Banking Marijuana Business: A Primer on This Emerging Field

This is not a nineteenth century shop on the frontier; this is how the vast majority of cannabis businesses operate today. It is both inefficient and dangerous. Why is this the case? Because the federal government considers marijuana a Schedule I drug, making its production, possession, and sale illegal under federal law.¹ Despite federal impediments, states have taken the lead on legalizing marijuana under state law, giving rise to a multibillion-dollar industry that operates despite federal prohibition.

Our unique dual-sovereign system has created a regulatory gauntlet for financial institutions that want to work with the state-legalized marijuana industry. This article provides a brief overview of the tension keeping most banks from working with marijuana clients, the uneasy truce that has developed between the federal government and states that have legalized marijuana under state law, and congressional efforts to reform federal law.

How We Got Here—A Very Brief Overview of Federal Marijuana Prohibition and State Legalization

Over the past two decades, 35 states, the District of Columbia, Guam, Puerto Rico, the Northern Mariana Islands, and the U.S. Virgin Islands have legalized marijuana for medical and recreational use. However, marijuana remains a Schedule I drug and, therefore, federally illegal.

States are divided into two categories: (1) “Medical Only” states—those that have legalized the use of marijuana for the treatment of symptoms associated with certain specified medical conditions and (2) “Adult and Medical Use” states or “recreational” states—those that allow the recreational use of marijuana. As of November 6, 2020, 21 states have adopted “Medical Only” laws,² and another 14 states (15, if we include the District of Columbia) have adopted “Adult and Medical Use” laws.³ Additionally, three states—Nebraska, North Carolina, and Virginia—have decriminalized the possession of small amounts of marijuana.

Lacking a federal regulatory regime because the federal government still considers marijuana an illicit substance, each state that has legalized marijuana under state law has adopted, is adopting, or continues to refine its own comprehensive body of regulations to replace outright prohibition.⁴ The regulations stipulate detailed rules for a litany of marijuana-related activities. For example, Colorado has adopted nearly 200 pages of regulations governing the supply of marijuana just for the adult-use market.⁵ Among many other things, Colorado’s Retail Marijuana Code requires vendors to apply for a special license from the state, maintain detailed records of inventory, limit their advertising, and apply warning labels to all marijuana products. The state has even created a Marijuana Enforcement Division within its Department of Revenue to regulate the state’s more than 1,000 licensed marijuana facilities. Many states also allow local municipalities and counties to determine whether marijuana can be legally produced or sold within the jurisdiction’s boundaries.⁶ Some jurisdictions, such as D.C., failed to legalize marijuana sales. Licensed marijuana retailers in the District sell other goods, such as T-shirts, for exorbitant prices and then “gift” an amount of marijuana with every purchase. Where there is demand, the market will find a way.

Even as state reforms have proliferated—and public support for them has ballooned—federal law governing marijuana has remained largely unchanged since the passage of the Controlled Substances Act (CSA) in 1970. Under the CSA, all controlled substances—those that can cause dependence—are placed onto one of five Schedules (I–V) using criteria based on their accepted medical uses, potential for abuse, and effects on the body.⁷ The scheduling system has been called the “cardinal feature” of the CSA’s effort to rationalize and consolidate federal drug control laws.⁸

Schedule I contains drugs that the U.S. Drug Enforcement Administration (DEA) considers without accepted medical uses in treatment in the United States and what DEA considers a “high propensity for abuse,” while Schedules II through V rank drugs that do have an accepted medical use considering each drug’s potential for abuse and physical or psychological dependence.⁹ Schedule I drugs besides marijuana include hydroxybutyric acid (GHB) and lysergic acid diethylamide (LSD), while Schedule II drugs include many of the narcotics that today make up the focus of enforcement priorities: phencyclidine (PCP), cocaine, methadone, hydrocodone, fentanyl, and methamphetamine.¹⁰

Congress itself placed marijuana in Schedule I when it passed the CSA.¹¹ This was based, at least in part, on the recommendation from the assistant secretary of the U.S. Department of Health, Education, and Welfare, who said that cannabis be placed in Schedule I “at least until the completion of certain research.”¹² This classification means that marijuana—like other Schedule I drugs, such as heroin and LSD—is subject to the strictest possible regulatory controls. Indeed, the manufacture, distribution, and even possession of Schedule I substances, including marijuana, are criminal offenses, with the exception of narrowly circumscribed Food and Drug Administraion-approved clinical research trials, of which there are very few for marijuana.¹³

