Over the past several years, cannabis reform has swept the country. To date, marijuana is legal for recreational use in 11 states and medicinal use in 33 states. The trend is expected to continue. Two market research companies, Arcview and Greenwave, are predicting that the cannabis industry’s revenues will exceed the National Football League’s revenues in 2020. Nevertheless, a majority of depository institutions refuse to offer services to marijuana-related businesses.
Cannabis is a Schedule I narcotic under the Controlled Substances Act of 1970. It is a federal crime to grow, possess or distribute cannabis under federal law even if legal under state law. It is a federal crime under the Money Laundering Control Act (“MLCA”) to knowingly conduct or attempt to conduct a financial transaction with the intent to promote the carrying on of a “specified unlawful activity.” Any person who violates the MLCA may be fined up to $500,000 or twice the value of the property involved in the transaction and/or imprisoned for up to 25 years. In other words, depository institutions, officers, directors and employees who knowingly accept proceeds from state legalized cannabis activities risk violating the MLCA.
In February of 2014, the Financial Crimes Enforcement Network issued a memorandum titled “BSA Expectations Regarding Marijuana-Related Businesses” clarifying how financial institutions could provide services to the cannabis industry in compliance with the Bank Secrecy Act. The FinCen guidance was based on a memorandum issued to federal prosecutors by U.S Justice Department Deputy Attorney General James Cole concerning marijuana enforcement under the CSA.
The Cole Memo set forth the federal government’s marijuana-related enforcement priorities and directed prosecutors and law enforcement to focus on marijuana-related crimes involving minors, gangs, violence, among others, and not on activity legal under state law. The FinCen guidance indicated that depository institutions could offer services to marijuana-related businesses in compliance with the BSA if a risk assessment and due diligence were performed at onboarding and during the account relationship to confirm that none of the marijuana-related customer’s activities implicated any of the Cole Memorandum priorities and suspicious activity reports were filed.
The issue was further complicated when former Attorney General Jeff Sessions rescinded the Cole Memorandum on which the FinCen guidance was based and gave no assurances that state legalized cannabis activity would not be prosecuted.
Legislative efforts stalled
Last fall, the House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 in an attempt to resolve the lack of banking services available to marijuana-related industry participants. The vote was 321 for and 103 against. The bill includes three key protections for Federal Reserve depository institutions that provide services to cannabis-related companies and their ancillary service providers:
- Section 2 of the SAFE Act provides such depository institutions with a safe harbor from adverse regulatory action by federal banking regulators.
- Section 3 provides that any transactions stemming from the activities of a cannabis-related legitimate business or service provider shall not be considered derived from “unlawful activity” for purposes of the MCLA or any other provision of federal law.
- Finally, Section 4 of the bill provides that neither depository institutions nor their officers, directors or employees may be held liable under any federal law for providing services to cannabis-related businesses and their service providers.
The SAFE Act is stalled in the Senate Banking Committee.
The public’s best interest
It is in the public’s interest to resolve the cannabis industry’s banking problem.
There are two compelling reasons why Congress should enact the SAFE Act into law. The first reason is public safety. The lack of banking services results in the cannabis industry operating predominantly on a cash basis. It is handling billions and billions of cash annually. There is significant anecdotal and other evidence that criminals are increasingly targeting cannabis companies, thereby endangering business owners, employees, customers and others.
The City of Denver, which is one of the most developed cannabis markets, issued a report showing that although cannabis companies constituted only 1% of businesses, they accounted for 10% of all reported burglaries from 2012-2016. In May 2019, a bipartisan group of 38 state attorneys general sent congressional leaders a letter indicating that the cannabis industry’s preclusion from the banking system and forced reliance on cash contributes to a public safety threat.
The second reason why the cannabis banking problem should be solved is for anti-money laundering reasons. Pursuant to the BSA, banks, credit unions and others are required to surveil their customers’ account activity to prevent, identify and report illicit activity. In addition, pursuant to the BSA and FinCen guidance, cash-intensive businesses are considered high risk from a financial crime perspective. Due to the lack of banking services available to cannabis companies, there is no surveillance whatsoever over billions of dollars associated with a high-risk cash-intensive industry.
It is in the public’s best interest for depository institutions to offer banking services to the cannabis industry. It would reduce crime associated with marijuana related businesses, result in surveillance of and reporting of illicit activity and provide money trails useful to law enforcement. Congress or the states should address those issues separately and fix the cannabis industry banking problem now. Failing to do so is against public safety and would result in continued lack of transparency in a multi-billion-dollar cash-intensive industry that is already high risk from a financial crime perspective.
