On February 14, 2014, FinCEN released new guidance seeking to clarify how financial institutions may provide services to marijuana-related businesses. Also on February 14, the Department of Justice (DOJ) issued complementary guidance to federal prosecutors for determining whether to charge individuals or institutions that engage in financial transactions involving proceeds from marijuana-related businesses.
The guidance documents follow the recent legalization of marijuana sales in Colorado and Washington. Because selling marijuana remains a federal crime under the Controlled Substances Act, financial institutions that provide services to marijuana-related businesses, such as checking or savings accounts, risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money remitter statute (18 U.S.C. § 1960), and the Bank Secrecy Act. Yet – as Attorney General Eric Holder acknowledged – forcing marijuana sellers in Colorado and Washington to operate on an all-cash basis is untenable. The best way to make a business holding large quantities of drugs more attractive to thieves is simultaneously to ensure that the store is holding large quantities of cash. Moreover, marijuana businesses, like any other business, must pay electric bills, transmit taxes to the federal and state governments, and engage in countless other everyday activities that require basic banking services.
The February 14 guidance documents, however, do little to resolve these problems. Financial institutions considering doing business with marijuana-related businesses should be aware that substantial legal risks remain.
The DOJ Guidance
The DOJ guidance reiterates that it remains a federal crime to engage in financial transactions involving proceeds from marijuana-related businesses – directly or indirectly. The guidance states, however, that DOJ will focus its limited resources on only the “most significant” marijuana cases. In determining what constitutes a “significant” case, federal prosecutors are to consider the following eight priorities:
- Preventing distribution of marijuana to minors
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands
- Preventing marijuana possession or use on federal property
The priorities mirror those listed in a 2013 DOJ memorandum to prosecutors concerning federal prosecution of individuals or groups engaged in the distribution of marijuana.
Although the guidance suggests that prosecutors will focus their attention on conduct other than state-sanctioned marijuana sales, it provides no safe harbor. The DOJ memorandum makes this explicit:
This memorandum does not alter in any way the Department’s authority to enforce federal law, including federal laws relating to marijuana, regardless of state law. Neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the [Controlled Substances Act], the money laundering and unlicensed money transmitter statutes, or the [Bank Secrecy Act], including the obligation of financial institutions to conduct customer due diligence.
As such, risk of investigation or prosecution remains for financial institutions that provide services to marijuana-related businesses, even where those businesses do not trigger any of the enforcement priorities. The highest risk may be for financial institutions that do not meet the burdensome due diligence required to ensure that marijuana businesses are not triggering the enforcement priorities. DOJ notes that prosecution may be appropriate not only if a financial institution is aware that its client’s activities implicate a federal priority, but also if the financial institution fails to “conduct appropriate due diligence” to rule out that possibility.
The FinCEN Guidance
Building on the DOJ guidance, the FinCEN guidance seeks to clarify how financial institutions that decide to provide services to marijuana-related businesses can comply with reporting obligations under the Bank Secrecy Act. Because distribution and sale of marijuana remain illegal under federal law, a financial institution must file a Suspicious Activity Report (SAR) when handling transactions involving funds derived from a marijuana-related activity, whether that activity is allowed under state law or not.
The Treasury guidance provides for three types of marijuana-related SARs.
- A “Marijuana Limited” SAR is to be filed when a bank reasonably believes that a business is involved in marijuana-related activities, but that its activities comply with relevant state laws and do not implicate any of the eight DOJ priorities.
- A “Marijuana Priority” SAR is to be filed when the bank believes that the business is violating state law or that its activities implicate one of the DOJ priorities.
- A “Marijuana Termination” SAR is to be filed if the bank terminates its relationship with a marijuana-business because it is concerned about money laundering.
