January 30, 2020

Accounts That Go Up in Smoke: To Bank or Not to Bank, the Marijuana Industry

Adrian Snead and Logan Hill

Imagine that you run a store. Everything you sell is legal, according to the law where you live. You have inventory, employees and a very advanced sales tracking system. Yet, you cannot accept credit cards, and you can't pay your employees, suppliers or bills with checks. Paying state and federal taxes requires you to haul bags of cash to the Internal Revenue Service and state revenue offices. In fact, everything you do has to be paid with cash.

However, this isn't a 19th-century shop on the frontier; this is how nearly every cannabis business has to operate today. It is both inefficient and dangerous.

While 33 states, the District of Columbia, Guam, Puerto Rico, the Northern Mariana Islands and the U.S. Virgin Islands have legalized marijuana for recreational and/or medical use, marijuana remains a Schedule I drug and illegal under federal law.

It may be helpful for readers to understand some of the basic terminology used in the industry. Cannabis refers to both marijuana and hemp, which are derived from the Cannabis sativa plant. Federal prohibitions on hemp were lifted on Jan. 1, 2019. The 2018 Farm Bill defines hemp as the plant Cannabis sativa L, with no more than 0.3% THC content (the psychoactive ingredient in cannabis) by dry weight volume. Growers and dispensers of cannabis and its products are referred to as touch-the-plant businesses. Individuals and businesses that provide services to the marijuana industry, including attorneys, accountants, utility companies, real estate owners, plumbers and others, are referred to as ancillary businesses. Touch-the-plant and ancillary businesses are all considered marijuana-related businesses (MRBs).

Despite official federal prohibition, the state-legalized marijuana industry continues to gain momentum. At the end of 2019, the U.S. cannabis industry was worth an estimated $12 billion and is projected to nearly triple by 2025, reaching $30 billion. Amazingly, the vast majority of this industry remains unbanked, operating completely in cash.

Federal prohibition of marijuana affects all MRBs. Any contact with money that can be traced back to MRBs, no matter how ancillary, could be considered laundered and, therefore, at risk of seizure. Banking institutions serving the industry risk losing their master account with the Federal Reserve and could face additional scrutiny. For most banks, the risk of working with the marijuana industry is simply too high. Lawyers, Native American tribes, and even politicians and interest groups supporting cannabis reform have seen longstanding banking relationships ended for earning money from the industry.

The Obama Administration took a cautious but progressive approach to state-legalized marijuana. In 2013, then-Deputy Attorney General James Cole released his Guidance Regarding Marijuana Enforcement memorandum, better known as the Cole Memo, which established eight federal law enforcement priorities for marijuana—none of which was to stop the state-legalized marijuana industry. In 2018, then-Attorney General Jeff Sessions rescinded the Cole Memo. However, his successor, Attorney General Bill Barr, recently said that the U.S. Department of Justice (DOJ) continues to follow the Cole Memo's priorities.

Building on the precepts set forth in the Cole Memo, in 2014, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued guidance for banks working with the cannabis industry. The FinCEN document attempted to clarify Bank Secrecy Act (BSA) expectations and "how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and align the information provided by financial institutions in BSA reports with federal and state law enforcement priorities."

FinCEN's 2014 guidance established four banking due-diligence requirements, the most important of which was the requirement to file special Suspicious Activity Reports (SARs) for all marijuana-related transactions, including those with ancillary businesses.

FinCEN also laid out three different categories for marijuana SARs that relate to various law enforcement priorities based on the risk posed by the transacting company. The baseline Marijuana Limited SAR must be filed for any and all transactions that directly or indirectly relate to MRBs. This includes something as innocuous as a one-time payment made by a dispensary to a contractor for making a repair. All marijuana SARs must be filed within 30 days of the transaction. As with other SARs, additional continuing reports must be filed 90 days after the initial SAR, and every 90 days thereafter if the activity continues. Banks must also keep records of the SARs and their underlying transactions for five years. These marijuana SARs impose increased regulatory burdens on financial institutions. As of September 30, 2019, FinCEN had received 102,807 marijuana-related SARs.

While the de jure risk to banks serving the marijuana industry might be elevated, the de facto risk is low. Continuing congressional appropriations riders prohibit the DOJ (but not banking regulators) from prosecuting individuals who are operating in compliance with state medical, but not recreational, marijuana laws. Nevertheless, there have been no documented prosecutions of banks serving the marijuana industry where the banks otherwise comply with FinCEN and DOJ guidance.

