Legalized marijuana sales have turned out to be a boon for the state of Colorado, which now expects to collect $98 million in tax revenue from recreational pot, 40% more than initially expected. Although business is by all accounts booming, cannabis growers and dispensaries are now facing a new challenge: where to put their money when banks won’t take it. Financial institutions are spooked by the possibility of facing federal money laundering charges for taking cash from marijuana related businesses and while the Department of Justice has attempted to reassure them that they won’t be prosecuted for banking legal pot, the banks don’t appear to be budging.
The Obama Administration first outlined its approach to legal, recreational marijuana in an August 2013 memo by Deputy Attorney General James Cole (“the Cole Memo”). The Cole Memo laid out eight points of priority for the DOJ in enforcing marijuana prohibition including preventing sales to minors, preventing marijuana trafficking between states that have legalized the drug and those that have not, and preventing driving under the influence. Noticeably absent from the list of priorities is the prevention of regulated sales in states where marijuana is legal under state law. Furthermore, the memo emphasizes that low-level and localized activity has been and will continue to be left to the states. States that have legalized marijuana under state law are told that the implementation of strong regulatory and enforcement regimes are less likely to draw the interest of federal prosecutors. Although the memo is couched in equivocal language—necessarily, as marijuana remains a Schedule I controlled substance under the Controlled Substances Act—the message is quite clear: if you regulate then you won’t be hassled by the feds.
While the Cole Memo may have given some assurances to cannabis enterprises, it apparently was not enough to convince banks to take deposits or provide other services to legal pot. This inability to access financial services is a critical problem for those in the business of legal marijuana. Some businesses have been forced to shut down entirely. Others have been forced to do business on a cash-only basis and consequently they have to store massive amounts of cash on premises and arm their employees to protect it. This in turn could lead to further problems as one of the Cole Memo’s eight points of priority is “preventing violence and the use of firearms in the cultivation and distribution of marijuana.” It has also led to cries of hypocrisy as the state of Colorado can take its pot money to the bank, while the people paying those taxes are left to do the equivalent of stashing cash under their mattresses.
On February 14th,the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released guidance in an effort to assuage the concerns of banks about taking money from marijuana-related businesses. Specifically, the memo outlines how financial institutions can provide services to cannabis enterprises while still meeting the requirements of the Bank Secrecy Act. Under the process outlined by FinCEN, banks must do due diligence to determine whether a marijuana-related business is appropriately licensed by the state and that there are no red flags from its operations.
Institutions that provide financial services to a marijuana business are required to file one of three different suspicious activity reports (SARs), because marijuana is illegal under federal law. If the bank believes that the marijuana business does not implicate one of the Cole Memo priorities or violate state law, the bank should file a “Marijuana Limited” SAR as well as periodic continuing activity reports. The SAR contains limited information on the business and indicates that the bank is only filing the SAR because the client is in the marijuana business.
However, if the bank finds, either during initial or continuing due diligence, that a Cole Memo priority is implicated or a violation of state law is taking place, the bank must file a more detailed “Marijuana Priority” SAR. Finally, if the bank feels it needs to terminate the relationship to maintain compliance with anti-money laundering laws, it must file a “Marijuana Termination” SAR. The FinCEN memo lays out a number of “red flags” for banks to distinguish priority SARs.
Read together with the Cole Memo, FinCEN’s guidance can be seen as an assurance to banks that providing services to compliant cannabis enterprises in states where the substance is legal will not result in prosecution. A business that does not implicate the Cole Memo priorities and thus requires only a Marijuana Limited SAR would not, if the DOJ is to be believed, attract the attention of a prosecutor. Therefore, it is understandable why some media outlets reported the FinCEN guidance as the Obama Administration giving banks the go-ahead to accept deposits from marijuana-related businesses. However, as other commenters note, banks remain reluctant to offer services to marijuana-related businesses. The Colorado Bankers Association has stated that, “an act of Congress is the only way to solve this problem,” and that the FinCEN guidance is just a modified reporting system imposing a heavy burden with which “[n]o bank can comply.” The American Bankers Association has similarly stated that banks still face the risk of prosecution.
From a legal standpoint, the bankers are right to be unconvinced about the efficacy of these memos. They are not laws or even regulation and do not carry the same force. By relying on them, banks are placing themselves in the hands of the Department of Justice and trusting in prosecutorial discretion. Furthermore, the DOJ’s priorities may change under the next administration—or even under the current one—once again exposing banks to risk of money laundering charges. Legal marijuana generates about $2.6 billion in sales per year, meaning the market may not be large enough for banks to take a risk by providing services in an uncertain environment.
For those who follow the interplay between global finance and the drug trade, this new reluctance to accept deposits from legal marijuana businesses is a head scratcher. After all, the history of banks taking deposits from drug cartels is well documented. Perhaps banks are on edge due to the record $1.9 billion fine assessed to HSBC for its acceptance of deposits from Mexico’s Sinaloa cartel among other blacklisted organizations. However, this explanation is unpersuasive considering that the fine was a drop in the bucket for a bank with $2.6 trillion in assets. In fact, the relative softness of the fine, contrasted with the harsh penalties that some face for carrying or selling small amounts of drugs, lead at least one commenter to deem it proof that the “Drug War is a Joke.”
Whatever the reason for banks’ reluctance to offer services to cannabis enterprises, it appears that Congressional action will be necessary for legal pot to be a viable business. To that end, in 2013, Colorado representatives Jared Polis and Ed Perlmutter introduced legislation aimed at legitimizing recreational marijuana sales. Polis’ Ending Federal Marijuana Prohibition Act of 2013 is the more ambitious of the two bills. It aims to amend the Controlled Substances Act to eliminate marijuana as a controlled substance and to set up a regulatory framework for marijuana similar to that in place for alcohol. Perlmutter’s Marijuana Businesses Access to Banking Act of 2013 sets a more modest goal of removing criminal liability for banks who provide services to legitimate marijuana-related businesses. Unfortunately for those in the marijuana business, neither bill is likely to pass in the near future.
Legal pot has proven to be a financial boon to the state of Colorado, and given the state’s success in extracting tax revenue from legalization it appears that other states will soon follow suit. For existing marijuana businesses, increasing legalization by states may be the best hope for spurring Congressional action to make financial services accessible to the industry. Without the ability to bank, the legal marijuana experiment may die in its infancy.