Twenty-three states and the District of Columbia now permit the use and possession of marijuana to some degree under state law, and public support for legalization is at an all-time high. Despite the growing number of states legalizing marijuana, however, it remains a Schedule 1 controlled substance under the federal Controlled Substances Act (CSA). President Trump’s appointment of Alabama Senator Jeff Sessions, a long-time cannabis critic, as attorney general, brings even more uncertainty to currently hazy federal enforcement efforts. For banks and other financial institutions interested in providing loans or other banking services to the “legal” marijuana industry, the current federal prohibition and related regulatory challenges continue to result in risks that most institutions will find too high to overcome.
Federal Law and Current Guidance.
Because the manufacture, distribution, and dispensation of marijuana remains illegal under the CSA, banks and other financial institutions providing services to marijuana-related businesses risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act (BSA). These statutes can impose criminal liability for engaging in certain financial and monetary transactions with the proceeds of a “specified unlawful activity” and for failing to identify or report financial transactions that involve the proceeds of marijuana-related violations of the CSA.
In February of 2014, the Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying due diligence expectations and reporting requirements under the BSA for financial services provided to marijuana-related businesses. On the same date, the U.S. Department of Justice (DOJ) issued guidance clarifying the focus of its enforcement efforts. Neither of these issuances, however, provide financial institutions with any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions brought by the DOJ, FinCEN or other federal regulators.
The DOJ guidance directs federal prosecutors to use the following eight priority factors to determine the “most significant” marijuana cases:
- 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 under state law in some form 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; and
- preventing marijuana possession or use on federal property.
The DOJ guidance instructs federal prosecutors to weigh these enforcement priorities in determining where to focus their limited resources for enforcement and in determining whether to charge financial institutions in connection with marijuana-related violations of the CSA. While the DOJ memo notes that prosecution may not be appropriate if a financial institution offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, it nevertheless also clearly states that the guidance “does not alter in any way the Department’s authority to enforce federal law” and does not provide a legal defense to any civil or criminal violation of federal law.
The FinCEN guidance, which was issued in tandem with the DOJ guidance, clarifies BSA monitoring and reporting expectations for financial institutions providing services to marijuana-related businesses. The FinCEN memo describes extensive due diligence and monitoring requirements for financial institutions, which necessitate a level of scrutiny that is far beyond what is expected in normal banking relationships. The guidance also lists red flags that indicate that a marijuana-related business may be engaged in activity that implicates one of the DOJ priority factors or violates state law. These red flags should be analyzed carefully by financial institutions performing their due diligence and assessing risk.
If a financial institution does decide to provide services to a marijuana-related business, the FinCEN guidance confirms that it is required to file suspicious activity reports (SARs), as such services would typically involve funds derived from activity that remains illegal under federal law. The guidance goes on to describe three types of SARs that financial institutions may file in connection with marijuana-related businesses:
- “Marijuana Limited” SARs should be filed when an institution reasonably believes, based on its due diligence, that the marijuana-related business does not implicate one of the DOJ priority factors or violate state law;
- “Marijuana Priority” SARs should be filed when an institution reasonably believes, based on its due diligence, that the marijuana-related business implicates one or more of the DOJ priority factors or violates state law; and
- “Marijuana Termination” SARs should be filed if an institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program.
Administration Changes.
The guidance issued by the DOJ and FinCEN does not have the force of law and is subject to change at any time – particularly with the installation of the new Trump administration.
While President Trump has publicly stated that he is in favor of legalization of medical marijuana and that legalization of marijuana for recreational use should be left to the states, his pick for attorney general, Sen. Sessions, has long criticized legalization, calling reform a “tragic mistake,” and stating that pot is “not the kind of thing that ought to be legalized.” In Sessions’s Senate confirmation hearing earlier this month, he responded equivocally to a question about conflicting federal and state marijuana laws by stating “I won’t commit to never enforcing federal law, but absolutely, it’s a problem of resources for the federal government.” It thus remains unclear whether the Trump administration’s justice department will follow the current enforcement priorities outlined in the DOJ guidance or whether the leadership of Sen. Sessions will result in stricter federal enforcement efforts.
Conclusion.
As long as marijuana remains illegal under federal law, guidance alone is not enough to get most financial institutions comfortable with the increased scrutiny and risk involved in providing services to marijuana-related businesses. As a result of this continuing uncertainty, a lack of financial institutions willing to work with marijuana businesses has forced much of the industry to operate on an all-cash basis, which makes such businesses a target to thieves (as they are holding not only large quantities of drugs, but cash as well), prevents them from efficiently carrying-out their everyday activities such as paying utility bills and taxes, and severely diminishes the availability of traditional bank financing for businesses that operate within the bounds of state law.
The effect of Trump’s inauguration, and appointment of Sen. Sessions as attorney general, on enforcement of federal marijuana laws remains unclear. Until Congress acts to pass new legislation providing clear defenses and safe harbors for banks and other financial institutions that provide services to marijuana-related businesses, banks should just say no.
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