse Prevention and Control Act of 1970, regulates the production, possession, distribution, and use of certain controlled substances, including marijuana. The CSA makes it illegal to manufacture, distribute or dispense marijuana. Pursuant to the Department of Justice Deputy Attorney General James M. Cole memorandum issued on August 29, 2013 (“Cole Memo”), state laws legalizing businesses’ marijuana-related activities do not shield such businesses from federal liability.  It therefore stands to reason that a financial institution supporting such businesses could be prosecuted for violation of federal drug laws. And, those violating federal marijuana laws are subject to criminal prosecution, fines, imprisonment and forfeiture of property. The implications of this dilemma are far-reaching for marijuana-related businesses and banks alike.

  • The U.S. regulated marijuana business – expected to reach $35-40 billion per Forbes magazine – is largely cash-only.[1] While MasterCard and Visa have reportedly unofficially relaxed their rules regarding regulated marijuana transactions, their official rules prohibiting such transactions, remain unchanged; and accepting cards require a merchant banking account.
  • Banks are reconsidering services supplied to customers that, in turn, provide services to marijuana-related businesses (e.g., leasing, inventory), creating a potential domino effect.

Cole Memo
The Cole Memo was the first effort to address the apparent tug-of-war between federal and state laws related to marijuana-related activity. The Cole Memo established the following eight priorities in enforcing the CSA against marijuana-related conduct:

  • Preventing the distribution of marijuana to minors;
  • Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
  • Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
  • Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
  • Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
  • Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
  • Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
  • Preventing marijuana possession or use on federal property.

Federal prosecutors are expected to focus on these priorities and, as suggested by the Cole Memo, marijuana-related conduct not implicated by these priorities will be left to state and local law enforcement in accordance with past practices provided that the federal government believes that the state has implemented strong and effective marijuana regulatory and enforcement systems.

Cole Memo Part Deux
On February 14, 2014, contemporaneously with the FinCEN guidance, the Department of Justice updated the Cole Memo to tailor its guidance to marijuana related financial crimes. The updated Cole Memo clarifies the impact of the eight priorities on enforcement of financial crimes under provisions of anti-money laundering statutes and the Bank Secrecy Act (“BSA”). Financial institutions serving marijuana-related businesses could face criminal liability under the BSA for failing to identify and report transactions involving proceeds generated by activity that violates the CSA – with or without an underlying marijuana-related conviction.

The updated Cole Memo distinguishes between financial institutions serving marijuana-related businesses (whether willfully blind or knowingly) whose activity falls within the eight enforcement priorities (e.g., a business that transports state-sanctioned marijuana over state lines for resale into a state where distribution of marijuana is illegal under state law) from financial institutions serving marijuana-related businesses that do not implicate any of the eight enforcement priorities, and states that prosecution for the latter “may not be appropriate.”

FinCEN Guidance
The FinCEN Guidance provides specific due diligence and risk assessment mandates for financial institutions considering service to marijuana-related businesses. FinCEN clarifies that the decision to open, close, or refuse any particular account or relationship to a marijuana-related business ultimately lies with the institution. FinCEN expects marijuana-related business due diligence to include:

  • Assessment of implication of Cole Memo priorities;
  • Assessment of state law compliance;
  • Verification of state license and registration;
  • Review of license application documents;
  • Information requests to state licensing authorities;
  • Understanding of expected business activity (types of products and customers expected of licensee);
  • Ongoing monitoring of public sources for adverse information concerning licensee;
  • Ongoing suspicious activity and red flag monitoring; and
  • Periodic due diligence information updates commensurate with risk.

