In 1996, California voters passed Proposition 215, making it the first state to allow for the medical use of marijuana. To date, a total of twenty-one states and the District of Columbia allow for comprehensive public medical marijuana programs. On April 10, 2014, Kentucky Gov. Steve Beshear signed into law Senate Bill 124 which gives families experiencing difficult health problems a new treatment option: the use of cannabidiol (a derivative of hemp oil), if it is prescribed by a research university or through a Federal Drug Administration Study. Kentucky's new law is far from a comprehensive medical marijuana program, but it is nonetheless a small development - one that could eventually lead to broader measures.
While Kentucky may be taking baby steps toward medical marijuana use, Colorado and Washington have taken giant leaps to legalize the drug-not only for medicinal purposes, but for recreational use as well. In Colorado, retail sales began on January 1, 2014; Washington is still working out the details of its measure, but sales are slated to begin this year.
No matter one's personal opinion about the infamous plant, there is no denying that the marijuana industry is growing. However, banks are learning that, even in states where marijuana has been approved for medicinal or recreational use, the cost of doing business with dispensaries of the drug can be high.
The Legal Conundrum
At the federal level, marijuana is a Schedule 1 drug and joins the ranks of heroin, LSD and Ecstasy under the Controlled Substances Act ("CSA"). Schedule 1 drugs are not recognized for any medical purposes and, under the CSA, it is illegal to manufacture, distribute or dispense them. Notwithstanding the federal ban, more than 1/3 of the states have legalized some form of marijuana-related activity.
Dispensaries and marijuana-related businesses, like all other businesses, need banking and financial services to successfully operate. They may need to obtain a loan to purchase equipment, a lease for their store front, a credit card for daily expenditures, and lines of credit. Yet, access to these kinds of services is limited. In fact, most legal marijuana entrepreneurs have to conduct their business entirely in cash. This is because banks are leery of providing services that might constitute violations of federal statutes that govern their industry.
The Bank Secrecy Act ("BSA") requires banks to monitor money passing through their institutions for suspicious activity that might signify money laundering or other criminal activities. Pursuant to the BSA, banks are required to file Suspicious Activity Reports ("SARs") with the Financial Crimes Enforcement Network ("FinCEN") (an agency of the United States Department of the Treasury) when suspicious activity is suspected. Because the CSA forbids the sale and distribution of marijuana, any proceeds that are a result of those transactions would be considered illegal and, thus, immediately raise money laundering or criminal concerns (and require the filing of a SAR). Banks (and their employees) that did not file a SAR after receiving such proceeds could be sanctioned with criminal or civil fines. By accepting deposits from or extending loans to marijuana entrepreneurs, banks could also be held liable for the aiding and abetting of a criminal offense.
On February 14, 2014, FinCEN issued guidance intended to clarify the BSA expectations for financial institutions seeking to provide their services to marijuana-related businesses. Just how much the guidance eased the banking industry's concern is debatable.
The document begins by reiterating that the CSA makes it illegal to manufacture, distribute, or dispense marijuana, but adds that banks must make their own decision to open, close or refuse any particular account or relationship based on a number of risk factors.
In August of 2013, the U.S. Department of Justice Deputy Attorney General James M. Cole issued a memorandum ("the Cole Memo") to all United States Attorneys providing updated guidance to federal prosecutors concerning marijuana enforcement. The FinCEN guidance repeatedly refers to the Cole Memo and, specifically, the Cole Memo priorities. Within the Cole Memo, there are eight priorities that call for DOJ attorneys' and law enforcement's attention and resources:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from begin used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property.
The FinCEN guidance directs that prosecutors consider these enforcement priorities as they relate to federal money laundering, unlicensed money transmitter, and BSA offenses predicated on marijuana-related violations of the CSA. In other words, the FinCEN delicately suggests that prosecutors turn their heads when banks and marijuana entrepreneurs do business together, unless the transactions implicate one of the eight priorities listed above.
The guidance also outlines what "due diligence" factors financial institutions must consider when performing risk assessments in conjunction with marijuana-related transactions. It further maintains that the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity and establishes a perplexing three-tier SAR classification for these activities.
Banking officials had hoped that the Treasury Department would offer more explicit legal authorization, but the guidance stays on the safe side and stops short of giving institutions a green light. Without the thumbs up it was seeking, it remains unclear if banks will feel comfortable enough to transact with these businesses. For instance, it is difficult, if not impossible, for banking employees to suspect whether a legal transaction will somehow implicate any of the Cole Memo priorities. In addition, the due diligence factors set forth call for actions that many banks will not have the manpower or resources to carry out, such as "ongoing monitoring of publicly available sources for adverse information about the business and related parties."
In response to the limited guidance from the Treasury Department, Colorado legislators have proposed a bill in their current legislative session that would allow a credit union-like co-op specifically for medical and recreational marijuana businesses. The co-op would be overseen by Colorado's Division of Financial Services and be vested with the power to provide credit and checking and other financial services. A similar measure was introduced by Colorado lawmakers two years ago, but the effort failed. The success of the proposed bill is questionable, but it is undeniable that states are ready for change and are looking for ways to reform the laws.
Banks in states that have legalized the use of recreational or medicinal marijuana must proceed with caution until more specific guidance becomes available. This issue will no doubt garner additional attention as more states approve the drug's use in some fashion. Compliance issues abound in this area and banks will have to follow the regulations and laws closely so as to not run afoul of prohibited practices. No one wants to see a bank go up in smoke over a marijuana deal gone bad.
Masten Childers, III, an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC, is a member of the firm's Litigation department where he focuses his practice on bank litigation, estate planning litigation, personal injury and closely-held business services. Mr. Childers can be reached at (859) 231-8780 or firstname.lastname@example.org.
This article is intended as a summary of federal and state law and does not constitute legal advice. This an advertisement.