The CSA provides a mechanism to administratively reschedule cannabis, based on research and discoveries demonstrating marijuana’s medical efficacy.¹⁴ Despite a proliferation of research from around the world demonstrating marijuana’s medicinal value, the DEA has repeatedly rejected requests to reschedule marijuana, most recently in August 2016, when it denied a petition from the states of Rhode Island and Washington, and in 2020, when it denied another petition.¹⁵ The agency’s rationale for refusing to reschedule is always the same: the dearth of clinical trials demonstrating cannabis’s medical efficacy. The DEA continues to claim “there are no adequate and well-controlled studies proving efficacy; the drug is not accepted by qualified experts; and the scientific evidence is not widely available.”¹⁶ Of course, the DEA has also made U.S. clinical trials nearly impossible and has required researchers to use government-grown, substandard marijuana, which is not suitable for research.¹⁷

The 35 states and various countries, including Canada, that have legalized cannabis for medicinal purposes disagree with the DEA’s assessment. Nevertheless, marijuana remains a Schedule I drug in the United States.

Federal and State Divergence Results in Regulatory Quagmire for Depository Institutions

The obvious tension between marijuana’s Schedule I status and state legalization has created a regulatory mess for industries serving the cannabis sector, particularly banks, credit unions, and other financial services companies. While state and federal laws often diverge—on everything from environmental to workplace laws—marijuana policy is the only area where the states regulate and tax conduct that federal law all but universally prohibits.

One of the biggest issues facing the state-legalized marijuana industry and those who serve it is limited access to traditional banking and credit facilities. A significant concern for depository institutions is regulatory scrutiny from their primary federal regulatory agency. The Federal Reserve Board of Governors, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) all regulate banks. They have tremendous regulatory control over whether a depository institution can continue to exist.

Beyond regulatory concerns, federal prohibition has raised concerns for banks as to possible criminal liability.¹⁸ Such liability is very low and even “theoretical” because, as discussed in detail below, the U.S. Department of Justice (DOJ) has set out federal enforcement priorities, none of which includes prosecuting a business operating pursuant to state marijuana laws or companies, like banks, that provide otherwise legal services to the industry. Additionally, there are no known prosecutions of financial institutions serving the marijuana industry. At one point, these concerns led the American Bankers Association to caution banks about these legal risks while calling for reform from Congress. Unfortunately, the legal and reputational risks have, at times, caused financial institutions to close accounts or refuse to open accounts for a slew of professionals and others who service the marijuana industry.¹⁹

“Touch the plant” businesses, in particular, regularly cannot find banking services or pay increased, risk-based fees to depository institutions that will maintain a relationship, and are often unable to transact business other than in cash or bitcoin. However, other otherwise-legal businesses have not always been spared. Some institutions, particularly in the early era of legalization, went so far as to close accounts of ancillary businesses, including lawyers and other professionals, who were working with marijuana clients. One bank became so cautious after the Trump administration came into office that it closed the account of an organization dedicated to lobbying Congress for the reform of marijuana laws, which had been a longtime account holder.

Lack of ready access to the mainstream financial industry has led some cannabis businesses to resort to alternative and sometimes less-reputable sources of banking and finance. Ironically, this results in increased risk of money laundering. Most transactions with cannabis companies must be done in cash. This includes paying taxes, bills, and payrolls. This has spawned an industry of off-the-books alternative payment systems and alternative private financing. Payments in cash and through alternative payment systems can cloud investigators’ abilities to trace transactions and inhibit law enforcement from determining whether transactions and businesses are legitimate or fronts for illegal activity.

State and Federal Frenemies—Bridging Regulatory Gaps

Working in this convoluted system, the federal government and the states have reached an uneasy truce that has reduced, but not eliminated, this tension. The DOJ, Congress, and the Treasury Department have taken steps to focus federal enforcement of marijuana laws. In 2009, and, more famously, in 2013, the DOJ sent memoranda to U.S. attorneys around the country counseling deference to state policy as a matter of federal criminal policy.²⁰ The 2013 memo from then Deputy Attorney General James Cole (Cole Memo) expressly recognized the changing nature of state marijuana laws and directed U.S. attorneys to focus on eight federal priorities, such as preventing distribution to children and drugged driving, and preventing organized crime from using state legalized marijuana as a front for other illegal activity.

Underscoring these policy priorities, in 2014, Congress passed an appropriations rider, the “Rohrabacher–Farr” amendment (more recently known as the Rohrabacher–Blumenauer amendment).²¹ The rider prohibits the DOJ from using any of its budgeted funds to “prevent . . . states from implementing their own state laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”²² The rider has been passed every year since 2014 and has been extended through appropriation-continuing resolutions. Because of U.S. House of Representatives procedural requirements, the language of the amendment must list every state or other jurisdiction to which it applies. As new states legalize cannabis, Congress must newly include them in the rider before its protections are available. For example, the current rider does not protect the new cannabis jurisdictions of Mississippi and North Dakota, both of which voted to legalize medicinal marijuana in November 2020.

