The Financial Crimes Enforcement Network (FinCEN) got a whiff of the fact that financial institutions provide services to burgeoning marijuana-related businesses and published guidance to clarify customer due diligence expectations and reporting requirements for financial institutions. Baked into the unusual guidance, dated February 14, 2014, is the government’s tacit acknowledgement that financial institutions can provide services to these businesses, even though federal law prohibits their activities.
Background. The Controlled Substances Act (CSA) makes it illegal under federal law to manufacture, distribute or dispense marijuana. Despite the federal ban, 20 states and the District of Columbia have legalized varying levels of marijuana-related activity. Federal banking regulators now face an unusual dilemma: how can interactions of financial institutions – like banks, money services businesses, broker-dealers, and investment companies – be legal with businesses that are illegal under federal law?
FinCEN writes the rules and regulations that financial institutions must follow to help protect the U.S. financial system from money laundering and terrorist financing. FinCEN implements the requirements of the Bank Secrecy Act (BSA), which is designed to help the federal government detect and prevent money laundering. Among other things, FinCEN regulations require financial institutions to file a “Suspicious Activity Report” (SAR) when it suspects that a transaction, or series of transactions, involves illicit financial activity.
BSA reporting requirements unaffected by state law. The guidance reminds financial institutions that their reporting obligations under the BSA with respect to financial transactions involving marijuana-related businesses continue, even though the activities are now legal under state law. The guidance clarifies how financial institutions can provide services to marijuana-related business in a manner consistent with their obligations under the BSA.
Reconciling conflicting laws. FinCEN reconciled the inconsistencies between state and federal law with respect to the legality of marijuana sales with a bit of smoke and mirrors. If a financial institution provides services to a business that does not implicate a set of enumerated priorities (for example, preventing the sale of marijuana to a minor, or financing terrorist activities), the financial institution must file a “Marijuana Limited” SAR, containing limited information, even though the activity is legal under state law. If it suspects that the business is engaged in some of the enumerated “priority” activities, the financial institution must file a full SAR. The enumerated activities are contained in an August 29, 2013 guidance published by the Department of Justice to U.S. Attorneys regarding marijuana enforcement (popularly known as the so-called “Cole Memo”).
FinCEN’s apparent goal is to collect information on transactions with businesses that are legal under state law, and weed out transactions that are high on FinCEN’s list of “priority” activities.
Broker-dealers and investment companies that establish accounts with marijuana-related businesses should review their know-your-customer procedures to ensure that they comply with FinCEN’s guidance. They should conduct due diligence efforts. Among other things, financial institutions should:
Verify with state authorities that the business is properly licensed and registered;
Request from state licensing and enforcement authorities information about the business and related parties;
Understand the normal and expected activity for the business, including the types of products to be sold and the customers served (e.g., medical versus recreational customers);
Conduct ongoing monitoring of publicly available sources for adverse information about the business and related parties; and
Conduct ongoing monitoring for suspicious activity, including the red flags described in the guidance.
In any event, financial institutions should think twice before engaging in transactions with a marijuana-related business, which may violate federal law, even though the Department of Justice or a federal banking regulator, as a matter of policy, chooses not to prosecute.