Since 1996, when California became the first state to legalize marijuana (at the time, for medicinal purposes only), 28 additional states and the District of Columbia have legalized marijuana to some extent. Public support for legalization continues to rise as more and more jurisdictions loosen their marijuana laws, with 64 percent of Americans in favor of legalization, nearly double the percentage that supported legalization in 2000.

While the use and possession of marijuana is still illegal under federal law, the long-term outlook for the legal-marijuana industry appears strong. This emerging industry took in approximately $9 billion in sales in 2017, with that number expected to grow to $11 billion in 2018 and $21 billion in 2021.

Despite these eye-popping numbers, the legal-marijuana industry is severely underserved by many of the industries it requires for support, perhaps none more so than the banking and financial services industry. Broadly speaking, the reason for this is obvious – the federal prohibition on marijuana found in the Controlled Substances Act. In light of that prohibition and the regulatory challenges that come with it, many financial institutions have decided that doing business with this industry is simply too risky.

But not all financial institutions share that view, and the number of institutions willing to reap the reward of engaging an underserved $11 billion industry continues to grow. Now, almost 400 banks and credit unions provide banking services to the legal-marijuana industry, more than three times the amount that served the industry in 2014.

Like most decisions in the financial world, whether to do business with the legal-marijuana industry is a question of risk tolerance. While the risks in this arena are certainly higher than most, so too are the potential rewards given the relative scarcity of competition compared to other industries.

To assist in evaluating those risks, this article provides a brief overview of two key laws governing a financial institution’s relationship with marijuana-related businesses: (1) the Bank Secrecy Act (BSA), and (2) the Federal Deposit Insurance Act’s prohibition of “unsafe or unsound practices” for banks insured by the Federal Deposit Insurance Corporation (FDIC). Future articles will provide a more in-depth look into each.

The Bank Secrecy Act

The BSA – along with its implementing regulations promulgated by the Office of the Comptroller of the Currency (OCC) – establish various recordkeeping and reporting requirements for national banks, federal savings associations, and agencies of foreign banks. The OCC, as well as the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC), all play a role in enforcing the BSA.

On February 14, 2014, FinCEN issued guidance that, by its terms, “clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations” (the FinCEN Guidance). The FinCEN Guidance is expressly based on the Cole Memorandum – Obama-era guidance from the Justice Department that directed federal prosecutors to take a hands-off approach to legal-marijuana businesses in states where marijuana had been legalized to some degree. Although Attorney General Sessions rescinded the Cole Memorandum on January 4, 2018, FinCEN has since indicated that the FinCEN Guidance remains in effect.

While some nonetheless viewed Sessions’ rescission of the Cole Memo as weakening the FinCEN Guidance, the pendulum may have swung back on April 13, when Colorado Senator Cory Gardner – who began blocking the confirmation of Justice Department nominees after Sessions rescinded the Cole Memo – announced that he received a commitment from President Trump “that the Department of Justice’s rescission of the Cole Memo will not impact Colorado’s legal marijuana industry.” The White House confirmed that Senator Gardner’s statement was “accurate,” but did not offer details as to how the Administration would implement President Trump’s directive. Given Trump’s directive and FinCEN’s indication that its Guidance remains in effect, financial institutions transacting with marijuana-related businesses should still look to the FinCEN Guidance to clarify their BSA obligations in this space.

The FinCEN Guidance requires that a financial institution engaging a marijuana-related business conduct substantial, and, importantly, continuing due diligence to determine whether that business is (1) complying with state law, (2) interfering with any of the eight priorities listed in the Cole Memorandum, or (3) otherwise engaging in “suspicious activity,” including a list of “red flags” enumerated in the Guidance. The institution must then file one of three marijuana-specific Suspicious Activity Reports (SAR), and continue filing SARs throughout its relationship with the marijuana-related business. Which of the three depends on what the institution uncovers in its due diligence:

• The institution should file a “Marijuana Limited” SAR if “it reasonably believes, based on its customer due diligence,” that the business “does not implicate one of the Cole Memo priorities or violate state law[.]”
• The institution should file a “Marijuana Priority” SAR if “it reasonably believes, based on its customer due diligence,” that the business “implicates one of the Cole Memo priorities or violates state law[.]”
• The institution should file a “Marijuana Termination” SAR if “it reasonably believes, based on its customer due diligence,” that it must terminate its relationship with the business “to maintain an effective anti-money laundering compliance program[.]”

While the FinCEN Guidance mandates an onerous compliance program for financial institutions doing business with the legal-marijuana industry, the costs of such programs can be passed through to the legal-marijuana client. Given the dearth of supply and substantial demand for financial institutions willing to do business with them, such clients understand the need for and are willing to pay such fees.

“Unsafe and Unsound Practices”

The FDIC provides deposit insurance to its member banks, and all federally- and nationally-chartered banks, and nearly all state-chartered banks, are required to have FDIC Insurance. FDIC-insured banks that engage in “unsafe or unsound practices” are subject to FDIC enforcement actions. While the FDIC has broadly declared that “committing violations of law” is an unsafe and unsound practice, courts have interpreted the phrase “safe or unsound practice” as a “flexible concept which gives the administering agency the ability to adapt to changing business problems and practices in the regulation of the banking industry.”

Given the federal prohibition on marijuana, providing banking services to legal-marijuana businesses can put an institution’s FDIC Insurance at risk. But a financial institution serving the legal-marijuana industry may be able to decrease the risk that the FDIC would deem such service an “unsafe and unsound practice” through certain actions, like limiting marijuana-related deposits to a small percentage of its total deposits to decrease liquidity risk and ensuring its employees are well-trained on its policies and procedures for serving the industry.

Notably, unlike their bank counterparts, credit unions are not supervised by the FDIC, and the FDIC does not insure their deposits. Those deposits are instead insured by the National Credit Union Administration (NCUA), which also supervises federally-chartered credit unions. The NCUA has indicated that it will follow the FinCEN Guidance when examining the federally-chartered credit unions it supervises, and state-chartered credit unions are not supervised by federal banking regulators. For these reasons, many view the regulatory environment for providing banking services to the legal-marijuana industry as more favorable for credit unions than their bank counterparts.

Takeaways

Until marijuana is legalized at the federal level or Congress passes legislation protecting financial institutions that serve the legal-marijuana industry, providing banking services to that industry will be a risky endeavor. But financial institutions can minimize that risk to an extent by building out a robust compliance program. While that program may be costly, financial institutions can recoup those costs through the fees they charge to the legal-marijuana client, which can provide a potentially lucrative opportunity for financial institutions willing to engage with the industry.