Marijuana banking faces extra scrutiny for businesses

Cover photo

By Jana Weltzin

Despite growing support for legalization of cannabis, federal law remains stagnant, making banks uneasy about doing business with cannabis companies.
The federal government has yet to enact an authoritative law that explicitly gives banks the blessing to do business with cannabis companies.

However, the U.S. Department of Justice’s guidance memo from August 2013 bluntly states that the federal “Cole Memo” priorities may be “affirmatively addressed … with a tightly regulated market in which revenues are traced and accounted for.”
It would seem, given the federal government’s concession that a tightly regulated and tracked marijuana market would help achieve its priorities, the next logical step would be to change the law in a manner that would give banks the assurance they need to do business with cannabis companies. This would allow cannabis companies to more easily track and account for all money coming in and going out.
In February 2014, the Department of the Treasury Financial Crimes Enforcement Network authored another guidance memorandum clarifying expectations relating to the Bank Secrecy Act (BSA) and cannabis businesses. This memo aimed to clarify how financial institutions may provide services to cannabis related businesses while upholding their obligations under BSA.
BSA requires financial institutions to issue reports that include information that is aimed to aid federal enforcement and further the objectives laid out in the Cole Memo, which are:
• Preventing the distribution of cannabis to minors;
• Preventing revenue from the sale of cannabis from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of cannabis from states where it is legal under state law in some form to other states;
• Preventing state-authorized marijuana from states where it is legal under state law in some form to other states;
• Preventing state-authorized activity from being used as a cover or pretext for the trafficking of other illegal of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in cultivation and distribution of marijuana;
• Preventing drugged driving and 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.
The 2014 Treasury memo urges financial institutions to consider key factors when conducting its due diligence for assessing the risk of doing business with a cannabis company. These factors include confirming whether the business is duly licensed and registered, review of the license application and ancillary documentation that was submitted to the state to obtain its license, request information from state licensing and enforcement authorities about the business and related parties, develop an understanding of the normal and expected activity for a cannabis business, including types of products sold and customer base, monitoring of publicly available sources for adverse information relating to the business and related parties and monitoring for ongoing suspicious activities.
Under the BSA, banks are obligated to file Suspicious Activity Reports (SARs) regardless of state law. The institution must file a SAR if it suspects, or has reason to suspect, that a transaction conducted involves funds derived from illegal activity, is designed to evade regulations promulgated under BSA, or lacks a business or apparent lawful purpose. The last of these — “lacks a business or apparent lawful purpose” — is problematic for cannabis businesses, which are all unlawful under federal law.
Under the 2014 Treasury memo, banks are required to file SAR for cannabis businesses, even if those businesses are 100% in compliance with state law.
The memo addresses this issue and lays out the varying levels of SAR filing.
The first level of SAR is “Marijuana Limited.” These must be filed by a financial institution that believes its client operates a marijuana business that complies with both the Cole Memo priorities and state law.
The next level of SAR filing is referred to as “Marijuana Priority.” These are to be filed when a financial institution reasonably believes its client operates a marijuana business that implicates one of the Cole Memo priorities or is in violation of state law based on red flags identified in the 2014 Treasury Memo.
If the financial institution deems it necessary — based on identification of red flags — to terminate the relationship with the marijuana-related business in order to maintain an effective anti-money laundering compliance program, it is required to file a “Marijuana Termination” SAR.
The red flags identified in the 2014 Treasury memo include some pretty arbitrary and discretionary observations. For example, if the business receives more revenue than “reasonably expected” given the limitations imposed by the state in which it operates, the financial institution should deem that a red flag under the SAR reporting requirements.
Clearly, this is problematic for both the institution and the cannabis business — what does the term “reasonably expected” mean? Surely Colorado’s market was not expected to be as robust as it was, but should that trigger a red flag? And what education and training are these institutions supposed to provide their compliance officers to aid them in identifying these red flags?
Overall, the 2014 Treasury memo provides good guidance to financial institutions, but unfortunately, the guidance is just that — guidance. It provides no assurance of legal protection to financial institutions or cannabis businesses. Because marijuana is illegal under federal law, and there is no exemption for state law legalizing cannabis, guidance alone isn’t going to be enough for most banks to be comfortable doing business with cannabis companies. The guidance memos make for nice cocktail hour chit-chat, but when it comes down to legalities, the memos offer no binding authority, nor do they provide a legal defense.

Jana Weltzin is a member of Rose Law Group’s medical marijuana and zoning/land use departments. She advises clients in the cannabis industry in Arizona and Alaska. Rose Law Group assists its clients with business structure, compliance with state and local laws, zoning approval and use permits, site selection, and product regulations.

Comment

One response to “Marijuana banking faces extra scrutiny for businesses”

  1. Rick Fague says:

    Excellent article. The more information the feds disseminate to MJ business people such as myself, the better.

    My company offers the first full featured business banking service, and other products and services, to licensed MJ businesses and we’re authorized to do so in all 50 states. Our product suite was designed with Treasury and BSA compliance in mind, so even if our customers are audited by the IRS, they routinely pass through an audit without having to make any changes to their reporting, business practices, or pay any additional taxes.

    We’ve established a network of state and federal government level contacts to ensure that everything we do and the products/services we offer stay on the right side of the law, our MJ business customers rely on that. And we do it at competitive rates, too, which is harder than it looks given all of the turmoil and uncertainty the industry is dealing with as a whole.

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