For financial institutions who engage in marijuana-related banking services, the primary compliance challenge remains the disconnect between federal and state law, as it is still illegal to manufacture, distribute, or dispense marijuana under the federal Controlled Substances Act (CSA).
As a result, financial institutions who consider serving customers involved in the marijuana industry must first develop a deep and wide understanding of marijuana laws at the state and federal level [including but not limited to money laundering laws, money transmitter laws, the Bank Secrecy Act (BSA), and the guidance of the Department of Justice (DOJ) and Financial Crimes Enforcement Network (FinCEN)] in order to first and properly gauge and assess the institution’s risk tolerance. There are various financial institutions that offer marijuana-related banking services including national banks, federal credit unions, state chartered banks, and state chartered credit unions.
In this Part II, we provide an overview of the primary compliance challenges these institutions face under federal law.
Federal Marijuana-Related Law Enforcement Priorities Relevant to Financial Services
The 2013 Cole Memorandum (Cole Memo I)
In 2013, Deputy Attorney General James M. Cole sent the first of two memoranda to all United States Attorneys that detailed the DOJ’s commitment to use its resources to address the most significant threats posed by marijuana. “Cole Memo I” set forth eight enforcement priorities of the DOJ for civil and criminal enforcement:
- 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 to states where it is not;
- 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.
However, the memorandum clearly stated that the guidance in the memorandum, state law, or local law would not provide a legal defense to a violation of federal law, including any civil or criminal violation of the CSA.
The 2014 Cole Memorandum (Cole Memo II)
Approximately six months after Cole Memo I was issued, Deputy Attorney General Cole issued another memorandum specifically addressing marijuana-related financial crimes (“Cole Memo II”) on February 14, 2014. Cole Memo II was issued on the same day as the FinCEN guidance for financial institutions regarding compliance with the BSA. Cole Memo II stated that the money laundering statutes, unlicensed money remitter statute, and the BSA were still applicable to marijuana-related conduct. In other words, financial transactions involving proceeds from marijuana-related conduct could be prosecuted under those laws.
Cole Memo II offered the following examples of possible prosecution related to financial transactions:
- money laundering offenses related to financial transactions with the proceeds of the specified unlawful activity involving marijuana-related violations of the CSA;
- transactions by or through a money transmitting business involving funds derived from marijuana-related conduct;
- criminal liability for financial institutions under the BSA for failing to report financial transactions that involved the proceeds of marijuana-related violations of the CSA.
Cole Memo II noted that a conviction for the underlying marijuana-related activity was not required for prosecution based on the related financial transactions. Examples of potential prosecution given in the memorandum include situations where:
- a financial institution provides banking services to a marijuana-related business knowing that the business is diverting marijuana from a state where marijuana sales are legal to states where sales are illegal (violation of Cole Memo I, Enforcement Priority No. 3), or
- the funds are being used by a criminal organization to conduct financial transactions for its “criminal goals,” such as the concealment of funds derived from other illegal activity, or the use of marijuana funds to support other illegal activity (violation of Cole Memo I, Enforcement Priority No. 4).
Cole Memo II also stressed that financial institutions could not be willfully blind to such activity, and must conduct appropriate due diligence of its marijuana-related business customer’s activities. The memorandum, however, offered little consolation to financial institutions if none of the eight enforcement priorities of the Cole Memo I were implicated, stating only that prosecution under those circumstances “may not” be appropriate.
While the Cole Memos were rescinded by Attorney General Jeff Sessions in 2018, subsequent Attorneys General have upheld and followed the guidance in the Cole Memos. The Cole Memos also provide the basis for the FinCEN guidance that applies to financial institutions today.
Bank Secrecy Act Requirements and FinCEN Guidance (2014)
Plainly stated in Cole Memo II, it is “essential” for financial institutions to follow the FinCEN guidance for marijuana-related transactions. The FinCEN guidance remains the current guidance on BSA expectations for financial institutions who offer marijuana banking services and financial institutions generally, if any suspected marijuana-related activity taking place in the financial institution requires a report to be filed pursuant to the guidance.
