The Financial Crimes Enforcement Network (“FinCEN”) issued guidance (the “Guidance”) to clarify FinCEN’s expectations as to how financial institutions (“FIs” and each an “FI”) will meet their compliance requirements under the Bank Secrecy Act (the “BSA”) when FIs seek to provide services to marijuana-related businesses (“M-R Businesses”). FinCEN issued the Guidance in light of actions by 20 states and the District of Columbia to legalize certain marijuana-related activities and related guidance by the U.S. Department of Justice (“DOJ”) concerning its marijuana-related enforcement priorities.
Federal Law and the Cole Memo Priorities
The Federal Controlled Substances Act (“CSA”) prohibits the manufacture, distribution or dispensing of marijuana. As mentioned above, however, 20 states and the District of Columbia have recently legalized certain marijuana-related activities. To address these developments, the DOJ issued a memorandum (the “Cole Memo”) to all United States attorneys providing guidance to Federal prosecutors concerning marijuana activity enforcement under the CSA. The Cole Memo lists eight enforcement priorities:
- 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;
- 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.
Providing Financial Services to M-R Businesses
In the Guidance, FinCEN states that an FI that is considering providing financial services to an M-R Business should assess the risks involved by conducting customer due diligence that includes:
- verifying with the appropriate state authorities whether the business is duly licensed and registered;
- reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its M-R Business;
- requesting from state licensing and enforcement authorities available information about the M-R Business and related parties;
- developing an understanding of the normal and expected activity for the M-R Business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
- ongoing monitoring of publicly available sources for adverse information about the M-R Business and related parties;
- ongoing monitoring for suspicious activity, including for any of the red flags described in this Guidance; and
- refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
In addition, as part of its customer due diligence an FI should consider whether the activities of the M-R Business violate state law or implicate one of the priorities listed in the Cole Memo.
Filing of Suspicious Activities Reports on M-R Businesses
In the Guidance, FinCEN next discusses an FI’s obligation to file a suspicious activity report (“SAR”) under the BSA in connection with the FI’s provision of financial services to an M-R Business. Because Federal law prohibits the sale and distribution of marijuana, an FI is required to file a SAR in connection with providing financial services to an M-R Business (even if the M-R Business is duly licensed under state law). To make SAR filings related to M-R Businesses most useful to enforcement authorities, the Guidance instructs an FI to consider the facts and circumstances of the M-R Business and indicate in the FI’s filing whether the filing is a “Marijuana Limited,” “Marijuana Priority” or “Marijuana Termination” SAR filing. The simplest SAR related to an M-R Business is a “Marijuana Limited” filing, which should be filed if the FI does not believe that the M-R Business is violating state law or any of the Cole Memo priorities. Where an FI believes that, based upon its customer due diligence, the applicable M-R Business may be violating state law or that the M-R Business’s activities may implicate one or more of the Cole Memo priorities, the FI is instructed by FinCEN to file a “Marijuana Priority” SAR. In the event the FI has determined to terminate its relationship with an M-R Business, the Guidance instructs the FI to file a “Marijuana Termination” SAR, which should set forth the FI’s basis for terminating the relationship. Next, the Guidance provides an extensive list of “red flags” that are intended to help an FI to assess whether a SAR filing related to an M-R Business should be filed as a “Marijuana Priority” SAR.
Currency Transaction Reports
The Guidance confirms that FIs must report currency transactions related to M-R Businesses in the same manner as they would report them for any other business. Accordingly, for example, an FI “would need to file [Currency Transaction Reports] on the receipt or withdrawal by any person of more than $10,000 in cash per day.” FinCEN also notes in the Guidance that M-R Businesses are not eligible for an exemption under the BSA currency transaction reporting requirements.
While FinCEN has provided useful information to FIs in the Guidance regarding reporting requirements and FinCEN’s expectations as to how an FI will conduct customer due diligence of a potential M-R Business client, the manufacture, distribution or dispensing of marijuana remains an illegal activity under Federal law, and bank regulators are highly likely to review transactions with M-R Businesses with a high level of scrutiny and some skepticism. We expect that, although some mid-sized or smaller banks will begin to make loans to M-R Businesses, most FIs will decide that the current risks and costs of doing business with M-R Businesses exceed the likely rewards and will refrain from doing business with M-R Businesses unless or until Congress takes action to legalize transactions with M-R Businesses under Federal law.