The language of the amendment is broad, and courts have used its language to dismiss cases against parties whom the DOJ has sought to prosecute for acting in compliance with state medical marijuana laws.²³ While no such appropriations rider prevents prosecutions of individuals or companies in the recreational marijuana industry, even under the Trump administration, the government has not conducted prosecutions of companies that are complying with state law concerning recreational use.

Building on the Cole Memo, in 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance for banks wishing to work with the state-legalized cannabis industry.²⁴ While the FinCEN Guidance expressly recognized the illegality of marijuana, it laid out how depository institutions serving the marijuana industry could comply with their Bank Secrecy Act (BSA) obligations.

FinCEN laid out seven criteria that institutions should use when analyzing the risk of serving any particular marijuana-related business. This includes working with state regulators to confirm a marijuana business’s licensing and compliance with state regulations; monitoring publicly available sources such as local media about the business’s activities; “developing an understanding of the normal and expected activity for the business,”²⁵ including whether the business sells to medicinal or recreational markets, or both; and conducting ongoing due diligence, including monitoring for suspicious activity outside the normal bounds of the business.

The guidance underscored that working with the marijuana industry does not alter a financial institution’s legal obligation to report suspicious activity. Financial institutions must provide FinCEN with suspicious activity reports (SARs) whenever it suspects a transaction “(i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA, or (iii) lacks a business or apparent lawful purpose.”²⁶

The FinCEN Guidance created a three-tier system of special marijuana SARs. The difference in the tiers of marijuana SARs relates to whether the institution believes a business’s transactions implicate the Cole Memo priorities.

• “Marijuana Limited” SARs: These, filed for routine transactions that due diligence confirms do not implicate Cole Memo priorities, nevertheless must contain identifying and address information for the subject parties. An institution must file continuing activity reports per normal agency guidelines.
• “Marijuana Priority” SARs: A financial institution is required to file these when it has reason to believe a marijuana firm is operating inconsistently with the Cole Memo. These SARs should include information relevant to law enforcement.
• “Marijuana Termination” SARs: This SAR is required whenever an institution ends its relationship with a firm doing marijuana-related transactions, regardless of the reason. The SAR must include the reason for the termination.

The FinCEN Guidance also laid out a series of “red flags” that institutions working with the marijuana industry should watch for. The two pages of red flags are extensive and require substantial due diligence on the part of banks. Banks must observe and report any transactions without sufficient documentations, large cash transactions (which encompasses many of the transactions in an otherwise all-cash business), and whether any interstate or international activity is found.

FinCEN expected the “guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.”²⁷ However, FinCEN’s Guidance was insufficient to entirely alleviate the fear of regulatory scrutiny for most depository institutions. Others were likely concerned about the substantial regulatory burden that the FinCEN Guidance places on financial institutions. Out of approximately 10,000 banks and credit unions in the United States, less than 7 percent (695 depository institutions) submitted marijuana SARs to FinCEN in the second quarter.²⁸ This merely means that each of those institutions identified at least one marijuana-related transaction.

While the Cole Memo and its predecessor were rescinded by then–Attorney General Jeff Sessions in January 2018, current Attorney General William Barr stated that the DOJ continues to “follow” the Cole Memo’s guidance, that he favors a lenient policy on marijuana, and that he would prefer a single federal regulatory framework. FinCEN has not rescinded its 2014 Guidance and has made clear that “[t]he SAR reporting structure laid out in the 2014 guidance remains in place.”²⁹

Future Outlook

Lack of access to traditional banks remains a major issue for the marijuana industry and those who serve it. Federal Reserve Chair Jerome Powell testified that banking the cannabis industry “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.”

Notwithstanding the steps taken by Congress, the DOJ, and FinCEN, however, the tension between state and federal laws governing marijuana persists. For one thing, spending riders do not shield anyone acting in compliance with any state’s adult-use marijuana laws. Moreover, the protection afforded by such riders is only temporary. If a rider lapses, both medical and nonmedical marijuana users and suppliers would be subject to arrest and prosecution by the DOJ, and not just for their conduct going forward. Those using and producing marijuana could also be prosecuted for violations of the Controlled Substances Act they committed while the riders were in effect (so long as the statute of limitations has not expired). Moreover, anyone out of compliance with state regulations would also be subject to criminal sanctions, even if their violations of state regulations were de minimis.

