Cannabis Banking for Legal Cannabis Businesses: Part 2

THE GUIDANCE

The recent Treasury Department Guidance was hailed as happy news. It was reported this was finally the reassurance banks needed from the federal government to open their doors to legal cannabis dispensaries. Four months and only a handful of banks are offering bank accounts to legal cannabis businesses. We don’t yet have the answer as to why or who is allowing cannabis banking. So we look to the Guidance, for guidance.

On February 14, 2014 the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released a guidance (FIN-2014-G001) titled:

BSA Expectations Regarding Marijuana-Related Businesses*

The Guidance essentially tells banks it is OK to offer services to legal cannabis businesses so long as the banks follow rules and regulations some of which are applicable to all banking relationships and some of which are specific to providing banking services to legal cannabis businesses.   The Guidance begins with a caution that although 20 states and DC have legalized medical marijuana and two states have legalized recreational marijuana, the federal government considers marijuana to be a dangerous drug and it is still very much illegal at the federal level. Notwithstanding what any state has done regarding legality, the federal government will still be enforcing federal laws according to federal priorities.

The Guidance then refers the reader to The Cole Memo, August 29, 2013: “Guidance Regarding Marijuana Enforcement.”   The Cole Memo reminds all attorneys working for the federal government that “marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels (and that) the Department of Justice is committed to the enforcement of the Controlled Substances Act consistent with those determinations.”   The Cole Memo then outlines the federal government’s enforcement priorities, which include preventing:

  • sale of marijuana to minors;
  • money made from sale of marijuana from going to criminal enterprises;
  • transport of marijuana from state where it is legal to state where it is not;
  • legal marijuana activity being used as a cover for illegal activities;
  • violence and use of firearms when growing and selling marijuana;
  • drugged driving and other adverse public health consequences;
  • growing, possessing, or using marijuana on public lands.

Basically the federal government is saying they want to put their resources toward preventing this list of acts as they pertain to the marijuana industry. The Cole Memo goes on to say, in essence, “Oh and one other thing…” though the states have enacted laws, which under specific circumstances make the growth, distribution, sale, possession, and use of marijuana legal, if the federal government doesn’t feel these laws are robust and if we don’t feel you are enforcing your laws appropriately, we will step in.

“Jurisdictions that have implemented systems that provide for marijuana activity must provide the necessary resources and demonstrate the willingness to enforce their laws…If state enforcement efforts are not sufficiently robust to protect against the harms set forth above the federal government may seek to challenge the regulatory structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions, focused on these harms.”

Finally, the Aug 29th memo advises that though a previous memo suggested it’s attorneys to leave seriously ill people and their caregivers alone and that they don’t focus on small operations, that is no longer the case. Now, anyone and any size operation can be the focus of an investigation and the attorneys have broad “prosecutorial discretion” to do so. It seems then that though the government says they want to focus on protecting kiddos and keeping money out of the hands of bad guys, it’s really up to the local US Attorney: they choose what they want to pursue. Understanding the basics of the Cole Memo, we return to the FinCEN guidance.

After the reference and reiteration of the Cole Memo in the Guidance, the document goes on to detail what banks must do to accept legal cannabis businesses as customers.   While the memo does not use the term, legal cannabis businesses are considered high-risk customers so before a bank can offer products or services to a legal cannabis business they must conduct an investigation:

“Thorough customer due diligence is a critical aspect of making this assessment.”

Legal cannabis businesses are not the only high-risk customers banks serve. Banks conduct thorough due diligence and have increased reporting requirements for businesses such as foreign money services providers like currency exchanges; casinos; brokers/dealers in securities; dealers in precious metals, stones, or jewels; cash-intensive businesses like convenience stores, liquor stores, cigarette distributors, privately owned ATMs, vending machine operators and parking garages; and professional service providers: attorneys, accountants, doctors, or real estate brokers. (see Federal Financial Institutions Examination Council)   The memo suggests banks do the following to assess the risks of providing services to cannabis businesses:

  • verify whether the business is duly licensed and registered
  • review the license application and supporting documentation
  • request information about the business and related parties from state licensing and enforcement bodies
  • develop an understanding of the normal and expected activity for the business
  • develop and understanding of the types of products sold and types of customers served
  • monitor publicly available sources for adverse information about the business and related parties
  • continually update information gathered as part of initially due diligence
  • consider whether the business implicates one of the Cole Memo priorities or violates state law

 

Once the bank offers products or services to a legal cannabis business there are more requirements. The moment a legal cannabis business opens a bank account the bank must file a Suspicious Activity Report (SAR). Suspicious Activity Reports are generally reserved for times when a bank knows or has reason to believe one of it’s customers is involved in something illegal. More simply said if the bank thinks the customer is doing something that doesn’t pass the “sniff test” or seems “hinky” the bank is required to file an SAR.   For legal cannabis businesses there are three types of SAR a bank can file:

  • Marijuana Limited
  • Marijuana Priority
  • Marijuana Termination

No matter what, the bank must file a Marijuana Limited SAR for every legal cannabis business customer they accept. The Marijuana Limited SAR indicates that the bank believes the business is operating within state law and is not implicating one of the Cole Memo priorities. This SAR includes

  • identifying information on the subject and related parties
  • address of the subject and related parties
  • the fact that the bank is filing this SAR solely because the subject is engaged in marijuana-related business
  • the fact that no additional suspicious activity has been identified

Next, the bank must continually monitor the activities of the customer and send “continuing activity reports.” If no illegal activity is suspected, these reports contain the same information the original Marijuana Limited SAR contained plus details about the amount of deposits, withdrawals, and transfers. Basically the same report with the business’ bank statement attached. If, however, the bank “reasonably believes” that anything hinky is going on with the account, they must file a new SAR titled Marijuana Priority.

The Marijuana Priority SAR is a detailed report to law enforcement that says the bank believes their customer has violated state law or implicated one the the Cole Memo priorities. The report details the who, what, where, and how of their belief that the customer is doing something illegal. The bank is under no obligation to check any of the facts or communicate with the customer before filing the report.   The third type of SAR is the Marijuana Termination report. This is filed “in order to maintain an effective anti-money laundering compliance program.” This seems to be saying that if the bank suspects the customer is using the account to launder money they should terminate/close the account and notify via the Marijuana Termination SAR. This paragraph goes on to say that a bank is within its rights to notify other banks of the termination and the reason for it if they learn the customer is trying to open an account at another bank.

The final pages of the Guidance are dedicated primarily to a list of red flags that could or should trigger a Priority SAR. Among the expected red flags such as cash deposits followed by immediate cash withdrawals and deposits apparently structed to avoid Currency Transaction Reports are other more marijuana-specific red flags including:

  • the business receives substantially more revenue than the relevant limitations imposed by state law
  • the business receives substantially more revenue than it’s local competitiors
  • the business makes cash deposits over a short period of time that are excessive relative to local competitors and
  • a customer seeks to conceal or disguise involvement in marijuana-related business activity by, for example, using a business with a non-descript name like consulting or management.

The final paragraph reiterates the requirement to file reports on all transactions involving funds in excess of  $10,000 per day. A footnote to the Guidance reads “FinCEN’s enforcement priorities in connection with this guidance will focus on matters of systemic or significant failures.” *BSA: Banking Secrecy Act