To adequately weigh the risks of doing business with the legal cannabis industry, financial institutions should be apprised of (1) recent action by the Department of Justice (DOJ) to allow federal prosecutors to prosecute cannabis offenses under federal laws, including the CSA and the anti–money laundering (AML) provisions of the BSA, and (2) 2014 guidance from the Financial Crimes Enforcement Network (FinCEN) that instructs financial institutions to mitigate BSA risks by filing Suspicious Activity Reports (SARs) on all transactions with MRBs. In light of the November 2018 resignation of Attorney General Jeff Sessions and Canada’s recent action to legalize marijuana nationwide, financial institutions should remain vigilant not only for signs that the DOJ will step up enforcement actions against MRBs that are operating legally under state or Canadian laws but also for new guidance from FinCEN on BSA expectations for financial institutions that do business with MRBs.
Sessions Rescinds the Cole Memo
On January 4, 2018, Sessions rescinded the Cole Memo, which provided guidance to federal prosecutors concerning marijuana enforcement under the CSA in light of conflicting state laws. The Cole Memo, issued on August 29, 2013, by James M. Cole, former deputy attorney general, directed prosecutors to focus enforcement resources only on people or organizations whose conduct interfered with certain priorities, such as preventing the distribution of marijuana to minors and preventing revenue from the sale of marijuana from going to criminal enterprises. Sessions’s announcement returned to federal prosecutors the discretion to prosecute marijuana offenses to the full extent of the law, including under the BSA.
Sessions’s actions raised the question of whether the DOJ would escalate enforcement efforts against MRBs and the financial institutions that do business with them for violating federal criminal statutes, including the BSA. To date, a large increase in such prosecutions has not materialized.
Importantly, although the Cole Memo has been rescinded, guidance issued by FinCEN and the DOJ in 2014 on BSA expectations regarding MRBs remains intact. A top Treasury official has stated, however, that although FinCEN’s guidance remains in place for the moment, FinCEN is reviewing the 2014 guidance for conflicts with the new DOJ position.
This guidance provides financial institutions with a road map for minimizing exposure while continuing to do business with MRBs. On February 14, 2014, FinCEN and the DOJ concurrently issued guidance clarifying how financial institutions, including banks and casinos, could serve MRBs consistent with their obligations under the BSA. The guidance allows financial institutions to take money knowingly from MRBs without facing prosecution for violating the BSA, provided that such institutions follow a detailed list of guidelines, including conducting enhanced due diligence and filing an SAR with FinCEN. According to the FinCEN guidance, although many states have legalized marijuana activities, financial institutions remain obligated to file an SAR if there is a financial transaction involving suspected marijuana sales because such transactions remain illegal under federal law. This means that even in states where medical marijuana is legal, financial institutions that transact with state-licensed medical marijuana dispensaries should conduct enhanced due diligence and file an SAR.
Pursuant to the FinCEN guidance, financial institutions should conduct “thorough” risk-based due diligence before transacting with an MRB, including verifying that the MRB has a valid state license and developing an understanding of the normal and expected activity for the MRB (such as types of products sold and services offered). FinCEN Guidance at 2. Financial institutions should also conduct ongoing monitoring of MRBs for suspicious activity.
In addition, the FinCEN guidance provides a nonexhaustive list of red flags that may indicate an MRB is engaged in activity that violates state law or implicates one of the Cole Memo priorities. Those priorities include, for example, preventing distribution of marijuana to minors, diversion of revenue to cartels or criminal enterprises, and violence or use of firearms in the cultivation and distribution of marijuana. The red flags include the following:
(i) There are signs that a customer is using a state-licensed MRB as a front or pretext to launder money derived from criminal activity or illegal marijuana sales, such as the MRB receiving substantially more revenue than may be reasonably expected.
(ii) The MRB is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law.
(iii) The MRB is unable to demonstrate the legitimate source of significant outside investments.
(iv) A customer seeks to conceal or disguise involvement in MRB activity.
(v) A review of publicly available sources and databases about the MRB, its owner(s), its manager(s), or other related parties reveals negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.
(vi) The MRB, its owner(s), its manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws or regulations.
The FinCEN guidance provides that the presence of any of these red flags in a given transaction or business arrangement may indicate a need for additional due diligence, which could include seeking information from other involved financial institutions under section 314(b) of the Patriot Act.
The FinCEN guidance provides a modified SAR reporting system that allows financial institutions to file a “limited” SAR for marijuana businesses that do not implicate any of the Cole Memo priorities, and a “priority” SAR for marijuana businesses that do implicate one or more of the Cole Memo priorities or violate state law. Financial institutions are also instructed to file a “termination” SAR when necessary to sever a relationship with an MRB in order to maintain an effective AML compliance program. Additionally, financial institutions must report any activity suspected to be outside of state regulations.
Recent statistics from FinCEN on banking services and MRBs indicate that a growing number of financial institutions are providing services to MRBs, even after Sessions rescinded the Cole Memo. For example, FinCEN reports that in the first quarter of 2016, about 200 depository institutions provided banking services for MRBs. By the time Sessions announced that he was repealing the Cole Memo in early January 2018, the number had grown to about 300. Indeed, the number of depository institutions offering banking services to MRBs did not plunge after Sessions’s announcement but instead appears to have grown in 2018 at about the same pace as between 2015 and 2017. Likewise, the number of financial institutions that filed limited SARs steadily rose between 2017 and 2018, even after Sessions’s announcement in January. (See FinCEN data on graph below.) This trend suggests that a growing number of financial institutions are doing business with MRBs despite the repeal of the Cole Memo and uncertainty over how a new attorney general will approach marijuana enforcement actions.