Financial Institutions who have dipped into the burgeoning $7 billion marijuana market face greater uncertainty in light of U.S. Attorney General Jeff Sessions’ January 4, 2018, Memorandum.
Under the prior administration, Deputy Attorney General James Cole issued “Cole Memorandum #3” (February 14, 2014), which outlined suggestions for financial institutions that operated in the marijuana forum. It focused on guiding the Department of Justice’s (DOJ) enforcement of financial crimes statutes – money laundering, unlicensed money remitter and the Bank Secrecy Act (BSA) – against persons or organizations that provide financial services to marijuana businesses in states that have legalized some form of marijuana use.
A prior Cole memorandum outlined eight enforcement priorities for the DOJ and Cole Memorandum #3 restated the expectation for effective state regulatory and enforcement systems, and included disclaimers that compliance with state law or the guidance memoranda are not a defense for violating federal law, including the Controlled Substances Act, money laundering, unlicensed money transmitter statutes, or the BSA. Part of the problem with this was that banking regulators in states like Florida did not enact any regulatory or enforcement systems dealing specifically with marijuana and how they may relate with financial institutions.
On February 14, 2014, the Financial Crimes Enforcement Network (FinCEN) also issued its own guidance, “to clarify customer due diligence expectations and BSA reporting requirements for financial institutions providing services to marijuana businesses in light of state laws legalizing certain marijuana-related activity and DOJ marijuana-related enforcement priorities.”
This, along with the enhanced customer due diligence, resulted in banks creating ever more robust BSA compliance procedures. With the issuance of the Sessions Memorandum on January 4, it was apparent that FinCEN was not forewarned of the memorandum. In response to the Sessions memorandum, FinCEN issued a statement though, that its former marijuana-related guidance memorandum remained in effect. That may not be reassuring because “guidance memorandum” do not have the force and effect of law and are subject to change without notice.
Sessions’ memorandum creates the possibility of a chilling effect on financial institutions transacting with marijuana-related business. At its extreme, financial institutions may be choose to opt out of the marijuana-related business industry altogether. The result would be a high-dollar industry that becomes almost entirely unbanked, which in turn creates additional problems of transportation of cash, payment of bills and taxes, credit, and the list goes on and on.
In addition, could we see more rigorous examinations of financial institutions by state banking regulators and the FDIC? And what of existing accounts? The temptation would be to simply un-bank these lucrative businesses and force them into a cash-only scenario that would cause the industry to move into the shadows, without any government oversight or regulation.
It is doubtful that was the intent, but with the prospect of the industry growing and becoming more lucrative, businesses will continue to grow and new actors will enter the market. So the question begs… “Do we truly want this industry’s finances to operate in the shadows, and free of government and regulatory oversight?” The fears addressed in the FinCEN guidance memorandum of money laundering, criminal targeting, in addition to those banks address every day in their compliance departments with Know Your Customer and BSA compliance requirements, could slowly become realized.
On January 16, 19 state attorneys general sent a letter to House and Senate leaders urging Congress to structure a legal safe harbor for financial institutions. In addition, two bills, one in the House and one in the Senate, would provide some protection to financial institutions in states that have laws and regulations that ensure accountability in the industry. Again, the State of Florida is not among such states.
Colin M. Roopnarine is a partner on Berger Singerman’s Government and Regulatory Team who focuses his practice on administrative law. Roopnarine can be reached at firstname.lastname@example.org www.bergersingerman.com