Banks face even greater risks and are likely to back away from marijuana-related businesses after the U.S. Attorney General changed the federal government’s stance on legalized pot.

What happened

As the number of states that have legalized marijuana continues to rise (currently, 29 states have legalized medical marijuana, while eight states and the District of Columbia permit recreational use of the drug), the financial services industry has struggled with how to address the banking needs of the growing—and lucrative—industry.

Marijuana remains illegal under the federal Controlled Substances Act (CSA), and banks are prohibited from knowingly providing services to illegal enterprises. However, under the Obama administration, the Department of Justice (DOJ) adopted a hands-off federal policy that deferred to state governments, as set forth in the “Cole Memo,” a memorandum issued by then-Deputy Attorney General James M. Cole to all U.S. attorneys on the issue of enforcement of federal anti-marijuana laws in light of growing state acceptance.

The Financial Crimes Enforcement Network (FinCEN) also weighed in, issuing guidance on how to work with marijuana-related businesses while still complying with due diligence expectations and reporting requirements consistent with Bank Secrecy Act (BSA) obligations.

But in a one-page memorandum authored by Attorney General Jeff Sessions, the DOJ reversed course, emphasizing that marijuana remains illegal under federal drug laws and specifically referencing a provision of the BSA that requires financial institutions to create and maintain sufficient anti-money laundering (AML) policies and procedures.

“In the Controlled Substances Act, Congress has generally prohibited the cultivation, distribution, and possession of marijuana,” the AG wrote. “It has established significant penalties for these crimes. These activities also may serve as the basis for the prosecution of other crimes, such as those prohibited by the money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act. These statutes reflect Congress’s determination that marijuana is a dangerous drug and that marijuana activity is a serious crime.”

Prosecutors should follow “the well-established principles that govern all federal prosecutions” in deciding which marijuana activities to prosecute under these laws, Sessions indicated, such as federal law enforcement priorities set by the AG, the seriousness of the crime, the deterrent effect of criminal prosecution and the cumulative impact of particular crimes on the community.

“Given the Department’s well-established general principles, previous nationwide guidance specific to marijuana enforcement is unnecessary and is rescinded, effective immediately,” according to the memorandum.

How U.S. attorneys across the country implement the policy shift remains to be seen. In Colorado—where marijuana has been legal for both recreational and medicinal use for several years—U.S. Attorney Bob Troyer issued a statement saying he had no intention to change his office’s approach to marijuana prosecution decisions.

The new U.S. attorney in Massachusetts plans to take a different approach, however, stating that he cannot “provide assurances that certain categories of participants in the state-level marijuana trade will be immune from federal prosecution.”

“As the Justice Department has highlighted, medical studies confirm that marijuana is in fact a dangerous drug, and it is illegal under federal law,” U.S. Attorney Andrew E. Lelling said. “As a result, our office will aggressively investigate and prosecute bulk cultivation and trafficking cases, and those who use the federal banking system illegally.”

To read the AG’s memorandum, click here.

Why it matters

While the Cole Memo and the FinCEN guidance didn’t open the floodgates for financial institutions to work with marijuana-related businesses, they offered a road map (and a measure of comfort from prosecution) that has now disappeared. Already wary of taking on the risk of marijuana businesses, banks are likely to back away even further in the wake of Attorney General Sessions’ memorandum despite recent moves by many states to legalize various forms of use of marijuana.