Last month, news outlets reported1 that Scotiabank and Royal Bank of Canada, the two top banks in Canada, ceased all business with companies in the marijuana industry and canceled all of their existing accounts. Despite Canada’s apparent movement toward the legalization of recreational marijuana, these events again highlight one of the major difficulties facing the industry both in Canada and the United States — the big banks’ refusal to service marijuana-related businesses.

Indeed, Bank of America, Wells Fargo, JP Morgan Chase, Key Bank, and BECU have all refused to work with marijuana-related businesses without further assurances or clarity on federal law. The reasoning? Marijuana is still illegal under federal law. See 21 U.S.C. § 812. While the big banks have shied away from the marijuana industry, some smaller credit unions have filled that gap. In Washington state, Numerica Credit Union (Spokane Valley) and Salal Credit Union (Seattle), have accepted accounts from marijuana businesses under certain circumstances, proving that, while complex, compliance with federal directives is possible. But what does compliance look like?

The road to compliance starts with the Department of Treasury and Department of Justice. In 2014, the Department of Treasury, Financial Crimes Enforcement Network, issued directive FIN-2014-G001, setting forth its guidelines for financial institutions seeking to provide services to marijuana-related businesses. Under FIN-2014-G001, banks can serve marijuana-related businesses, provided they follow strict anti-money-laundering procedures. First, extensive due diligence must be conducted on each business:

(i) verifying with the appropriate state authorities whether the business is duly licensed and registered;
(ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
(iii) requesting from state licensing and enforcement authorities available information about the business and related parties;
(iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
(v) ongoing monitoring of publicly available sources for adverse information about the business and related parties;
(vi) ongoing monitoring of suspicious activity, including for any of the red flags described in this guidance; and
(vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

The detailed and extensive nature of the due diligence process requires significant and ongoing monitoring by the financial institution. In addition to due diligence requirements, the bank must also assess and analyze whether the business implicates any of the priorities outlined in the August 29, 2013 Department of Justice memo authored by Deputy Attorney General James M. Cole (the Cole memo).2 These priorities include:

(i) preventing the distribution of marijuana to minors;
(ii) preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
(iii) preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
(iv) preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
(v) preventing violence and the use of firearms in the cultivation and distribution of marijuana;
(vi) preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
(vii) preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
(viii) preventing marijuana possession or use on federal property.

If any of these priorities are implicated, the bank must report the business to the authorities and cease accounts with the business. FIN-2014-G001 also creates a multi-tiered suspicious activity report (SAR) requirement system for banks, beginning with “Marijuana Limited” SARs (reporting on all marijuana-related business not implicated in the Cole memo priorities and compliant with state law), “Marijuana Priority” SARs (on all marijuana-related business implicating the Cole memo priorities or violating state law) and “Marijuana Termination” SARs (on all marijuana business being terminated due to implication of the Cole memo priorities or violating state law). In addition, FIN-2014-G001 implements a “red flag” warning system requiring the bank to routinely check and monitor the business for a multitude of situations, examples including where a business receives more revenue than local competitors or is depositing more cash than is being reported for federal and state tax purposes.

Despite having both FIN-2014-G001 and the Cole memo as guideposts, the big banks’ current refusal to do business with the marijuana industry is not surprising. The priorities and red flags identified are broad and subject to varied interpretation. The costs of establishing and maintaining the extensive due diligence program required by FIN-2014-G001 and the Cole memo, combined with the risks of violations and loss of FDIC status, as it stands, appears to outweigh the benefits for some banks. Hanging over all of these considerations is that fact that marijuana is still listed as a Schedule 1 drug under the Controlled Substance Act and thus illegal under federal law. See 21 U.S.C. § 812. While FIN-2014-G001 and the Cole memo provide guidance for financial institutions, they are not law. A change in administration could reverse the current executive green light. Given that the Department of Justice has prosecuted cases against individuals engaging in legal marijuana business, the worry is justifiable.

However, for the small banks and credit unions that have already taken the jump, compliance is projected to lead to large profits. In February 2016, ArcView Market Research3 released a report showing an increase in sales of legal marijuana of 17 percent in 2015, making the industry worth $5.4 billion in 2015 alone. The report concludes that sales of legal marijuana will increase 25 percent by the end of the year, resulting in a $6.7 billion industry. By 2020, marijuana sales in the United States are expected to surpass $22 billion. This growth will only continue as more states propose and adopt legalization of either recreational or medical cannabis products. With these projected numbers, the question ultimately is not whether the big banks will allow the accounts, but when, and what path will federal regulation look like?