CSI Resources

You are here:
The Advisor banner

Making It SAFE to Bank the Marijuana Industry

  • by Amber Goodrich
  • Jun 05, 2019

Will Proposed Legislation Change the Risk Calculus for Financial Institutions?

As states continue to legalize medical and recreational marijuana, pressure is mounting on both marijuana-related businesses (MRBs) and financial institutions due to current federal restrictions.

While the marijuana industry becomes more legitimate—and more lucrative—its participants’ need for traditional banking products and services increases. Conversely, current federal laws make capitalizing on this emerging new client base an extremely risky proposition for financial institutions.

However, the recently introduced Secure and Fair Enforcement (SAFE) Banking Act might finally reconcile this conflict by providing safe harbor to those institutions that bank MRBs, and momentum for its passage is growing. In fact, the attorneys general of 38 U.S. states and territories pushed for it in a letter to Congressional leaders, in which they highlighted the benefits of regulating “grey market financial activities” like marijuana.

Here is where the matter currently stands and what it means for our industry.

Marijuana Takes on the Veil of Legitimacy

Twenty-three years ago, California was the first state to legalize medical marijuana, and in 2012, Colorado and Washington State were the first to legalize its recreational use. Today, medical marijuana is legal in 33 states, and recreational marijuana is legal in 10. The District of Columbia has legalized both.

Despite the shift toward state legalization, marijuana is still considered a Schedule I drug by the federal government, a dichotomy the Department of Justice (DOJ) addressed in the 2013 Cole Memorandum. It indicated that the DOJ would focus its “limited investigative and prosecutorial resources” on eight priority areas of marijuana law enforcement, such as preventing its distribution to minors.

In early 2014, the Financial Crimes Enforcement Network (FinCEN) followed suit and issued BSA Expectations Regarding Marijuana-Related Businesses to provide guidance to financial institutions that bank MRBs in states where marijuana is legal. However, marijuana’s growing legitimacy hit a snag in 2018 when former U.S. Attorney General Jeff Sessions rescinded the Cole Memo. But in another conflicting twist for banks, the FinCEN guidance remains in effect, according to the ABA Banking Journal.

In advocating for the SAFE Banking Act, the state attorneys general pointed out the significant value of the marijuana industry, which was estimated to be $8.3 billion in 2017 and expected to grow to $25 billion by 2025. “Yet,” they say, “those revenues are handled outside of the regulated banking system.” This creates significant tax and compliance issues and “contributes to a public safety threat as cash-intensive businesses are often targets for criminal activity.”

A SAFE Path Forward

Proposed legislation may resolve some of that conflict. Both houses of Congress are expected to vote on the SAFE Banking Act in the near future. It would create a safe harbor for depository institutions in order to “increase public safety by expanding financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses.” Further, Treasury Secretary Steven Mnuchin supports the pending legislation.

The bill’s five key tenets—which apply to financial institutions that bank legitimate MRBs and their ancillary partners and vendors—prohibit federal banking regulators from imposing the following penalties on these institutions:

  1. Terminating or limiting their deposit insurance just because they bank MRBs.
  2. Prohibiting, penalizing or discouraging them from banking MRBs in states where it is legal.
  3. Recommending, incentivizing or encouraging them not to bank MRBs, their owners or employees.
  4. Taking adverse or corrective action on a loan to an MRB, its owner or employees.
  5. Prohibiting or penalizing institutions or their third-party service providers for conducting routine banking functions for MRBs.

There is one other piece of legislation proposed that tackles the marijuana banking conundrum from a different angle, which current U.S. Attorney General William Barr is said to prefer. As described by Fortune, the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act would amend the Controlled Substances Act (CSA) “to restrict federal enforcement of the CSA against individuals and companies in states where cannabis is legal.”

To Bank MRBs or Not

Until legislative measures such as these are enacted, financial institutions must decide whether to bank MRBs or not. If your institution is already banking MRBs or is considering doing so in light of the SAFE Banking and STATES Acts, follow this risk-based approach to the matter:

  • Make an individual, risk-based decision:

    As with any strategic decision, conducting a business impact analysis and risk assessment will help you determine if banking MRBs fits into your institution’s business model. It will also help you identify all the risk variables involved and decide if your institution has the wherewithal to mitigate them while still matching your risk appetite. Even institutions already banking MRBs should periodically go through this exercise.

  • Develop specific due diligence protocols for MRBs:

    The FinCEN guidance notes that, “In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution.” When making the decision to open or maintain an account for an MRB, thorough and specific due diligence is prescribed by FinCEN:

    • Determine if the MRB falls under any of the eight marijuana enforcement areas outlined in the Cole Memo. Even though it has been rescinded, the memo still provides a good guidepost for the most criminally problematic marijuana activities.
    • Verify the MRB’s licensing and registration with the appropriate state authority
    • Review the actual licensing application and documentation submitted to the state authority
    • Ask state authorities for any available information about the MRB and related parties
    • Gain an understanding of the “normal and expected activities” for the MRB
    • Monitor news and other public sources for adverse information about the MRB
    • Monitor the account for suspicious activity
    • Conduct periodic reviews of the MRB to identify any change to their risk profile

    Keep in mind that such due diligence should extend to businesses that serve MRBs, such as delivery companies or grow light manufacturers. Your due diligence of these ancillary businesses should include a thorough vetting of their MRB customer base to ensure they aren’t involved in any of the enforcement areas outlined in the Cole Memo.

  • Complete Suspicious Activity Reports (SARs) as required:

    Because marijuana is still considered a Schedule I drug by the federal government, banking activities related to marijuana must still be reported. The FinCEN guidance specifically states that, “The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity.” However, it outlines three distinct marijuana-related SARs in order to address the conflict between federal and state laws:

    • Marijuana Limited SAR:
      1. Provide identifying information for the MRB and related parties
      2. Provide addresses for the same
      3. Indicate that the only reason for the SAR is the fact that the customer is an MRB
      4. State that no additional suspicious activity has been spotted
      5. Use the term “marijuana limited” in the narrative section
    • Marijuana Priority SAR:
      1. Provide identifying information for the MRB and related parties
      2. Provide addresses for the same
      3. Describe the law enforcement priorities that the activity appears to violate
      4. Include the dates, amounts and other relevant details of the transaction
      5. Use the term “marijuana priority” in the narrative section
    • Marijuana Termination SAR:
      1. Indicate that the relationship is being terminated and why
      2. Notify FinCEN if it is discovered that the MRB is looking for another institution
  • Monitor the proposed legislation’s progress:

Keep a close eye on the status of the SAFE Banking Act, as well as the STATES Act, as their progress and amendments may help inform your decision about whether or not to bank MRBs.

Legal or Not, MRBs Pose Risk

Passage of the SAFE Banking Act and/or the STATES Act would certainly make the choice easier for banks. Both laws would alleviate a major risk currently associated with banking MRBs: the fact that at present it is done in contradiction to federal law and federal banking regulations.

While that scenario may push the risk calculus toward banking the marijuana industry, know that it does not remove all of the danger. By its very nature, the marijuana industry will likely always be at a heightened risk for money laundering. If you’re currently banking this industry or considering doing so in the future, follow the advice of the ABA Banking Journal and “take careful steps to address each and every one of” the risks associated with it.

Amber Goodrich, compliance strategist for CSI Regulatory Compliance, has more than 15 years of financial industry experience. She is a Certified Anti-Money Laundering Specialist (CAMS) and a Certified Regulatory Compliance Manager (CRCM).