Congress is considering a number of more substantive measures, including the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (commonly known as the MORE Act), for which Vice President-elect Kamala Harris (D-Calif.) is the lead sponsor.³⁰ The bill would legalize and tax marijuana. Other, more focused measures have received approval by the U.S. House of Representatives but remain stalled in the U.S. Senate. In September 2019, the House passed the Secure and Fair Enforcement (SAFE) Banking Act of 2019 (H.R. 1595) by a vote of 321–103. The SAFE Banking Act was also passed as part of the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, which the House passed in May 2020. While HEROES awaits Senate action, Minority Leader Chuck Schumer (D-N.Y.) reportedly included the SAFE Banking Act in the Senate Democrats’ COVID relief proposal. This represents a milestone for marijuana reform, as it is the first time either caucus has made providing banking relief to the industry part of a major bill.³¹ The SAFE Banking Act would explicitly allow depository institutions to allow banks to provide services to attorneys and others serving the cannabis industry without fear of legal violations. This would allow banking regulators to provide the clearer rules and guidelines that Federal Reserve Chairman Powell has said are necessary.

At the state level, various measures have been considered and passed to ease banking restrictions. In September 2020, California Gov. Gavin Newsom signed AB 1525, removing state penalties that could have been levied on banks for working with state-legalized marijuana businesses. In 2019, the California Senate also passed SB 51, which would have allowed for a limited-purpose state bank charter in order to provide depository services to licensed cannabis businesses. However, the measure never made it to the governor’s desk.

At the 2020 American Bar Association’s Midyear Meeting in Austin, Texas, the ABA House of Delegates approved Resolution 103D, resolving that the ABA would urge Congress to enact legislation protecting proceeds earned by lawyers and other service providers working with the state-legalized cannabis trade.³² This measure allows the ABA to advocate on behalf of bills such as the SAFE Banking Act.

Conclusion

The incongruence between federal and state cannabis policy has created a multibillion-dollar market serviced by numerous actors even without legal protections afforded non-illicit industries. For this reason, the financial industry’s penetration into this market remains tepid, with the vast majority of banks and credit unions staying on the sidelines. Others that have chosen to service the industry have done so only after consultation with regulatory and cannabis counsel, and after strengthening their compliance policies and procedures, all of which increases costs.

Cannabis measures outperformed both parties in the states where voters could decide to legalize. In deep-red Mississippi, medical marijuana legalization passed with nearly 66 percent of the vote, beating the portion of Mississippians who voted for President Trump by 7 percentage points. In South Dakota, full legalization passed with 54 percent of the vote; in Arizona, full legalization passed with 60 percent of the vote. And in deep-blue New Jersey, full legalization passed with 67 percent of the vote, beating President-elect Biden’s 57.4 percent.

Although during the campaign President-elect Biden did not come out for complete legalization, it is likely that his administration will push to liberalize the federal government’s approach to cannabis. Vice President-elect Harris has vowed that a Biden administration would seek to decriminalize marijuana. As the lead sponsor of the MORE Act, she is likely to lead the administration’s reform efforts. The most likely reforms and those that could be rolled out early in the administration would consist of further guidance from the DOJ, FinCEN, and other financial regulators. The guidance would likely provide increased security to industry actors and those who serve them.

Ultimately, congressional legislation providing clarity and regulatory certainty to financial institutions will likely be needed before the cannabis industry can access traditional banking products and services with the same level of comfort and normal scrutiny as mainstream customers. Any reforms will need the 60 votes required to succeed in the U.S. Senate to overcome a filibuster. Given the growing number of states legalizing cannabis, including deeply conservative states such as Oklahoma, Mississippi, and both Dakotas, it appears probable that, should a marijuana reform bill reach the Senate floor, it would have sufficient votes to pass.

Endnotes

1. Controlled Substances Act (CSA), 21 U.S.C. §§ 801 et seq.

2. Arkansas, Connecticut, Delaware, Florida, Hawaii, Louisiana, Maryland, Michigan, Minnesota, Missouri, Mississippi, New Hampshire, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, Utah, and West Virginia.

3. Alaska, Arizona, California, Colorado, Illinois, Maine, Montana, Massachusetts, Nevada, New Jersey, Oregon, South Dakota, Vermont, Washington, and Washington, D.C.

4. For a thorough discussion of how states now regulate marijuana, see Robert A. Mikos, Marijuana Law, Policy, and Authority (2017).

5. 1 Colo. Code Regs. 212-2.