In deciding whether to provide services to marijuana-related businesses, and which type of SAR to file, financial institutions are advised to undertake substantial due diligence. Among other recommendations, the guidance counsels financial institutions to request relevant information from state licensing and enforcement agencies and periodically update that information; “develop” an understanding of the “expected activity” for a particular marijuana business; and conduct ongoing monitoring of publicly available sources to uncover adverse information about the business or related parties. Most notably, these obligations include “ongoing monitoring” of marijuana-related businesses to uncover signs of nearly two dozen types of “red flags” that suggest a transaction should be properly classified as “Marijuana Priority” instead of “Marijuana Limited.” Some of the red flags are similar to existing warning signs that financial institutions might apply to any transaction. For example, banks are required to look for indications of illegal structuring, rapid movement of funds, or failure to produce satisfactory licensing documentation. Others are marijuana-specific, such as monitoring a marijuana-related business to determine whether it receives substantially more revenue than “might be expected” relative to population demographics or competitors, whether a customer purports to engage in activity unrelated to marijuana but deposits cash that “smells” like marijuana, whether the business owner or related parties have ever been convicted of drug-related crimes or subject to enforcement actions, or whether the business is too close to a school. FinCEN cautions that this list of red flags is not “exhaustive.”
The guidance makes clear that, in addition to filing the SARs described above, financial institutions must file a SAR when they provide indirect financial services to a marijuanarelated business. For example, providing financial services to another financial institution that offers accounts to marijuana-related businesses would trigger a SAR reporting obligation, as would providing services to a landlord that leases property to a marijuana-related business. When filing based on indirect ties with a marijuana-related business, the financial institution is not required to categorize the SAR as Marijuana Limited rather than Marijuana Priority.
Finally, financial institutions must report currency transactions in connection with marijuana-related businesses to the same extent as is required in other contexts. For example, any cash transaction of more than US$10,000 in one day must be reported, and marijuana-related businesses are not eligible for consideration for a CTR reporting exemption.
The DOJ guidance promises only that DOJ is not promising anything. Financial institutions that do business with marijuana-related businesses still run the risk of federal prosecution because DOJ retains its right to prosecute. And even if the government limits its focus to entities that fall within the eight enforcement priorities, a financial institution may be hard-pressed to determine whether the priorities apply. Moreover, trafficking in recreational marijuana remains illegal in 48 states and the District of Columbia. The DOJ guidance is not a federal law and does not preempt those state laws, so financial institutions are potentially on the hook for marijuana-derived transactions that fall within state laws other than Washington or Colorado.
Financial institutions that transact with marijuana-related business can avoid prosecution for violating the Bank Secrecy Act – although not the money laundering and money transmittal statutes – by submitting the reports outlined in the FinCEN guidance. Treasury’s existing regulations require a financial institution to file a SAR if it “knows, suspects, or has reason to suspect” that the transaction, inter alia, “involves funds derived from illegal activities.” See, e.g., 31 C.F.R. § 1020.320. The new guidance suggests that with respect to due diligence for marijuana-related businesses, there may be enhanced requirements. Some potential red flags – like whether the client’s marijuana sales are out of the “ordinary” – will be exceedingly difficult to monitor and evaluate. Banks risk violating the Bank Secrecy Act if they fail to engage in this monitoring and make a mistake.
Finally, the guidance and existing regulations make clear that, at a minimum, a financial institution will have an obligation to file a SAR if it has “reason to suspect” that one of its clients provides services to a marijuana business. A financial institution doing business in Colorado or Washington should conduct a review of its legal obligations under the Bank Secrecy Act if it is doing business with any company – for example, a telephone company or a private security firm – that could potentially provide services to a marijuana business.
The Way Forward
The DOJ guidance and FinCEN guidance provide little of the certainty that would truly encourage banks to do business with state-sanctioned marijuana businesses. The situation, however, is evolving. Bills to address the situation have been introduced in Congress, including one that would immunize financial institutions from punishment by federal regulators and one that would amend the Controlled Substances Act to decriminalize all marijuana-related transactions that comply with state laws. In the meantime, financial institutions should not consider the Treasury or DOJ guidance a safe harbor for purposes of directly or indirectly transacting with marijuana sellers.