On August 29, 2013, after Washington and Colorado voters legalized marijuana, then-acting U.S. Deputy Attorney General James M. Cole issued an enforcement memorandum (2013 Cole Memo) to address the tension between the federal Controlled Substances Act and states with regulated marijuana programs. This memo essentially provides that the federal government will tolerate robustly regulated state marijuana licensing schemes for marijuana businesses, but that the Department of Justice will continue working to prevent the following:
- the distribution of marijuana to minors;
- cannabis revenues going to criminal enterprises, gangs, and cartels;
- diversion of marijuana from states where it is legal to other states;
- state-authorized activity used as a cover for illegal activity, including trafficking of other illegal drugs;
- violence and the use of firearms in the cultivation and distribution of marijuana;
- drugged driving and exacerbation of other adverse public health consequences associated with marijuana use;
- the growing of marijuana on public lands; and
- marijuana possession or use on federal property.
The 2013 Cole Memo “rests on [the Department of Justice’s] expectation that state and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.” If a state’s oversight of its marijuana industry is insufficient, those who own, operate, or even provide services to marijuana businesses may be subject to federal enforcement and arrest under federal laws.
In February 2014, the Department of Justice issued a second marijuana enforcement memorandum (2014 DOJ Memo), extending the 2013 Cole Memo’s treatment of marijuana businesses to financial institutions that provide banking to marijuana businesses. By offering services to businesses that generate revenue from marijuana sales, a financial institution could potentially violate criminal anti-money-laundering and money-transmitting statutes. The February 2014 DOJ Memo communicated that these issues would be treated as low law-enforcement priorities so long as the financial institutions were working within the confines of robust state regulation and were continuing to follow adequate, risk-based anti-money-laundering procedures.
At the same time in complementary guidance, the Financial Crimes Enforcement Network (FinCEN), an agency within the Department of Treasury, addressed the issue of cannabis business banking accounts. These guidelines set forth that banks can provide financial services to marijuana businesses without violating existing federal regulations if they do the following:
- ensure the business is duly licensed and registered with its state regulators;
- vet and review all license applications and related financial and background documentation the cannabis business used to secure its license to operate from the state;
- request and receive from state regulators and law enforcement all available information about the cannabis business and its related owners and financiers;
- develop an understanding of the normal and expected commercial activity for the business, including the products to be sold and customer profiles; and
- monitor publicly available sources, including social media accounts, to ensure the marijuana business complies with applicable state laws and the 2013 Cole Memo.
Banks also must file Suspicious Activity Reports (SARs) at least quarterly with FinCEN for all their marijuana-business clients. There are no direct or immediate consequences arising from these SAR filings, but these SARs enable the federal government to know exactly who owns and runs the marijuana businesses and with whom they are banking.
The FinCEN guidelines increase banking costs for banks with cannabis business accounts, nearly all of which the banks push onto their cannabis clients. In turn, most marijuana businesses must pay a financial premium just to have a bank account.
Some government entities and banking institutions have tried to build marijuana-only financial institutions. The state of Colorado attempted to create its own marijuana-only cooperative banking system, which failed because of federal-law conflicts and an inability to secure insurance. A few credit unions and small banks in Colorado and Washington have developed special pilot programs to take on state-licensed marijuana businesses. Despite these efforts, there remains a significant lack of banking for cannabis businesses, and major banking institutions are not expected to take on cannabis business accounts unless and until the federal prohibition against cannabis ends. In the meantime, many marijuana businesses will no doubt continue operating on an all-cash basis, which renders them easy targets for criminal activity and complicates their business operations.
Marijuana businesses that want banking services should expect their banks and credit unions to fulfill their FinCEN due diligence requirements, which include investigating their payment account to vendors, landlords, and others to verify who is receiving the proceeds of marijuana sales. Marijuana businesses must be prepared to disclose the details of their business operations to their financial institutions in a way required of no other business.
If a bank or credit union sees too many red flags with a cannabis business, that business will not secure a bank account. Red flags under the FinCEN guidelines include anonymous out-of-state or international investors or financiers; an inability to trace money flow to investors, owners, and/or vendors; failing to secure a state and/or local license to operate; owners and/or financiers who have significant criminal histories; the business’s failure to report income and/or pay taxes to the state or the federal government; the business’s violation of state operational laws and rules; and the failure to timely renew state and/or local operational licenses.
Since FinCEN issued its guidelines, the federal government has been mostly uninterested in addressing the cannabis industry’s banking problem. But California’s recent legalization of recreational marijuana could soon render this issue too big to ignore. Once California implements legalization (expected by 2018), its cannabis industry will be significantly larger than that of any of the other seven states that have legalized recreational cannabis. The sheer size of the market may force the federal government to expand the FinCEN guidelines to facilitate banking services for cannabis businesses.
On December 2, 2016, California’s then-acting State Treasurer, John Chiang, wrote to President Trump seeking increased guidance on California cannabis and banking:
Conflict between federal and state rules creates a number of difficulties for states that have legalized cannabis use, including collecting taxes, increased risk of serious crime and the inability of a legal industry under state law to engage in banking and commerce . . . We have a year to develop a system that works in California and which addresses the many issues that exist as a result of the federal-state legal conflict . . . Uncertainty about the position of your administration creates even more of a challenge.
Chiang also wrote about how California may “exacerbate” the banking problem because of the immense size of its current and anticipated marijuana marketplace. The Trump administration has yet to respond to Treasurer Chiang.
Under former Treasury Secretary Jack Lew, the Department of Treasury defended its cannabis banking guidelines to Congress on the grounds of public safety and increased transparency. The question now is whether newly appointed Treasury Secretary Steven Mnunchin will do the same. Mnunchin has so far said nothing publicly about marijuana banking or the FinCEN guidelines, so it is difficult to know whether he supports or opposes the cannabis banking status quo or whether he considers it a priority. In the meantime, banking uncertainty for cannabis businesses remains.
Even in states where cannabis is legal, financial institutions that do not want to work with marijuana businesses consistently deny and shut down cannabis business bank accounts. This causes financial chaos across the state-legalized cannabis industry, primarily in those states without banks and credit unions willing to work within the confines of FinCEN’s 2014 guidance. Experience has shown, however, that once one or two banks or credit unions begin working with marijuana businesses within the confines of the FinCEN guidance, other banks and credit unions begin to follow suit. As more and more financial institutions choose to work with cannabis businesses, federal lawmakers, regulators, and insurance providers must grapple with the complexities of providing deposit services within an industry that is federally illegal.