While many people were watching the elections in November to witness who would be the next President, other important ballots were on the table across the country to legalize recreational and/or medicinal marijuana usage. Certain activities remain illegal while under the influence of marijuana, and usage in certain locations such as schools, colleges and universities, and other public places remains prohibited.
As of November 8, 2016, the United States has eight states, plus the District of Columbia, that have legalized the use of recreational marijuana (with some restrictions still in effect). Medical marijuana is now legal in 28 states, plus the District of Columbia, Guam, and Puerto Rico.
With now more than half the states in the country allowing some form of marijuana usage, the question arises whether this latest movement will bring us closer to a repeal of the federal cannabis prohibition, either completely or via formal waiver systems. Even the latest Gallup Poll has found public support to be stronger than ever for legalizing marijuana usage, up from 51% in 2014 and 58% in 2015 to 60% in 2016.
For a compliance officer, Bank Secrecy Act officer, chief risk officer, director, or other member of senior management, the more pressing question comes in the form of how these changes will affect financial institutions, if at all.
Many state regulators are encouraging (or at least not discouraging) financial institutions to bank marijuana businesses and increase their access to the federal banking system. Federal regulators are furiously trying to keep track of this changing playground and balance what is still currently illegal under federal rules with what is clearly legal in more than half the country.
De-risking, one of the newer buzz words in the financial world, has now brought banks, credit unions, and other lending entities to a very large crossroad, where the regulators, most specifically the Financial Crimes Enforcement Network (FinCEN), have been vocal in expressing their displeasure with financial entities that choose not to open certain types of accounts for business customers, mostly due to the concerns of monetary penalties, risks, and the expense involved in the expected management and ongoing monitoring of certain “higher-risk” customers. Until now, the focus has been on money services businesses and third-party payment processors. However, given the changes within the marijuana markets, financial institutions are likely to be the recipients of more questions from marijuanarelated business owners looking to find a banking relationship in order to operate various types of growing, dispensing, and processing operations.
The Department of Justice’s Cole Memo from August 29, 2013, and FinCEN’s guidance (FIN-2014-G001) issued on February 14, 2014, are the closest official releases that provide meaningful guidance for banking marijuana-related businesses.
FinCEN issued its guidance to clarify how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, while aligning the information to be provided by financial institutions through suspicious activity reporting, with both federal and state law enforcement priorities.
As financial institutions prepare for a new year of compliance concerns across their organizations, the decision to open deposit accounts for marijuana-related businesses still has both benefits and risks. The two listed documents above should be the first things to become very familiar with, along with understanding the structure, business model, and risk tolerance of your institution.
Thorough customer due diligence will continue to be a keystone for managing the risk aspect. According to FinCEN’s guidance, this can be broken down into seven steps, which in many cases you may already be doing for other higher-risk businesses.
- Verifying with the appropriate state authorities whether the business is duly licensed and registered.
- Reviewing the license application (and any related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business.
- Requesting from state licensing and enforcement authorities available information about the business and related parties.
- Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers).
- Continuously monitoring publicly available sources for adverse information about the business and related parties.
- Continuously monitoring for suspicious activity, including any of the red flags described in detail within the guidance.
- Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
Financial institutions have to evaluate the legality of an entity and also the list of priorities found in the Cole Memo. These priorities are focused toward basic, safety-related concerns, which are broken into eight focus areas.
- 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 in some form under state law 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.
- Preventing marijuana possession or use on federal property.
In addition to the normal Currency Transaction Report filing requirements, financial institutions will be expected to file specifically named Suspicious Activity Reports based on the marijuana-related business that they choose to bank. These take the form of marijuana-limited, marijuana-priority, and marijuana termination Suspicious Activity Reports. FinCEN’s guidance provides details on how each form should be completed and the timing expectations for these reports. In addition, the guidance strongly encourages financial institutions to enroll within the 314(b) voluntary information sharing program to allow qualified information to be shared between institutions when potential illegal activity has been identified and an institution may be aware that a marijuana-related business may be moving their banking relationships.
While all this may still be more than some institutions are willing to take on, there are some financial benefits that may be gained by banking these types of customers, such as monthly service and initial setup fees. Institutions should consider reaching out not only to compliance and Bank Secrecy Act-related experts but also to legal counsel to determine whether these customers can be managed to the levels expected by federal regulatory agencies.
With more and more states allowing various levels of legal marijuana usage, this topic is not likely to just disappear into thin air like a puff of smoke. Instead, financial institutions should identify these risks head on within a documented risk assessment that is evaluated and updated, as with other risk assessments, allowing both state and federal regulators to see that a business decision, not just a mediarelated decision, has been made to determine whether to bank marijuana-related businesses.