By Teddy Kirsch and Steve Lenn of L&S Business Law.
As the cannabis industry continues to expand, so too will the universe of existing and potential banking customers that will necessarily have financial or business relationships with licensed cannabis companies (“Licensees”). While the SAFE Banking Act languishes in Congress, under the limited existing federal guideline available, even banks that do not do business directly with Licensees are finding it necessary to address the possible requirements for enhanced due diligence, documentation and monitoring that may be required when considering doing business with customers that have interests and relationships that may be considered “marijuana related businesses” (“MRBs”) even when the proposed banking relation is totally separate from, and unrelated to, the customer’s cannabis interests. In fulfilling their know your customer (“KYC”) responsibilities at intake and on an ongoing basis, banks need to be alert to these potential requirements. They must also understand that the banking regulators are both sensitized to the possibilities and appear to be working cooperatively to address them, so transparency with regulators is, at the same time, a must.
While securing services from financial institutions has been a challenge for MRBs, there are several dozen federally insured banks and credit unions that openly offer such services. To mitigate the risk of running afoul of a myriad of federal financial crimes laws by doing so, banks (and banking regulators) draw upon guidance in a release dated February 14, 2014 issued by the Financial Crimes Enforcement Network (“FinCen”), “BSA Expectations Regarding Marijuana-Related Businesses” (the “Guidance”).
FinCen is a bureau of the U.S. Department of the Treasury, the mission of which is to safeguard the financial system from illicit use and combat money laundering and promote national security. The text of the Guidance articulates as its purpose as clarifying “how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations….” It further articulated that the Guidance was intended to “enhance the availability of services for, and the financial transparency of, marijuana related businesses.”
The Guidance cites as underlying precepts the priorities established pursuant to a memorandum issued by U.S. Department of Justice Deputy Attorney General James M. Cole dated August 29, 2013 (the “Cole Memorandum”). Although the Cole Memorandum was supplemented by advisories from other Assistant U.S. Attorneys, the priorities have essentially been left in place. It is also important to keep in mind that the Cole Memorandum (as supplemented) provides guidance only. Early in his tenure, Attorney General Sessions issued a “recission” of the guidance, but there has been no perceptible change at the enforcement level.
The Cole Memorandum priorities include:
- Preventing distribution to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises;
- Preventing the diversion of marijuana to states in which it is not legal;
- Preventing state authorized marijuana activities from being used as a cover for other; drug trafficking or illegal activity;
- Preventing the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and other adverse health consequences.
The Guidance also provides a laundry list of red flags, and dictates that financial institutions seeking to act in compliance with the Guidance must tailor their relationships with MRBs to address and mitigate the risk of interfering with the accomplishment of the priorities shown above.
Unfortunately, the Guidance does not define “marijuana related business,” and FinCEN has not issued any further guidance regarding this definition. However, the Guidance makes clear that the classification includes more than just plant touching enterprises, choosing to directly extend the classification as far as to landlords of MRB’s