The Financial Crimes Enforcement Network’s new guidance on how to work with marijuana-related businesses is unlikely to make it easier for banks that have been wrestling with the basic question of whether they can provide services to such companies. The guidance makes clear that Suspicious Activity Reports (SARs) must still be filed on transactions involving the proceeds of marijuana sales and provides details on what should be included in such SARs.
Although 20 states and the District of Columbia currently recognize the legal use of marijuana for either medicinal or recreational use, federal law still categorizes the drug as illegal. As a result, banks have been hesitant to engage with marijuana-related businesses.
FinCEN released the guidance hoping to ease concerns for institutions seeking to enter the market by setting out due diligence expectations and reporting requirements in the context of marijuana-related businesses, consistent with Bank Secrecy Act obligations.
A greater use of financial services could prove beneficial not just to marijuana companies (moving away from an all-cash business model) and financial institutions (broadening the customer base), but law enforcement as well, with greater insight into the activities of such businesses. The guidance was issued in conjunction with the Department of Justice, which concurrently issued a guidance memo for U.S. Attorneys.
The decision to engage with marijuana-related businesses should be made on a case-by-case basis by each financial institution, FinCEN stated. The most important factor to consider: an evaluation of the risks and the bank’s ability to effectively manage those risks. Due diligence should include verification that the business is licensed and registered with the appropriate state authorities (with a review of the license application and related documentation), developing an understanding of the business itself – such as the types of products and customers – and ongoing monitoring for suspicious activity and any other adverse information about the business.
Banks should also consider last year’s “Cole Memo,” a memorandum issued by the DOJ’s Deputy Attorney General James M. Cole to all U.S. Attorneys with guidance on enforcement of federal antimarijuana laws in light of growing state acceptance. The Cole Memo sets forth the DOJ’s enforcement priorities and can provide a reference point for institutions working with marijuana-related companies, FinCEN advised.
If an institution chooses to work with marijuana-related companies, FinCEN emphasized that obligations under the BSA – particularly the requirement to file a suspicious activity report – are unaffected by any laws legalizing marijuana-related activity. “Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity,” according to FinCEN. “Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN’s suspicious activity reporting requirements and related thresholds.”
To meet BSA requirements and conduct business with marijuana-related companies, FinCEN established three different categories of SARs: Marijuana Limited, Marijuana Priority, and Marijuana Termination.
First, a marijuana business that doesn’t implicate concerns in the Cole Memo or violate state law should be filed as a “Marijuana Limited” SAR. This type of report will make clear that the sole reason for filing the SAR is because the subject is engaged in the marijuana-related business and that no additional suspicious activity has been identified.
If a business does trigger one of the Cole Memo priorities or violates state law, the bank should file a “Marijuana Priority” SAR, FinCEN said. This type of SAR should contain much more information than the “Marijuana Limited,” particularly details like dates and amounts of the suspicious financial activity.
The final type of SAR: “Marijuana Termination,” which should be filed if the financial institution determines it must end its relationship with a marijuana-related business in order to remain in compliance with anti-money laundering laws.
FinCEN also imposes a new and unprecedented obligation on financial institutions. If the financial institution learns that, after terminating its relationship, the marijuana-related company seeks out a new financial institution, it should alert the second bank of the potential illegal activity, FinCEN said.
The guidance also provides a list of red flags for financial institutions dealing with marijuana-related companies based upon activity identified by law enforcement or previously described in SARs. For example, the business might be unable to produce satisfactory documentation to demonstrate its licensure and operations consistent with state law, or a customer could try to disguise or conceal involvement in a marijuana-related business activity by claiming to operate a legal commercial activity but deposit cash smelling of marijuana.
Another possibility: a state-licensed marijuana business may be a front to launder money derived from other criminal activity. FinCEN said banks should be on the lookout for “substantially more revenue” than could be reasonably expected, deposits of cash greater than what is being reported for tax purposes, rapid movement of funds such as cash deposits followed by immediate withdrawals, or deposits by third parties with no apparent connection to the accountholder.
Currency Transaction Reports must still be filed on the receipt or withdrawal of more than $10,000 in cash per day, FinCEN reminded financial institutions. Deposits that appear to be structured to avoid CTR requirements should also be a red flag for banks.
For the full text of the guidance, FIN-2014-G001, click here.
Why it matters: “The guidance is not likely to make a significant difference to financial institutions located in states that have legalized sales of marijuana. FinCEN director Jennifer Shasky Calvery stated that her agency “seeks to move from the shadows the historically covert financial operations of marijuana businesses, [n]ow that some states have elected to legalize and regulate the marijuana trade.” She also pointed out that “our guidance provides financial institutions with clarity on what they must do if they are going to provide financial services to marijuana businesses and what reporting will assist law enforcement.” Although the agency noted that enforcement in connection with the guidance “will focus on matters of systemic or significant failures, and not isolated lapses in technical compliance,” financial institutions and their regulators are unlikely to find solace in this statement as it does not address the underlying liability of a financial institution that continues to do business with an entity engaged in an illegal act. Technical compliance with the Bank Secrecy Act’s reporting and recordkeeping rules does not relieve a financial institution of its obligations under the federal money laundering laws and this liability has not been fully addressed.