The Legalized Marijuana Industry’s Evolution Is An Exercise In Banking Compliance

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On Jan. 1, recreational marijuana officially went on sale in Colorado, marking the first state in the Union to permit the recreational sale and use of marijuana. For the last year — following the passage of Amendment 64, which legalized recreational marijuana in Colorado — state and federal officials have been working diligently to put together a comprehensive set of regulations to address the new industry. Most of those regulations have focused on the operations of marijuana stores and restrictions related to possession and consumption of the product. The recreational marijuana industry, however, does not just affect sellers and purchasers. Rather, because the cultivation, possession and distribution of marijuana remain illegal under federal law — and, for that matter, the laws of 48 states in the Union — this first of-its-kind industry, like the more common medical marijuana industry, poses unique compliance issues for businesses across many different industries. And perhaps no other industry is more affected than the banking industry. This article addresses some of the key compliance issues facing bankers following the legalization of recreational marijuana.

The ‘Cash Only’ Business Problem -

Recreational marijuana sales reportedly almost topped $5 million in just the first week the product was sold in Colorado. Because recreational — and even medical — marijuana businesses operate largely on a cash-only basis, the large volume of revenue has left many marijuana business owners struggling to figure out what to do with all of that money. Unlike other businesses, marijuana businesses cannot just go to their local bank and open an account. Rather, because the possession and distribution of marijuana is still illegal under federal law, banks are reluctant to engage in business with marijuana-related businesses. The Bank Secrecy Act, for instance, requires banks to monitor money passing through their institutions for potential money laundering. To comply with their antimoney laundering obligations, banks are required to file Suspicious Activity Reports (SARs) related to transactions they suspect involve potential money laundering. Because the sale and distribution of marijuana is illegal under federal law, any proceeds flowing from those transactions would be proceeds of an illegal transaction and, therefore, raise immediate and serious money laundering concerns. Failure to file a SAR for a reportable activity could result in criminal or civil fines and other penalties against the bank and any involved employees. What is more, banks accepting deposits from marijuana-related businesses face potential criminal liability for ‘‘aiding and abetting’’ the commission of a federal offense. Thus, even routine banking transactions, such as opening a savings or checking account for a small recreational marijuana start-up company, can be lurking compliance pitfalls for banks.

Originally Published in Bloomberg BNA BNA's Banking Report - February 4, 2014.

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