Due to difficulty in obtaining financial services and because marijuana is a “cash only” business, marijuana-related businesses (MRBs) face staggering safety, security and operational issues.
Help is on the way for this $7.2 billion per year industry via the Secure and Fair Enforcement Banking Act (SAFE Banking Act), 114 HR 2076, the stated aim of which is “creating protections for depository institutions that provide financial services to MRBs, i.e., those touching marijuana at some point along the supply chain including cultivators, extractors and dispensers.
Marijuana Banking Law
The Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. Sections 801, Et. Seq (1970), (CSA) lists marijuana next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision,” 21 U.S.C. Section 812(b)(1). The CSA prohibits marijuana’s manufacture, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s Supremacy Clause, state laws conflicting with federal law are generally pre-empted and void, (U.S. Const., Art. VI, cl. 2); Wickard v. Filburn , 317 U.S. 111, 124 (1942), (“No form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress”).
This federal prohibition creates exposure for both MRBs and those providing them with financial services. Depending on amount of cannabis possessed, cultivated or sold, the CSA imposes penalties ranging from incarceration of 15 days to life and fines of $1,000 to $1,000,000. Any transfer or deposit of monies yielded from cannabis’ sale may deemed “money laundering” in violation of 18 U.S.C. Section 1956 for the “seller” and a Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970 (Bank Secrecy Act) violation for the bank accepting the deposit and “failing to identify or report financial transaction involving proceeds of ‘the CSA’ violation,” 31 U.S.C. Section 531(g).
While still 100 percent illegal under federal law, state legalized marijuana industry’s existence rests on three Department of Justice “policy clarifying” memoranda restraining U.S. attorneys’ CSA enforcement in legalized marijuana states (hereinafter, collectively referred to as Cole Memorandum). While reiterating marijuana’s CSA illegality, the Cole Memorandum instructs focusing federal resources on “most significant threats in the most effective, consistent, and rational way” listing “eight enforcement priorities” of preventing: distribution of marijuana to minors; marijuana sale revenue going to criminal enterprises, gangs and cartels; diversion of marijuana from states where it is legal under state law in some form to other states; state-authorized marijuana activity from being used as a cover or pretext for trafficking of other illegal drugs or other illegal activity; violence and use of firearms in marijuana’s cultivation and distribution; drugged driving and exacerbation of other adverse public health consequences associated with marijuana use; growing of marijuana on public lands and attendant public safety and environmental dangers posed by marijuana production on public lands; and marijuana possession or use on federal
In its Feb. 14, 2014, dated guidance, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) clarified that through adhering to institution specific factors (particular business objectives, evaluation of risks associated with offering particular product or service, and capacity to effectively manage risks), banks may provide financial services to MRBs consistent with Bank Secrecy Act obligations by: obtaining and reviewing “marijuana-related business and parties” information from licensing and enforcement authorities including application, license and registration documentation; developing an understanding of business’ normal and expected activity including types of to-be-sold product and to-be-served customers (e.g., medical versus adult use); monitoring publicly available sources for adverse information about business and related parties; monitoring for suspicious activity, including the guidance’s specified red flags; and routinely updating customer due diligence information commensurate with risk (FinCEN guidance).
These “FinCEN guidance ‘red flags’ indicating state law or Cole Memorandum priority violations” include MRBs: appearing to use license as a pretext to launder “criminal activity derived funds;” inability to demonstrate a licensed business operating consistently under state law or legitimate source of significant outside investments; concealing or disguising cannabis involvement; are, or have been, subject to a marijuana-related law or regulation enforcement action (including owners and operators); engaging in international or interstate activity including making/receiving out-of-state cash deposits or interstate transfers; or purporting to be a “nonprofit” while engaged in commercial activity inconsistent with classification.
The FinCEN guidance compounds compliance costs by requiring that a bank providing financial services to an MRB file suspicious activity reports (SARS) following aforementioned “red flags” or if it knows, suspects, or has reason to suspect that a conducted or attempted transaction: involves—or is an attempt to disguise—funds derived from illegal activity; is designed to evade Band Secrecy Act regulations; or lacks a business or apparent lawful purpose.
Dangers/Obstacles Imposed by Lack of Financial Services
First and foremost, MRBs and their employees, patients and vendors face physical criminal risk of robbery and assault. for example, while attempting to stop a June 18, 2016, robbery, Colorado dispensary security guard Travis Mason was shot to death.
Second, the “lack of financial services” access both imposes additional disbursement and “accounting and record keeping” requirements on MRBs and causes a massive productivity loss. Third, because they lack financial services and receive all monies in cash, MRBs are forced to pay employees, landlord, taxes, utilities (electricity, water) and vendors in cash thereby “passing on” the criminal vulnerability, administrative burden and productivity loss.
Fourth, because insurance typically only covers up to $20,000 in “cash loss” and MRBs often have between $200,000 to $500,000 in cash on hand, theft can be a fatal blow to an enterprise. Fifth, even if it has a bank account, after writing a check to another MRB, an MRB’s account may be flagged and shut down creating huge business interruption issues. Further, following account closure, MRBs’ owners and employees often have their personal accounts closed and endure difficulty in obtaining home loans or credit cards.
SAFE Banking Act
Introduced on April 27, and co-sponsored by U.S. Reps. Ed Perlmutter (D-Colorado), Denny Heck (D-Washington), and Don Young (R-Alaska), the SAFE Banking Act provides a “safe harbor” for banks providing “financial services” to MRBs including:
• Barring federal banking regulators from: terminating/limiting “deposit insurance” or “share insurance;” prohibiting, penalizing or discouraging from providing financial services to MRBs; recommending, incentivizing or encouraging a bank not to offer—or diminish—financial services to an account holder that is or becomes an MRB or the MRB’s owner, operator, or employee;
• Immunizing both banks providing ”financial services” to MRBs and their officers, directors and employees from prosecution under any federal law or regulation; and
• Amending the Bank Secrecy Act to require the secretary of banking to issue “modified SARS reporting regulations” that do not “inhibit” providing financial services to MRBs.
Presently before the House Financial Services Committee, The SAFE Banking Act mirrors predecessor “Marijuana Businesses Access to Banking Act,” which languished after being introduced both in 2013 and 2015.
However, because, in the intervening four years, legalized medical marijuana’s footprint has expanded to encompass 29 states and several U.S. territories, 8 of which—and Washington, D.C.—legalized “adult use” by those 21 years of age and over), momentum has increased and The SAFE Banking Act has a greater likelihood of being enacted. •
Written for The Legal Intelligencer by Steven M. Schain