However, the SAFE Banking Act, if passed, would require this guidance to be updated within 180 days of its enactment, “to ensure that the guidance is consistent with the purpose and intent of the SAFE Banking Act of 2021 and does not significantly inhibit the provision of financial services to a cannabis-related legitimate business or service provider in a State, political subdivision of a State, or Indian country that has allowed the cultivation, production, manufacture, transportation, display, dispensing, distribution, sale, or purchase of cannabis pursuant to law or regulation.”
The current FinCEN guidance restates the standards set out in Cole Memo I, including the eight enforcement priorities. The FinCEN guidance then details the following requirements for financial institutions:
- Initial and Ongoing Customer Due Diligence. As part of the financial institution’s determination whether to open, close, or refuse an account, the customer due diligence conducted should include:
- Verifying with the appropriate state authorities whether the business is duly licensed and registered;
- Reviewing the license application and 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 or recreational customers);
- Ongoing monitoring of publicly available sources for adverse information about the business and related parties;
- Ongoing monitoring for suspicious activity, including for any of the red flags described in the FinCEN guidance; and
- Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
The financial institution’s customer due diligence should also include an investigation and analysis of whether the marijuana-related business implicates any of the Cole Memo’s eight priorities or a violation of state law at both the inception of the relationship and also at any point in the business lifecycle. This analysis is critical to the proper filing of suspicious activity reports, as discussed below.
- Suspicious Activity Reports (SARs). Regardless of any state law legalizing marijuana, a financial institution is required to file a SAR if the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution:
- Involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity;
- Is designed to evade regulations promulgated under the BSA; or
- Lacks a business or apparent lawful purpose. The inescapable fact is that since marijuana distribution and sale is prohibited under federal law, financial transactions involving a marijuana-related business involve funds derived from illegal activity. Financial institutions therefore must file SARs on marijuana-related business activity even if the marijuana-related businesses are legal under state law.
There are three types of SARs for marijuana-businesses, and financial institutions must determine which is appropriate for a transaction:
A “Marijuana Limited” SAR should be used if the financial institution reasonably believes based on its customer due diligence that the transaction does not implicate one of the Cole Memo enforcement priorities or a violation of state law. Continuing activity report requirements would apply after filing the initial SAR, and may include information about deposits, withdrawals, and transfers. Later activity may require filing of a “Marijuana Priority” SAR.
A “Marijuana Priority” SAR should be used if the financial institution reasonably believes based on its customer due diligence that the transaction does implicate one of the Cole Memo enforcement priorities or a violation of state law. The financial institution must include detail in the SAR on the enforcement priority or state law it believes is implicated.
A “Marijuana Termination” SAR should be used if the financial institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program. The basis for the termination must be provided in the SAR. Financial institutions are urged to share information with other financial institutions where the marijuana-related business subsequently attempts to open accounts.
Examples of “red flags” are provided in the FinCEN guidance to aid financial institutions in determining whether any of the Cole Memo enforcement priorities or violations of state law are implicated. Red flags include certain frequencies or amounts of transaction activity, reviewing documentation provided by the account holder, and comparison to the marijuana-related activities permitted under state law. Other red flags focus on the behavior of the account holder or third parties.
- Currency Transaction Reports. Financial institutions must still comply with currency transaction report (CTR) requirements for marijuana-related transactions. A CTR must be filed for any receipt or withdrawal by any person of more than $10,000 in cash per day. The marijuana industry is still overwhelmingly cash-based due to restrictions from card networks and other challenges.
Implementation & Practical Challenges for Financial Institutions
The Cole Memos and FinCEN guidance require financial institutions in practice to develop a sophisticated expertise in the marijuana laws and marijuana business environment particular to each marijuana-related business customer. Further, the financial institution’s employees must be trained to understand the Cole Memo’s enforcement priorities, applicable state law, red flags, and the business. Financial institutions must also develop sufficient expertise to properly file the appropriate type of SAR. The number of SARs required to be filed may require additional staffing in order to maintain standards set by FinCEN guidance. Financial institutions should have transparent conversations with their prudential regulator to properly assess the risks associated with banking the industry.
Despite the federal and state disconnect, as well as the oft-conflicting federal guidance, many financial institutions have chosen to serve marijuana-related businesses. In Part III, we will discuss how financial institutions manage these compliance and operational challenges. We will also look ahead to the future of marijuana banking.