The cannabis conundrum: Frank talk about marijuana-related business banking

As a growing number of states legalize medical and/or recreational marijuana use—Illinois becoming the latest, effective January 2020—financial institutions must acknowledge that they may (and likely do) provide banking services for marijuana-related businesses (MRBs), intentionally or not.

With 40 states and the District of Columbia legalizing marijuana use to some degree, financial institutions must take steps towards policies and procedures that clearly outline their intentions. This article provides a high-level overview of current federal law and considerations for creating a marijuana banking policy, regardless of the institution’s intent to allow or prohibit MRB accounts.

Federal legal landscape: Intrigue grows

A memoranda trail led to the current state of federal law as it concerns enforcement related to the cultivation, distribution and sale of marijuana:

1. Ogden Memo (2009): The Department of Justice (DOJ) will not prioritize the prosecution of medical marijuana operators in “clear and unambiguous compliance” with state laws.
2. First Cole Memo (2011): The Obama administration rescinds the Odgen Memo, allowing for cannabis shops in states where medical marijuana is legal.
3. Second Cole Memo (2013): Sets forth the following eight DOJ enforcement priorities to prevent:
   • distribution of marijuana to minors
   • marijuana sales revenue from going to criminal enterprises, gangs, and cartels
   • diversion of marijuana from states have legalized it in some form to other states
   • state-authorized marijuana activity from use as a cover or pretext to traffic other illegal drugs or conduct other illegal activity
   • violence and firearms use in marijuana cultivation and distribution
   • drugged driving and exacerbation of other adverse public health consequences related to marijuana use
   • marijuana growth on public lands and attendant public safety and environmental dangers posed by such marijuana production

   marijuana possession or use on federal property.

4. Sessions Memo (2018): Rescinds the Second Cole Memo, and reinstates standard DOJ enforcement priorities.

For practical purposes, this sequence of DOJ actions has created very little impact. Each U.S. Attorney has prosecutorial discretion, which likely follows the eight enforcement priorities in the Second Cole Memo—despite its official revision. This provides little comfort to most in today’s unsettled legal and political environment—but additional activity to follow at the federal level may allow some to breathe more easily.

Congress: Ready to act?

Though legislation introduced in the Republican-controlled Congress stalled, momentum may pick up in the Democratic-controlled House. Of note, the Secure and Fair Enforcement Banking Act (SAFE Banking Act) was introduced in the House on March 7, 2019. It provides safe harbor protections for depository institutions that provide financial services to cannabis-related legitimate businesses.

This new bill also adds protection from money laundering and other laws to ancillary professionals such as real estate owners, accountants and other vendors. Additionally, it adjusts the tribal language and definition of “cannabis-related legitimate business.” In an era of partisan rancor, the SAFE Banking Act remarkably enjoys bipartisan support, as well as general backing from banking and cannabis industry trade associations.

FinCEN: Three key relationship phases

Most financial institutions should be familiar with guidance issued by the Financial Crimes Enforcement Network (FinCEN) on Feb. 14, 2014. Bank Secrecy Act (BSA) Expectations Regarding Marijuana-Related Businesses specifies three phases that describe a financial institution’s relationship to MRBs in Suspicious Activity Reports (SARs):

• Marijuana limited: The MRB does not raise any red flags (as enumerated in the guidance) that would indicate activity that implicates any enforcement priority in the second Cole Memo, and complies with the appropriate state’s regulations for marijuana businesses. Due diligence requirements further dictate that an initial Marijuana Limited SAR requires periodic updates for ongoing cannabis-related activity.
• Marijuana priority: The MRB raises one or more red flags or may not fully comply with state marijuana businesses regulations. Banking services may continue while authorities further investigate.
• Marijuana termination: The MRB raises one or more red flags or fails to comply with appropriate state marijuana businesses regulations; or the financial institution turns away marijuana-related customers for business reasons; or the financial institution terminates its relationship with the MRB.

Even if financial institutions decline banking services to MRBs, they must monitor transactions and customers on an ongoing basis, and file updated SARs as appropriate. 

Marijuana banking: Ambiguity and enforcement

Based on the status of federal law, the proper course for any financial institution will depend, in part, on the following five factors:

• state marijuana laws,
• the financial institution’s risk profile,
• the board of directors’ opinion,
• the institution’s relationship with regulators, and
• the ability of staff to understand and implement appropriate policies and procedures to monitor MRBs.

As noted, even a decision to avoid marijuana banking requires a targeted BSA/anti-money laundering program and a robust customer identification program (CIP) to ensure daily enforcement of that decision at the branch.

Several considerations create further ambiguity. First, FinCEN guidance only targets marijuana-related activity that directly “touches the plant”—meaning it doesn’t address persons and businesses that provide goods and services to marijuana entities, even if they are one or two steps removed from the business itself. Second, this creates policy difficulty for financial institutions that prohibit banking services to marijuana business owners and entities.

You’ll want to coordinate with legal counsel to steer clear of banking policies that ignore these issues and lead to inadvertent violation of an institution’s own policy determinations.

Putting it all together: Just say ‘know’

Ultimately, the consequences for not viewing MRBs in a clear, intentional and comprehensive manner are great—regardless of any decision to “just say no.” For all the excitement generated by this burgeoning sector, it remains all too easy to lose sight of the forest for the weed.

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Tammy Campbell is principal compliance counsel at Finastra and Joseph T. Lynyak III is a partner at Dorsey & Whitney LLP.