As states rapidly begin to legalize the use of marijuana for both medical and recreational purposes, banks face uncertainty about their ability to accept marijuana-related deposits, provide financing for marijuana growers, or permit use of credit cards on their payment systems. Recreational marijuana is not legal in Iowa today, but as broader legalization becomes more likely, it is important for Iowa banks to understand the relevant state and federal laws.
Although over half the states have legalized marijuana use in some form, it still remains illegal under the federal Controlled Substances Act (CSA). The conflict between state and federal law has caused significant confusion, particularly for financial institutions. For instance, in states where marijuana use is legal, can banks provide services for workers and consumers in the industry? What about vendors of marijuana businesses, such as fertilizer, irrigation and other service suppliers? Unfortunately the answer is not clear, and the risk has caused most banks to stay away from the marijuana growing industry.
Banks have sought federal guidance regarding marijuana-related businesses. In February 2014, the Financial Crimes Enforcement Network (FinCEN) issued guidance to clarify the Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services to marijuana-related businesses. The FinCEN guidance emphasizes a risk analysis in providing services to marijuana businesses and states that the guidance should “enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” Essentially, the guidance has been viewed as promising that the federal government would prosecute only defined priorities under the Department of Justice “Cole Memo,” such as criminal enterprises, gangs, and cartels, and would not enforce the CSA so long as companies (including banks) obey state and local laws. The requirement to file suspicious activity reports (SARs) was not eliminated, and the guidance established three new SAR filings.
The FinCEN guidance, however, appears uncertain under the current administration. U.S. Attorney General Jeff Sessions issued a memo in January 2018 that eliminated the enforcement priorities in the “Cole Memo” and indicated a potential increase in federal prosecution of marijuana-related businesses. Although the FinCEN guidance remains in place, it is currently under review.
From a legal perspective, assisting marijuana-related businesses still remains a felony under federal drug laws. By knowingly providing banking services and filing a SAR with FinCEN, a bank is making an admission of probable criminal conduct and potentially subjecting itself, and its officers, directors and employees, to civil or criminal penalties. It is important that banks that do provide services to marijuana-related businesses continue to monitor the status of the FinCEN guidance and their compliance with it.
This uncertainty, particularly under the current administration, has caused many banks to avoid knowingly providing services to marijuana-related businesses. Some that do provide services tend to be quiet about it by limiting deposits or requiring confidentiality agreements. It is important that senior bank management and the board are fully briefed on the legal risks, and retention of legal counsel should also be considered.
There are also certainly a number of banks who are unknowingly providing banking services to marijuana-related businesses. However, the marijuana industry today remains primarily cash-based, and workers in the cannabis industry have developed unique workarounds such as staggered paydays and use of cryptocurrency. Until there is a change in federal drug laws, banks will likely continue to face legal uncertainty and are cautioned to avoid servicing the marijuana industry.