DOJ Rescinds Marijuana Enforcement Guidance, Creating Uncertainty for Banking Organizations and Other Financial Institutions

To Our Clients and Friends Memorandum friedfrank.com Copyright © 2018 Fried, Frank, Harris, Shriver & Jacobson LLP 01/26/18 A Delaware Limited Liability Partnership 1 DOJ Rescinds Marijuana Enforcement Guidance, Creating Uncertainty for Banking Organizations and Other Financial Institutions Introduction On January 4, 2018, the Department of Justice (“DOJ”) rescinded Obama administration guidance on prosecutorial discretion for marijuana-related crimes.1 Its stated rationale is that existing general guidance on prosecutorial discretion is sufficient to cover marijuana enforcement, but does not specifically address the status of marijuana laws that now exist in about 30 states. Among the items of guidance rescinded was the so-called “Cole memo,”2 which laid out the DOJ’s priorities for federal enforcement (or non-enforcement) of marijuana crimes. Also rescinded, however, was DOJ guidance on marijuana-related financial crimes (the 2014 Guidance). 3 Related guidance from the Department of the Treasury’s Financial Crimes Enforcement Network (the “FinCEN Guidance”) remains in place, for the moment. 4 With a marijuana-related business sector in North America currently reported to be generating over $6.7 billion in revenues in 2016 and continuing to grow, 5 banking organizations, credit unions and other financial institutions that provide services to marijuana-related businesses operating in accordance with state law face significantly greater uncertainty, absent further guidance on how to continue – or whether to end – their current customer relationships with marijuana businesses, as well as how to evaluate new customer relationships going forward. Suffice to say, the businesses themselves now face increased uncertainty regarding their compliance with federal law. In addition, shareholders and other current and potential investors in such businesses have not been addressed by federal enforcement guidance to date, and neither have investment bankers and other advisers involved in capital raising, mergers and acquisitions and other transactions related to such 1 Jefferson B. Sessions, III, Att’y Gen., Memorandum for All United States Attorneys: Marijuana Enforcement (Jan. 4, 2018) (the “2018 Guidance”). 2 James M. Cole, Deputy Att’y Gen., Memorandum for All United States Attorneys: Guidance Regarding Marijuana Enforcement (Aug. 29, 2013) (the “Cole Memo”). 3 James M. Cole, Deputy Att’y Gen., Memorandum for All United States Attorneys: Guidance Regarding Marijuana-Related Financial Crimes (Feb. 14, 2014). 4 FinCEN, BSA Expectations Regarding Marijuana-Related Businesses, FIN-2014-G001 (Feb. 14, 2014). See also infra footnote 20. 5 See, e.g., Debra Borchardt, Marijuana Sales Totaled $6.7 Billion in 2016, FORBES.COM (Jan. 3, 2017) (citing a forthcoming study by Arcview Market Research.) Fried Frank Client Memorandum 2 businesses. While federal prosecutors are likely to continue to focus on prosecutorial priorities such as gang-related and money laundering issues, there are no guarantees that local U.S. attorneys will not exercise their discretion to prosecute marijuana-related businesses, their owners, shareholders, management or advisers who may be otherwise engaged in lawful activity under state law. Rather, the rescission of the Cole Memo and the 2014 Guidance makes such prosecution more likely. Background Federal v. State Marijuana Laws Marijuana is classified as a Schedule 1 narcotic under the Controlled Substances Act, and its cultivation, distribution and possession are therefore prohibited under federal law.6 Six states have fully legalized recreational marijuana use and sales.7 A seventh state, Vermont, saw its state legislature approve a measure legalizing recreational use and sale (medical use is already legal in Vermont) within hours of the DOJ’s issuance of the 2018 Guidance.8 Twenty-one states have legalized medical marijuana use. Maine, Massachusetts and Washington D.C. allow both recreational and medical use, but not sales.9 At least four other states have taken steps to decriminalize the possession of marijuana for personal consumption.10 Marijuana-Related Business Sector in the United States Relevant federal guidance on marijuana enforcement guidance focusses on “marijuana-related businesses,” but does not define this term. As a practical matter, the term “marijuana-related businesses” could be viewed to include a wide range of publicly held and private companies across the United States and Canada that are engaged in marijuana-related products and services including, among other things, retail sales and wholesale growing facilities, scientific, pharmaceutical and biotechnology research, food and drink products, horticultural equipment and education, government contracting for medical marijuana growth for research and medical purposes, and perhaps most interestingly, exchange traded funds that invest in these subsectors of the industry. 