6. See, e.g., Or. Laws 2017, ch. 475B, § 461 (Or. Rev. Stat. § 475B.461 (2017)) (allowing a referendum to prohibit an applicant for a license for the production, processing, or sale of marijuana items to operate in a city or county); Or. Laws 2017, ch. 475B, § 928 (Or. Rev. Stat. § 475B.928) (allowing for local time, place, and manner regulations).

7. 21 U.S.C. § 812(b).

8. Nat’l Org. for Reform of Marijuana Laws (NORML) v. Ingersoll, 497 F.2d 654, 656 (D.C. Cir. 1974).

9. See Drug Enf’t Admin. (DEA), U.S. Dep’t of Just., Drugs of Abuse: A DEA Resource Guide 8–10 (2017 ed.), https://www.dea.gov/sites/default/files/2018-06/drug_of_abuse.pdf.

10. Id. at 8.

11. Gonzales v. Raich, 545 U.S. 1, 13–14 (2005).

12. Id. (citing H.R. Rep. 91-1444, 1970 U.S.C.C.A.N. 4566, 4579).

13. See 21 U.S.C. § 841 (criminalizing marijuana trafficking); id. § 844 (criminalizing marijuana possession).

14. See id. § 811.

15. DEA, Denial of Petition to Initiate Proceedings to Reschedule Marijuana, 81 Fed. Reg. 53687, 53687–53766 (Aug. 12, 2016); Sisley et al. v. DEA, Case No. 20-71433, Dkt. 18 at 16 (9th Cir. Sept. 29, 2020) (noting that the DEA denied a 2020 petition to reschedule submitted by Stephen Zyskiewicz).

16. DEA, Denial of Petition, 81 Fed. Reg. at 53688.

17. See, generally, In re Scottsdale Rsch. Inst., LLC, Petition for Mandamus, Case No. 19-1120 (D.C. Cir. June 6, 2019).

18. E.g., conspiracy, 21 U.S.C. § 846; aiding and abetting, 18 U.S.C. § 2(a); money laundering, id. § 1957; RICO, id. § 1961; and both civil and criminal asset forfeiture under various laws including the Bank Secrecy Act, 31 U.S.C. §§ 5311 et seq.

19. See Personal Stories Submitted to Senator Jeff Merkley, S. Comm. on Banking, Hous. & Urban Affairs, Challenges for Cannabis and Banking: Outside Perspectives at 19, 25 (July 23, 2019), https://www.merkley.senate.gov/imo/media/doc/19.07.23%20CANNABIS%20BANKING%20PERSONAL%20STORIES.pdf.

20. See Memorandum from David W. Ogden, Deputy Att’y Gen., to Selected U.S. Attorneys (Oct. 19, 2009), https://www.justice.gov/archives/opa/blog/memorandum-selected-united-state-attorneys-investigations-and-prosecutions-states; Memorandum from James M. Cole, Deputy Att’y Gen., to All U.S. Attorneys (Aug. 29, 2013), https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf.

21. See Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113–235, § 538, 128 Stat. 2130, 2217 (2014).

22. Section 538 of the Consolidated Appropriations Act. 2018, Pub. L. No. 115-141, March 23, 2018, 132 Stat. 348.

23. See, e.g., United States v. McIntosh, 833 F.3d 1163, 1177 (9th Cir. 2016).

24. Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury (FinCEN), BSA Expectations Regarding Marijuana Related Businesses, at 1 (Feb. 14, 2014) (FinCEN Guidance), https://www.fincen.gov/sites/default/files/guidance/FIN-2014-G001.pdf.

25. Id. at 2.

26. Id. at 3.

27. Id. at 1.

28. FinCEN, Marijuana Banking Update (June 30, 2020), https://www.fincen.gov/sites/default/files/shared/508_295174_MJ%20Banking%20Update%203rd%20QTR%20FY2020_Public_508%20compliant.pdf.

29. Id. at 2 n.1.

30. Marijuana Opportunity Reinvestment and Expungement Act of 2019 (MORE Act of 2019), S. 2227 (July 23, 2019).

31. Notably, this is not the first time a marijuana banking reform provision has made it to the Senate floor. In 2015, the Senate Appropriations Committee passed an appropriations rider mimicking the SAFE Banking Act by a vote of 16 to 14. See S.1910, § 638, 114th Cong., https://www.congress.gov/bill/114th-congress/senate-bill/1910/all-actions. The bill ultimately passed the Senate with the measure included; however, the conference committee removed the measure in the final bill passed by Congress.

32. ABA Resolution 103D (Feb. 2020), https://www.americanbar.org/content/dam/aba/administrative/news/2020/02/midyear2020resolutions/103d.pdf.