The state-legal marijuana sector operates in a largely cash-based economy—only about 400 banks and credit unions in the U.S. actively provide financial services to this sector—because marijuana remains illegal under federal law, despite the increasing number of states acting to legalize medical and/or recreational use. There is no carveout for state-legal activity and no safe harbor for financial institutions to serve customers engaged in such activity.

Until last week, though, banks and credit unions wanting to work with this sector could rely to some degree on guidance from the U.S. Department of Justice (DOJ) and from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Now, with the DOJ guidance withdrawn and the fate of the FinCEN guidance in question, the future of marijuana banking faces even more uncertainty.

The January 4 Sessions Action

On January 4, 2018, Attorney General Jeff Sessions announced the rescission of the Cole Memoranda, a series of issuances from senior DOJ officials during the Obama era. These issuances had recommended that U.S. Attorneys’ Offices focus prosecutorial priorities away from state-legal marijuana activity except where certain heightened risk factors were present. Now, instead, federal prosecutors deciding whether to take any actions regarding state-legal marijuana activity are to be guided by the “well-established principles” that apply generally to prosecutorial decisions, rather than by principles specific to state-legal marijuana.

It is important to note that Sessions’ announcement did not direct federal authorities to begin aggressively pursuing all marijuana activity. (Also, at least through January 19, a Congressional budget amendment, the Rohrabacher-Blumenauer Amendment, limits the ability of the DOJ to use federally-appropriated funds to prosecute state-legal medical marijuana activity.)

And the Cole Memoranda’s actual force was limited. The memoranda did not—and could not—change the fact that even state-legal marijuana-related activity is illegal under the federal Controlled Substances Act (CSA) and, in turn, potentially under other federal laws. Nor did the Cole Memoranda prohibit federal authorities from pursuing actions against state-legal marijuana activity even where the Cole factors were not present.

It can be said, then, that rescission of the Cole Memoranda does not actually change anything substantive about federal law or federal authority. But that does not mean that Sessions’ action will have no practical effect. Of particular relevance to financial institutions, the Cole Memoranda provided the basis for the only federal guidance on banking services for the marijuana sector. The future of that guidance is now unclear.

The 2014 FinCEN Guidance

Neither the DOJ nor the federal banking agencies have officially addressed the issue of providing financial services to the state-legal marijuana sector. Rather, the sole federal guidance directed to financial institutions on this issue is the guidance issued by FinCEN in 2014 on the same day as one of the Cole Memoranda.

The FinCEN guidance is singularly focused on ways to meet Bank Secrecy Act/anti-money-laundering (BSA/AML) obligations while serving marijuana-related businesses (MRBs). It does not authorize financial institutions to serve such businesses, nor does it provide a guide to compliance with every law and regulation that financial institutions must follow. Instead, it provides a framework specifically for BSA/AML compliance for institutions that choose to serve MRBs or that otherwise encounter transactions involving marijuana. This is significant because BSA/AML risk is one of the major risks inherent in banking MRBs—many transactions involving marijuana can constitute money laundering under federal law.

The FinCEN guidance explicitly incorporates the Cole Memoranda in stating that financial institutions should take certain actions based on whether any of the Cole factors are present. For instance, the FinCEN guidance creates three new types of Suspicious Activity Report (SAR) to file regarding marijuana activity, and which SAR to file depends in part on the presence of any Cole factor:

  • “Marijuana Limited” SAR: “A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a ‘Marijuana Limited’ SAR.”
  • “Marijuana Priority” SAR: “A financial institution filing a SAR on a marijuana-related business that it reasonably believes, based on its customer due diligence, implicates one of the Cole Memo priorities or violates state law should file a ‘Marijuana Priority’ SAR.”
  • “Marijuana Termination” SAR: “If a financial institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program, it should file a SAR and note in the narrative the basis for the termination. … To the extent the financial institution becomes aware that the marijuana-related business seeks to move to a second financial institution, FinCEN urges the first institution to use Section 314(b) voluntary information sharing (if it qualifies) to alert the second financial institution of potential illegal activity.”

In issuing the guidance, FinCEN expressed its expectation that “Providing clarity in this context should enhance the availability of financial services for marijuana businesses. This would promote greater financial transparency in the marijuana industry and mitigate the dangers associated with conducting an all-cash business.”

But even with the FinCEN guidance in effect, a very small number of banks and credit unions have chosen to serve MRBs, as reported by FinCEN itself based on the marijuana-related SARs that are filed. The institutions that have done so tend not to advertise that fact, with MRB customers finding them through word of mouth (or perhaps through media coverage, such as recent articles in in the New York Times Magazine and the Washington Post). It is common for such institutions to charge pricy account fees to MRB customers to offset associated risks and compliance costs. And MRB customers face the reality that the banks or credit unions could close their accounts at any time, whether because of pressure from their regulators or law enforcement, or changes in their own risk appetites.

The Future of the FinCEN Guidance

Now, a week after Sessions’ withdrawal of the Cole Memoranda, the FinCEN guidance remains in existence—but the Cole Memoranda do not. With so much of the FinCEN guidance based on Cole, it seems logical that FinCEN would withdraw or amend the guidance in some way. For FinCEN to keep the guidance in effect as written would mean that it references, by name, DOJ guidance that no longer exists.

But to date, the agency has not withdrawn or amended the guidance or stated that it plans to do so. (A FinCEN spokesperson said in a statement quoted in the Huffington Post, “FinCEN works closely with law enforcement and the financial sector to combat illicit finance and provide relevant information that allows law enforcement to pursue their priorities. We will continue to work with DOJ and other stakeholders on this issue.”)