11 Accordingly, assuming this business sector continues to grow, it is likely that financial institutions will necessarily develop increasing customer relationships within businesses in the sector. 6 See 21 U.S.C. § 812 Schedule I(c)(10) (“Marihuana”), § 841; see also 2018 Guidance. 7 Charlie Savage and Jack Healy, Trump Administration Takes Step That Could Threaten Marijuana Legalization Movement, N.Y. TIMES (Jan. 4, 2018) (citing the National Conference of State Legislatures). The states are Alaska, California, Colorado, Nevada, Oregon, and Washington. 8 Christopher Ingraham, Defiant Vermont legislature votes to legalize marijuana just hours after Sessions sets state for a crackdown, WASH. POST (Jan. 5, 2018). 9 Charlie Savage and Jack Healy, Trump Administration Takes Step That Could Threaten Marijuana Legalization Movement, N.Y. TIMES (Jan. 4, 2018) (citing the National Conference of State Legislatures). 10 See Charlie Savage and Jack Healy, Trump Administration Takes Step That Could Threaten Marijuana Legalization Movement, N.Y. TIMES (Jan. 4, 2018) (citing the National Conference of State Legislatures); NORML, States That Have Decriminalized, (Mississippi, Missouri, Nebraska, North Carolina). 11 See, e.g., Bryan Borzykowski, A new market high: First ETF to target marijuana stocks, CNBC (Apr. 5, 2017); Duncan Rolph, Marijuana Is The Next Big Investment, But Here’s Why Most Investors Will Have To Wait, FORBES.COM (Dec. 12, 2017). See generally The Marijuana Index. Fried Frank Client Memorandum 3 Since the adoption of state law legalizing the possession, sale and production of marijuana, marijuanarelated businesses have faced uncertainty in terms of legality under federal law. In addition, the concerns of shareholders and other current and potential investors in such businesses have not been specifically addressed by federal enforcement guidance to date, nor have those of investment bankers and other advisors involved in capital raising, mergers and acquisitions and other transactions related to such businesses. Due in part to the DOJ’s policy of forbearance with respect to some aspects of the federal enforcement of marijuana law embodied in the Cole Memo, discussed herein, marijuana-related businesses have grown in the states that legalized the possession, sale and/or use of marijuana. In Colorado, for example, marijuana sales generate more than $1 billion in annual revenue and provide thousands of jobs.12 However, that growth has been initially constrained by the difficulty posed by the lack of access to basic banking services such as checking accounts, payroll and vendor services, direct deposit, bill payment, cash management and credit transfers. In 2014, only 105 depository institutions had marijuana-related businesses as customers.13 In the wake of release of the Cole memo and FinCEN guidance, however, by the end of the third quarter of 2017, this number had more than quadrupled, as 400 depository institutions – representing just over 300 banks and just under 100 credit unions – had marijuana-related business accounts and reported the required SARs for such customers with FinCEN.14 The DOJ Cole Memo In the Cole Memo, the DOJ emphasized that it was relying on rigorous state enforcement of its regulatory structure for marijuana-related businesses,15 and therefore concluded that it was more efficient to put its enforcement resources elsewhere. The Cole Memo provided eight factors for U.S. attorneys to consider in evaluating whether to prosecute marijuana-related crimes, in all states, whether they had or had not legalized marijuana.16 Those factors are:  Preventing the 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; 12 See Charlie Savage and Jack Healy, Trump Administration Takes Step That Could Threaten Marijuana Legalization Movement, N.Y. TIMES (Jan. 4, 2018). 13 See FinCEN, Remarks of Jennifer Shasky Calvery (Aug. 12, 2014) (“[T]here are currently 105 individual financial institutions…engaged in banking relationships with marijuana-related businesses.”). 14 FinCEN, Marijuana Banking Update (Sept. 30, 2017). 15 See Cole Memo at 3 (“In jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems […], conduct in compliance with those laws and regulations is less likely to threaten the federal priorities set forth [in the Cole Memo] above. Indeed, a robust system may affirmatively address those priorities […]”). 16 The Cole Memo describes priorities related to marijuana-related “conduct,” not “business” per se. As discussed, the 2014 Guidance does discuss marijuana-related business without defining the term. Fried Frank Client Memorandum 4  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; and  Preventing marijuana possession or use on federal property. Under the 2014 Guidance and the related FinCEN Guidance, financial institutions providing services to marijuana-related businesses were required to:  Conduct specified elements of due diligence, including ongoing monitoring, with respect to their customers that were marijuana-related businesses;  Evaluate the financial services they provide to the marijuana-related businesses against the Cole Memo’s eight factors;  File Suspicious Activity Reports ("SARs") related to each customer that is in a marijuana-related business, initially and in an ongoing manner; 17 and  File currency transaction reports with respect to customers that are marijuana-related businesses in the same way that such reports are filed for all other customers. While adherence with these guidelines could not provide a full safe harbor to financial institutions, it provided a basis under which a bank or other financial institution could provide evidence that it followed reasonable procedures to make sure that transactions it facilitated were within the parameters of state law and federal guidance. Failure to do so would increase the risk of the financial institution being subject to penalties for violations of the criminal statutes regarding financial transactions related to marijuana, as discussed above, though even full compliance would not eliminate the risk, because of the factdependent nature of the inquiry under the Cole Memo, 2014 Guidance and FinCEN Guidance factors. New guidance The 2018 Guidance, a single-page memorandum, emphasizes Congress’s determination that marijuana is a dangerous drug and that “marijuana activity” is a serious crime. Marijuana activity, per the 2018 Guidance, includes certain federal financial statutes, related to marijuana business, that cover money laundering,18 unlicensed money transmission19 and the Bank Secrecy Act.20 The 2018 Guidance indicates that the DOJ’s general principles of prosecutorial discretion for all federal investigations and prosecutions, as stated in the U.S. Attorney’s Manual, render unnecessary a statement of priorities for 17 See supra footnote 14. 18 18 U.S.C. §§ 1956, 1957. 19 18 U.S.C. § 1960. 20 31 U.S.C. § 5311 et seq. Fried Frank Client Memorandum 5 marijuana-related prosecutions. Therefore, the 2018 Guidance rescinds the Cole Memo and the 2014 Guidance, among other items of DOJ marijuana-specific guidance.21 It does not address any federalism or preemption issues that may arise from the disconnect between federal and state law in this area. Potential impact on banking organizations and other financial institutions Without the 2014 Guidance (and likely without the FinCEN Guidance) to rely on, banks and other financial institutions will have much less protection from investigation and prosecution by individual U.S. attorneys who conclude, even in states where marijuana has been legalized, that prosecution for financial crimes related to marijuana is appropriate under the 2018 Guidance and existing DOJ guidance on prosecutorial discretion. Banks, credit unions and other financial institutions that have – or are considering -- marijuana-related businesses as their customers must carefully reevaluate their compliance with the various federal laws regarding transactions related to marijuana, as discussed above. As long as the FinCEN Guidance remains in force, financial institutions with marijuana-related businesses as customers should continue making required SAR filings and maintaining their Cole Memo compliance programs. Under the 2018 guidance, however, financial institutions may not be able to accurately assess and address their compliance risk and potential legal exposure associated with doing business with marijuana-related businesses, unless further guidance is provided; this could be particularly true if the 2014 FinCEN Guidance is also repealed. Marijuana-related businesses, shareholders and other investors, as well as their advisers, also face continued uncertainty as relates to the prosecutorial discretion provided under the 2018 Guidance to prosecute marijuana production and sales, since it rescinds the Cole Memo guidance stressing state enforcement of its laws. While federal prosecutors are likely to continue to focus on prosecutorial priorities related to gang-related and money laundering issues, we reiterate that there are no guarantees that local U.S. attorneys will not prosecute marijuana-related businesses, their owners, shareholders, management or advisors who may be otherwise engaged in lawful activity under state law; rather, the rescission of the Cole Memo and the 2014 Guidance makes such prosecution more likely. Additionally, with regards to business transactions, marijuana-related businesses will continue to be unable to make representations or warranties with respect to compliance with federal law. * * * 21 See 2018 Guidance n. 1 for a list of all rescinded items of guidance. We note that, at the time of writing, FinCEN had not formally withdrawn the FinCEN Guidance or announced any intention to do so, but such withdrawal is likely because the FinCEN Guidance is a companion to the 2014 Guidance and relies heavily on the factors presented in the Cole Memo. Fried Frank Client Memorandum New York Washington, DC London Frankfurt friedfrank.com 6 Authors: V. Gerard Comizio Nathan S. Brownback This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions about the contents of this memorandum, please call your regular Fried Frank contact or the attorney listed below: Contact: Washington, D.C. V. Gerard Comizio +1.202.639.7450 [email protected]