As more states legalize marijuana use, financial institutions face increased uncertainty about how to handle accounts opened by marijuana-related businesses (MRBs) in light of regulatory difficulties stemming from the obvious tension between state and federal law. Although the marijuana industry continues to rapidly grow, financial institutions have largely been sidelined by federal laws prohibiting the use of the financial system to violate the law. While federal regulators have issued regulatory guidance designed to encourage financial institutions wishing to provide services to MRBs, the guidance merely provided financial institutions that were willing to violate federal law a roadmap for reducing the regulatory risk. As such, in light of the mixed messages from federal regulators, there is little doubt that financial institutions choosing to provide services to MRBs do so at the risk of going up in smoke.
Tension Between Federal and State Law
Notwithstanding the increasing number of states that have decriminalized various forms of marijuana use, the use, cultivation, and distribution of marijuana remains illegal under the Controlled Substances Act, 21 U.S.C. § 801, et seq. (CSA). Significantly, federal law also prohibits aiding and abetting or conspiring with a person to use, cultivate, and distribute marijuana. Therefore, financial institutions may be subject to criminal liability for opening accounts for or giving loans to known MRBs. Even more, due to the CSA’s prohibition on marijuana, financial institutions doing business with MRBs also risk running afoul of federal anti-money laundering statutes, the unlicensed money-remitter statute, and the 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. Accordingly, unless and until there are significant changes to federal law, the risks associated with doing business directly with MRBs is likely more than most financial institutions can bear.
Federal Regulatory Guidance
On February 14, 2014, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying regulatory expectations under the BSA for financial institutions seeking to provide services to MRBs. FinCEN’s guidance was issued in conjunction with related guidance issued by the Department of Justice (DOJ) regarding marijuana-related enforcement priorities.
The DOJ guidance directs federal prosecutors to consider the following priority factors to identify the “most significant” marijuana cases for prosecution:
- 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 other states where it is not;
- preventing state-authorized marijuana activity from being used as a cover or pretext for trafficking of other illegal drugs or illegal activity;
- preventing violence and the use of firearms in the 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; and
- preventing marijuana possession or use on federal property.
While the DOJ guidance instructs federal prosecutors to weigh these enforcement priorities when determining whether to charge a financial institution in connection with marijuana-related violations of the CSA, it explicitly 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 violations of federal law.
The FinCEN guidance clarifies financial institutions’ due diligence and reporting obligations under the BSA in light of the enforcement priorities set forth in the DOJ’s guidance. The guidance sets forth enhanced due diligence and monitoring requirements for financial institutions doing business with MRBs. The guidance emphasizes that financial institutions must first evaluate the risks associated with offering certain products or services to an MRB. In assessing these risks, financial institutions should conduct customer due diligence that includes:
- verifying with the appropriate state authorities whether the business is duly licensed and registered;
- reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its MRB;
- requesting available information about the business and related parties from state licensing and enforcement authorities;
- 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;
- ongoing monitoring for suspicious activity, including for any of the red flags described in the guidance; and
- updating information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
The FinCEN guidance also identifies a number of red flags that indicated that an MRB may be engaged in activity that implicates one of the DOJ priority factors or violates state law.
The FinCEN guidance also confirms that financial institutions choosing to do business with MRBs are required to file suspicious activity reports (SARs), due to the fact that services provided to MRBs almost certainly involve funds derived from activity that is illegal under federal law. The FinCEN guidance includes, however, the following special provisions for SARs filed in connection with MRBs:
- “Marijuana Limited” SARs should be filed when an institution reasonably believes, based on its due diligence, that the MRB 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 MRB 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 an MRB in order to maintain an effective anti-money laundering compliance program.
While the DOJ and FinCEN guidance was designed to encourage financial institutions to provide services to MRBs, it has done little to alleviate the fears many financial institutions have about doing business with MRBs. Practically speaking, the federal guidance requires the implementation of burdensome and costly compliance measures that many financial institutions are simply unwilling to undertake. Even more, financial institutions find little comfort in the DOJ and FinCEN guidance, because it simply does not have the force of law and is subject to change at any time.
As the Trump administration begins to formulate enforcement priorities, financial institutions have no guarantee that the DOJ and FinCEN guidance won’t be summarily replaced. While President Trump has publicly expressed support for legalization of marijuana at the state level, Attorney General Jeff Sessions has a long history of opposing legalization. During his confirmation hearing earlier this year, Attorney General Sessions, in response to a question regarding the tension between state and federal marijuana laws, explained that he would not commit to not enforcing federal law. To be sure, it remains unclear whether the Trump administration’s DOJ will continue to follow the enforcement priorities outlined in the DOJ guidance or undertake strict enforcement of federal marijuana laws. In sum, unless and until federal law changes, guidance alone is not enough to alleviate the concerns financial institutions have regarding the increased scrutiny and risk involved in providing services to MRBs.
As industry and government stakeholders continue to push for reforms aimed at providing MRBs increased access to financial services, the stage appears to be set for significant changes to the uncertain regulatory environment.