Short of rescinding the guidance, one alternative would be for FinCEN to keep it substantively unchanged but delete the references to Cole. One argument against that approach is that it would mean that FinCEN is citing law enforcement priorities previously articulated by the DOJ that have now been disclaimed by the DOJ. While that is not clearly prohibited, it is intuitively somewhat odd. However, it may not be as odd if FinCEN explicitly ratifies those risk factors as those it considers to pose heightened BSA/AML risk.

It should be kept in mind that Sessions’ January 4 action was related, in part, to an ongoing process conducted in connection with Executive Order 13777, issued by President Trump in March 2017, which requires federal agencies (unless given a waiver or otherwise excluded) to undertake regulatory reviews aimed at alleviating regulatory burden, including identifying existing regulations “for repeal, replacement, or modification.” Thus, FinCEN is also subject to this EO 13777 process. How the marijuana guidance will fare if identified in this process remains to be seen. One could argue that repeal of the guidance would alleviate regulatory burden because it would eliminate the need to comply with the new types of SAR reporting, for example. But conversely, repeal could also arguably impose burden by making it harder for banks and credit unions to serve MRBs because it would be less clear how they could do so while still meeting their BSA/AML responsibilities. (If FinCEN were to take the regulatory review process to an extreme and repeal all of its BSA regulations, that would not solve this issue: it would neither remove all BSA/AML requirements on financial institutions nor give complete freedom to financial institutions to serve MRBs, because the BSA statutory provisions would still remain, as would the CSA and the other federal criminal law statutes potentially triggered by marijuana activity, unless repealed by Congress.)

The Future of Marijuana Banking

To determine what direction marijuana banking might take, and how the risk profile of that activity might change, it will be important to continue to monitor the actions of key players in this ecosystem.

The most obvious parties to watch are FinCEN and the DOJ. But their motivations—and the motivations of other federal law enforcement authorities and agencies—are not necessarily obvious. The federal government’s interests are not uniformly aligned against marijuana banking.

Despite the federal illegality of marijuana, the federal government actually faces potential harm from marijuana transactions being excluded from the mainstream banking system. Transactions conducted through banks and credit unions, and other financial institutions subject to the BSA, such as money services businesses (MSBs), are subject to BSA/AML provisions requiring the filing of SARs (whether marijuana-specific or not), Currency Transaction Reports (CTRs), and other forms. These reports provide a rich and constantly refreshed data set to FinCEN and the governmental entities — including the DOJ — that access these filings, and help them identify potential crimes to pursue. Already, many of these transactions are not reported or trackable because they are not moving through mainstream financial institutions. If even fewer financial institutions were to serve MRBs, that would result in even less of this data available to the government. (And the interests of state authorities in having banking access for MRBs seem even more clear: a cash-based industry brings the potential for violent crime and theft of that cash, and state regulators face the unwieldy process of accepting payments from their marijuana licensees in cash.) As a result, it is possible that federal agencies other than DOJ will join state governmental entities in calling for changes to the current situation—changes that likely must come from Congress.

Another open question relates to federal banking regulators’ supervisory priorities and expectations. To date, those agencies have not taken any official positions on marijuana banking, and have not indicated whether they will issue their own BSA/AML guidance if the FinCEN guidance is withdrawn. (While FinCEN has rulemaking and interpretive authority under the BSA, the banking agencies also may set their own additional supervisory expectations for institutions under their supervision with regard to BSA/AML.) It is also unclear what they will communicate to their supervised institutions behind closed doors, in the context of an exam or other nonpublic interaction.

If the banking regulators (and/or FinCEN) were to publish guidance in this area, one key issue ripe to discuss in such guidance is the need for robust BSA/AML processes to identify marijuana-related transactions that are not disclosed to the financial institution as such. Financial institutions—especially those that do not intend to serve MRBs—should be aware that any reduction in access to mainstream banking could incent some persons to attempt to open marijuana-related accounts under false pretenses or conduct marijuana-related transactions through their existing personal or (non-marijuana) business accounts. Such actions, depending on the facts and circumstances, could constitute bank fraud and/or other crimes. It is important that financial institutions be able to identify and act on such situations.

Even absent specific guidance from regulators on this issue, financial institutions should, for their own risk management purposes, address it. They should ensure that their BSA/AML policies and procedures are sufficiently robust to allow identification of marijuana-related activity and to ensure appropriate actions in response. Banks and credit unions should give particular consideration to this issue as they implement FinCEN’s beneficial owner rule, which does not specifically apply to MRB customers but imposes additional customer due diligence (CDD) requirements to determine the beneficial owners of legal entities. Compliance with this rule (mandatory as of May 11, 2018) may help identify customers that do not appear on their face to be MRBs but whose ownership includes persons involved in the marijuana sector. Financial institutions should determine what additional actions may be appropriate to determine whether new and existing customers are engaging in marijuana-related activity, including as part of onboarding and ongoing monitoring. Whether or not a financial institution intends to serve marijuana-related customers, it must understand the risks at issue and be able to understand the transactions going through its systems.

With the withdrawal of the Cole Memoranda and the unclear outlook for the FinCEN guidance, maintaining strong BSA/AML policies and procedures can help provide financial institutions with some measure of confidence in their knowledge of the nature of their customers and transactions. And in the current environment, that may be one of the few types of certainty that are possible.