While we were busily applauding the approval of laws in Colorado and Washington State to allow the recreational use of marijuana, not to mention the many states that have followed California’s lead in permitting the use of medical marijuana, there was a huge, essentially insurmountable obstacle, hiding in the background that few failed to consider.
The production and sale of this now-lawful product requires that nasty little detail involving finance. There is a need for money to flow into the lease of space and purchase of equipment. There is a need for the money received from the sale to go, well, somewhere. The exchange of money by plastic, currency, bitcoins, whatever, has to happen.
Except the banking system of the United States, including these enlightened states that have chosen to reject the federal government’s listing of marijuana on Schedule I because it’s utterly inane to all but the most virulent drug warrior, couldn’t accommodate the financial transactions that surrounded this new-born industry. That has now changed.
The Obama administration on Friday issued guidelines intended to give banks confidence that they will not be punished if they provide services to legitimate marijuana businesses in states that have legalized the medical or recreational use of the drug, even though it remains illicit under federal law.
The guidance, which requires banks to vigorously monitor their marijuana-industry customers, was provided by the Treasury Department and the Justice Department in separate advisories. The policy does not grant immunity from prosecution or civil penalties to banks that serve legal marijuana businesses. But it directs prosecutors and regulators to give priority to cases only where financial institutions have failed to adhere to the guidance.
This is a huge, almost mind-boggling, development. For all the drug war hating of marijuana, the gateway drug to the occasional bag of Doritos, the direction is for prosecutors to stand down when it comes to the otherwise lawful transaction of business in the normal channels of commerce.
Just to be clear, this could have served to strangle the industry – and it is most assuredly an industry — had producers and sellers been forced outside the normal banking channels. The consequences would be dire, forcing unusual currency transactions, money-laundering indictments, IRS jeopardy assessments and massive seizures because the commerce didn’t fit the usual business paradigm. But it couldn’t, because banks would have been breaking the law by allowing it. It was a Catch-22, with huge jeopardy for those trying desperately to conduct themselves lawfully.
The DOJ FinCEN memo, a study in governmental juxtaposition, provides:
The Financial Crimes Enforcement Network (“FinCEN”) is issuing guidance to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses. FinCEN is issuing this guidance in light of recent state initiatives to legalize certain marijuana-related activity and related guidance by the U.S. Department of Justice (“DOJ”) concerning marijuana-related enforcement priorities. This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.
It then goes on to remind us that the war isn’t over.
The Cole Memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that DOJ is committed to enforcement of the CSA consistent with those determinations.
The particulars of the banking requirements, however, still raise some harrowing risks for banks:
“Marijuana Limited” SAR Filings
A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” SAR.
SAR stands for “suspicious activity report,” and any transaction in marijuana proceeds remains “suspicious” by definition. But the kicker is that the bank’s liability hinges on its “customer due diligence,” that the bank’s client doesn’t implicate a continuing evil under the Cole Memo. If you’re a banker, this raises a few harrowing questions.
First, is the money flowing from the marijuana industry worth the potential risk? Granted, there will likely be huge amounts of money involved, and banks are in the business of taking in other people’s money and playing roulette with it. On the other hand, if the DOJ decides that a marijuana producer or seller isn’t dotting its “I’s” with the right color pen, it could well come in with a hammer and beat the daylights out of a bank. Worth the risk?
Second, it puts the banker in the position of giving marijuana producers and sellers a fiscal colonoscopy, requiring their involvement in the regulatory regimen of the industry. Do they want to be there? Can they handle it? What will the impact to the industry be of having a banker’s hand in their boxers?
Third, the priorities of the Cole Memo are sufficiently loose and vague that it’s quite conceivable, if not likely, that a small shift in focus will put a bank that’s fully compliant today at grave risk tomorrow. A change in personnel at Main Justice, a change in part in the executive branch, could fundamentally alter the DOJ’s approach toward its priorities, and render lawful banking unlawful in a blink of an eye.
Yet, the mere fact that Justice has offered this olive branch to the marijuana and banking industries reflects a paradigm shift in dealing with the new reality where marijuana isn’t just for killer drug lords and crazed jazz musicians.
Now, if they would only come to grips with reality so it could be removed from Schedule I and medical research into its use and implications could proceed, we would be well on the path of fully rational drug policy toward pot. Maybe.
H/T Doug Berman at Sentencing Law and Policy