Yet, banking institutions remain wary of entering the space. Out of approximately 12,000 U.S. banks and credit unions, only about 560 banks and 160 credit unions provide services to the cannabis industry. However, these institutions may charge substantially increased fees to cannabis-related clients as a reflection of the risk and expense required to implement and maintain a compliant anti-money laundering program for MRBs.

Many financial institutions have remained so concerned about banking the cannabis industry that they are still reluctant to work with hemp farmers and retailers, even though the 2018 Farm Bill legalized hemp. This may be why FinCEN, the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), in consultation with the Conference of State Bank Supervisors, released joint guidance on Dec. 3, 2019, clarifying that banking hemp was now legal.

Congress has long acknowledged the challenges posed by offering banking products and services to the cannabis industry. In 2013, Rep. Ed Perlmutter (D-Colo.) introduced the Marijuana Businesses Access to Banking Act in the House, and in 2015, Sen. Jeff Merkley (D-Ore.) introduced an updated companion bill in the Senate. The bill, now further updated and known as the Secure and Fair Enforcement Act (SAFE Banking Act), would create a federal safe harbor for depository institutions and account holders. It would also prevent federal regulators from penalizing or discouraging financial institutions from serving the state-legalized industry or incentivizing or even recommending the closing or downgrading of any individual account of any MRB or individual tied to an MRB acting in compliance with state law. Notably, while the SAFE Banking Act would prevent federal bank regulatory agencies from bringing a supervisory action solely on the basis that a bank was serving the cannabis industry, such agencies could still bring a supervisory action of the bank’s activities constituted other violations of law or unsafe or unsound banking practices. Moreover, ancillary businesses, insurers, Federal Reserve and Federal Home Loan Bank employees would receive explicit protection from money laundering statutes.

Significantly, the bill does not do away with the onerous marijuana SARs but instructs FinCEN to issue guidance "consistent with the purposes and intent of the SAFE Banking Act." When that provision was first drafted, the hope was that FinCEN would ultimately do away with the marijuana SARs as the industry matured and federal law changed.

The SAFE Banking Act is a popular bill, and the House version passed on Sept. 25, 2019, by a vote of 321-103. It has gained 33 Senate cosponsors, and has a notable level of support in the senate. For example, Sen. Corey Gardner (R-Colo.), formerly an opponent, has become a champion of the bill and testified in support of it in a July 2019 Senate Banking Committee hearing.

Unfortunately for proponents of the bill, a variety of hurdles remain. Sen. Mike Crapo (R-Idaho), chairman of the Senate Banking Committee, issued a statement on Dec. 18, 2019, documenting his concerns about the legislation. Namely, that the SAFE Banking Act "does not address the high-level potency of marijuana, marketing tactics to children, lack of research on marijuana's effects, and the need to prevent bad actors and cartels from using the banks to disguise ill-gotten cash to launder money into the financial system."

Ironically, proceeding with the current legal and regulatory framework enables issues such as money laundering to persist. This may be partly why Federal Reserve Chairman Jerome Powell noted that the current system "puts financial institutions in a very difficult place and puts the supervisors in a difficult place, too. It would be nice to have clarity on that supervisory relationship."

Sen. Crapo’s concerns, while substantive and understandable given the complexity of the issue, also signals a broader Senate bottleneck. This is unfortunate. The SAFE Banking Act is meant to conservatively address issues related to cannabis banking in a bipartisan manner. The issues raised by Sen. Crapo will continue to exist until MRBs can access the financial system.

Sen. Crapo invited input from all interested stakeholders. Recently, the ABA's Cannabis Law and Policy Committee within the Tort Trial and Insurance Practice section submitted a resolution to the ABA House of Delegates asking the ABA to support marijuana banking reform. The ABA will vote on the resolution at the mid-year conference in Austin, Texas, this February. Interested parties should contact Sen. Crapo's office directly and ask to speak to the chief of staff or legislative director, or contact the Senate Banking Committee and ask to speak to the majority staff’s policy director.

Adrian Snead

Holland & Knight LLP

Adrian Snead is an associate at Holland & Knight LLP’s Litigation and Dispute Resolution and White Collar Defense and Investigations practice groups. He is currently Vice Chair of the American Bar Association’s Cannabis Law and Policy Committee. From 2014 to 2017, he served as counsel and foreign policy advisor to Sen. Jeff Merkley, where he helped draft the original Senate version of the Marijuana Businesses Access to Banking Act of 2015 and the SAFE Banking Act of 2017.

Logan Hill

University of Mississippi School of Law

Logan Hill is a second-year law student at the University of Mississippi School of Law, where he is focusing on cannabis law and policy. Logan can be reached at lhill8@go.olemiss.edu.