The FinCEN Guidance also reiterates the importance of Suspicious Activity Report (“SAR”) obligations, and notes that such obligations are unaffected by state laws legalizing marijuana. Moreover FinCEN created three SAR filing categories unique to marijuana-related businesses. Financial institutions providing services to marijuana-related businesses are obligated to prepare a SAR filing(s). The category should be determined based on the financial institution’s reasonable understanding of the business activity. The SAR filing categories and requirements are set forth in the table below:

Marijuana-Related Businesses SAR Filing Categories

SAR Filing Category “Marijuana Limited” SAR Filings  “Marijuana Priority” SAR Filings “Marijuana Termination” SAR Filings
Qualifying Entity Marijuana-related businesses that do not implicate Cole Memo priorities Marijuana-related business that implicates one or more Cole Memo priorities Where institution feels necessary to terminate relationship with marijuana-related business due to AML risk
Required SAR Contents Limited to:
  • Identifying information of subject and related parties
  • Addresses of subject and related parties
  • The fact that the SAR is filed solely due to marijuana-related business
  • No additional suspicious activity identified
  • Narrative must include “MARIJUANA LIMITED”
  • Continuing activity reports same as initial SAR and number and amount of transactions since last SAR; timing of continuing activity reports governed by FinCEN’s existing guidance
  • Comprehensive detail regarding suspicious activity per existing regulations.
  • Identifying information of subject and related parties
  • Addresses of subject and related parties
  • Details regarding the Cole Memo priorities implicated by the subject
  • Dates, amounts, and other relevant details of transactions involved in suspicious activity.
  • Narrative must include “MARIJUANA PRIORITY”
  • Complete narrative with basis for termination
  • Narrative must include “MARIJUANA TERMINATION”
  • Recommended Sec. 314(b) voluntary information sharing to alert second financial institution if terminating institution knows subject plans move to another institution

If a financial institution is unable to determine whether a marijuana-related business implicates one or more Cole Memo priorities (e.g., where services are being provided indirectly) and therefore unable to determine the appropriate SAR Filing category, the FinCEN Guidance provides, “the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority”.”

The FinCEN Guidance also identifies a number of red flags that serve to assist financial institutions with the Cole Memo priorities determination. Red flags include:

  • Customer uses marijuana-related business to launder money derived from other criminal activity
  • No evidence to demonstrate that marijuana-related business is licensed
  • No legitimate source of significant outside investment[2]
  • Customer conceals involvement in marijuana-related business, but is depositing cash that smells like marijuana[3]
  • Public records reveal evidence of other criminal activity on the part of the business or its owners
  • Customer subject to enforcement under local marijuana laws
  • Business engaged in international or interstate activity
  • Business located on federal property

FinCEN makes it clear that its enforcement of the FinCEN Guidance will focus on “systemic or significant failures” and not “isolated lapses in technical compliance.”

The Crux
Marijuana may be big business but financial institutions are gun-shy about supporting marijuana-related businesses. In addition to the stigma associated with the industry, the trepidation can largely be attributed to the legal minefield created by conflicting state and federal laws. Efforts by the Department of Justice and FinCEN in the form of the Cole Memos and FinCEN Guidance provide some certainty as to BSA compliance but there is a strong argument that considerable uncertainty remains. Preparing the required SAR filings may satisfy a financial institution’s requirements under the BSA, but does not explicitly protect a financial institution from criminal liability under the CSA. The Cole Memo is guidance and does not modify the CSA or its authority; so a different administration may have a different interpretation.

In a letter sent to banking regulators, a group consisting of sixteen members of Congress recently encouraged banking regulators to issue guidance further clarifying FinCEN’s guidance and the Cole Memo. “Allowing licensed and regulated businesses to access the banking system will decrease the risks associated with operating a cash-only business and increase public safety,” the group wrote. One of the authoring Congressmen, Rep. Ed Perlmutter (CO), also authored H.R.2652, the Marijuana Businesses Access to Banking Act. The proposed legislation would permanently resolve the conflict for financial institutions seeking to serve marijuana-related businesses between state and federal law. The bill would protect financial institutions from federal liability for service to state-sanctioned legitimate marijuana-related businesses. The bill would also exempt financial institutions from SAR obligations solely based on the fact that a party to a transaction is a marijuana-related business. H.R. 2652 is currently awaiting hearing in the House Financial Services Committee.

[1] There are some marijuana-related businesses that accept debit cards over the ATM network and the banks supporting such businesses are a closely guarded secret.

[2] Did we mention that banks are gun-shy about providing services (including loans) to marijuana-related businesses

[3] Seems financial institutions may need to modify branch training manuals!