Introduction – The Cannabanking Conundrum
There has been much focus recently on the banking problems presented by individuals and entities in states where it is now legal, under state law, to manufacture, distribute or dispense marijuana. Since this activity remains illegal under United States federal law, such activity may be tantamount of money laundering or participation in a criminal enterprise. Recent federal guidance from the Department of Justice and the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has attempted to reduce fears among financial institutions choosing to do business with marijuana-related businesses (MRBs). The decision to do business with any person, whether depositor or borrower, ultimately rests with a financial institution’s management and board.
Even for financial institutions choosing to not directly service the emerging marijuana industry, the issue that arises is where the person that a financial institution does business with is doing business with an MRB. In other words, financial institutions need to be concerned about their customers’ customers. Since financial institutions risk prosecution or forfeitures for violations of federal law, they are assessing account relationships that are even peripherally related to marijuana businesses and discontinuing or thoroughly reviewing those relationships. There is also the issue that many financial institutions are likely interacting with MRBs, and facilitating credit or debit card payments, but they simply do not know it because they cannot identify these MRBs.
Tools to Identify Marijuana-Related Businesses
A number of organizations are in the process of developing tools whereby financial institutions can determine if they hold accounts related to the marijuana industry. For instance, Dow Jones & Company provides a number of risk and compliance data solutions designed to assist financial institutions, and its most recent product offering is described as a Marijuana-Related Businesses data feed that identifies those who are duly licensed or authorized to conduct business in the marijuana industry. Dow Jones is marketing this list as a tool to assist financial institutions to identity blindspots in their existing compliance infrastructure, and identify accounts that trigger heightened compliance obligations such as those outlined in the FinCEN Guidance. Similarly, another company has developed a comprehensive database of MRBs that financial institutions can use to screen for unknown marijuana-related customers and accounts. This resource, available at MRBMonitor.com, is continuing to add MRBs and is currently reported to have identified over 8,000 MRBs. These and other resources will allow financial institutions to identify MRBs.
Uncertain Duties of Financial Institutions as to Marijuana-Related Businesses
There is great uncertainty regarding the duties and obligations of financial institutions to determine the existence and identity of these MRBs, and to then determine the risk that these third-party MRBs pose to a financial institution. For instance:
- What are the risks associated with a loan to a landlord for which the financial institution receives collateral property that is rented and used for the cultivation or dispensing of marijuana?
- What are the risks associated with a line of credit the proceeds of which are used to invest directly in an MRB involved in the cultivation or dispensing of marijuana? Are the risks attenuated for investments in an MRB that simply provides horticultural or lighting supplies to a marijuana cultivator?
- What procedures are in place for collecting on loans in which federal drug seizure laws are implicated? Are there risks that the financial institution’s lien position would become subordinated to federal government claims?
- Do relevant agreements contemplate the ability to accelerate loan terms and call any balance due and payable should the financial institution have reason to suspect noncompliance with applicable federal marijuana guidances?
Given the uncertainties inherent in this industry until further federal legislation or guidance is made available, all that financial institutions can do to mitigate the parade of horrible scenarios is to get legal advice from experienced counsel and implement that advice through policies and procedures. With a little advance planning, handling the issues posed by marijuana are not different than any other compliance issues presented to a financial institution.
Known Obligations of Financial Institutions as to Marijuana-Related Businesses
Financial institutions directly serving MRBs need to ensure effective customer due diligence (CDD) and enhanced due diligence for higher-risk customers (EDD) and know-your-customer (KYC) policies and procedures in order to meet Bank Secrecy Act / anti-money laundering (BSA/AML) regulations and guidances. There are also obligations imposed on financial institutions through the FinCEN guidance to file Suspicious Activity Reports (SAR) with respect to marijuana-related businesses. There are three types of applicable SAR filings for marijuana-related businesses:
- “Marijuana Limited” SAR Filings - if a financial institution reasonably believes, based on its customer due diligence, that a marijuana-related business does not implicate one of the federal enforcement priorities or violate state law, it would file a “Marijuana Limited” SAR and would include streamlined information.
- “Marijuana Priority” SAR Filings - if a financial institution reasonably believes, based on its customer due diligence, that the marijuana-related business implicates one of the federal priorities or violates state law, it should file a SAR labeled “Marijuana Priority,” and the content of the SAR would include comprehensive details in accordance with existing regulations and guidance.
- “Marijuana Termination” SAR Filings – 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. Financial institutions should use the term “Marijuana Termination” in the narrative section.
Even for those not directly serving MRBs, or unaware of whether they are doing so, it is critical for financial institutions to:
- fully understand the risks posed by customers doing business with MRBs, including a thorough awareness of the applicable laws;
- have experienced, knowledgeable personnel involved to underwrite, control, and manage the unique risks posed by MRBs;
- implement strong controls to mitigate and limit risks posed from MRBs; and
- develop a strategy for account termination if any adverse situation or compliance concern arises relating to a customer and its relationship with an MRB.
Financial institutions need holistic advisors in order to navigate this shifting legal landscape.