The Coming Green Wellspring
There is a litany of negative consequences of withholding banking services from marijuana businesses. The lack of banking services keeps marijuana businesses operating in the shadows of American society. As most banks refuse to do business with even state-licensed medical marijuana businesses, these businesses are incentivized to either misrepresent their activities to secure the cooperation of unwilling banks or forego those banks entirely and accept the risk and stigma that comes with it. The rule of law has suffered.
From a public safety perspective, any business forced to operate as cash-only can become a magnet for crime and violence, as large sums of cash are known to be at certain physical locations. From a regulatory perspective, it is much more difficult to track and tax revenues from cash-only businesses. From a banking perspective, cash earns no interest and is problematic to invest and reinvest into the economy at large. But most importantly, equity requires checking accounts so that small business owners can pay their employees’ payroll and secure capital for investment and future expansion. If investments cannot be accessed from reputable financial institutions and professional investors, the inchoate industry will likely suffer, as it cannot attract people with more business experience.
The Burgeoning Marijuana Market
The lack of banking services is a “formidable barrier” to growth in the legal marijuana industry. With banking services, the sky is the limit. Marijuana is America’s number one cash crop. Legal cannabis sales soared to $5.4 billion in 2015. It is expected to generate revenues of $35 billion by 2020, surpassing the size and reach of the NFL. In California, marijuana dispensaries outnumber Starbucks coffee shops in some areas. Currently, the largest medical marijuana businesses have market caps exceeding $125 million. The market grew at a rate of 13.8 percent from 2008 until 2013. In 2014, the rate accelerated to 17.4 percent. These budding markets have contributed huge windfalls to state coffers derived from licensing fees and taxes.
High Operating Costs Without Accounts
Handling millions of dollars each month in cash, without bank cooperation, drives up the operating costs of marijuana business. What was once done on a handshake has now expanded to thousands of transactions on a daily basis. Cash accumulates. Medical marijuana businesses are then obligated to purchase vaults and cameras and hire professionally trained guards and follow rigorous security procedures to protect their cash intake. They need to find suppliers that
No issue faces greater disparate treatment than medical marijuana’s legal status in the eyes of our three levels of government—federal, state, and local. At the federal level, it is seen as a serious felony, a constitutional right at the state level, and a taxable public nuisance at the local level. As a consequence, state-licensed medical marijuana businesses are systematically denied access to banking services. Financial institutions, fearful of potential money laundering, criminal charges, or losing their FDIC coverage, refuse to offer them. It was not always this way.
Marijuana’s “Legal” Status
For most of American history, marijuana was both legal to grow and consume. It was present at the founding of our nation. But starting in the 1910s, a number of states criminalized the drug. In 1937, the federal government enacted the Marijuana Tax Act, which led to dropping marijuana from the Federal Pharmacopoeia, the list of approved permissible medicines. The American Medical Association (“AMA”) opposed the reclassification of marijuana but its opposition was to no avail.
By the 1970’s, with President Nixon’s “war on drugs” campaign, the federal government adopted a strict stance. The Controlled Substances Act (“CSA”) of 1970 prohibited marijuana entirely. Along with LSD and heroin, marijuana is listed as a Schedule I drug—the most dangerous category of narcotics under federal law. Under the CSA, the manufacture, distribution, possession, and use of a Schedule I narcotic can lead to punishments up to 10 years in prison and $2 million in fines. In addition, conspiring to commit an offense under the CSA subjects the accomplice to the same penalties as prescribed for the offense itself. Despite repeated efforts to repeal marijuana’s criminality under the CSA, marijuana prohibition remains the law of the land.
Schedule I drugs are considered to be highly addictive and without a safe dosage. As marijuana was classified as a Schedule I drug before medical testing could be conducted, its very classification hampers an accurate determination of its health benefits and risks. It is for this reason the AMA recommends a review of marijuana’s classification to test it in sanctioned clinical trials. After enacting the CSA, all fifty states followed suit, and prohibited marijuana.
Over the past forty-five years, “nearly all marijuana enforcement in the United States has taken place at the state level.” Of the 897,250 marijuana arrests in 2012, over 99% were made at the state and local levels as compared to those made by federal officers.
Legalization at the State Level
In 1996, California was the first state in the country to permit the use of medical marijuana with passage of Proposition 215. To date, twenty-three states and the District of Columbia have legalized medical marijuana. Another seventeen states permit the use of cannabis oil. In 2012 and 2013, Colorado and Washington went further by legalizing its recreational use. Four states and the District of Columbia now treat marijuana as if it were alcohol—subject to taxes and heavy regulation. Six states have pending legislation to legalize medical marijuana. In addition, a number of other states are expected to vote on the issue in 2016.
It has been more than 40 years since Congress passed the CSA—the federal government’s hardline against marijuana began. But there appears to be a sea change in the public’s view: today 58 percent of Americans support legalization compared to 12 percent in 1969. According to surveys, up to half of adults have tried marijuana. Nearly three-in-four Americans believe that it costs more to enforce marijuana laws than they are worth. With a third of state approvals for medical marijuana coming in the last three years, and as more votes to legalize are scheduled, it is clear that the issue of marijuana is no longer taboo in the American psyche. The momentum for legalization of medical marijuana is widespread and growing.
The Current Federal Policy of Non-Enforcement
In August of 2013, in reaction to the legalization of recreational use in Colorado and Washington, and entreaties by Governors Hickenlooper of Colorado and Jay Inslee of Washington for federal guidance, Deputy Attorney James M. Cole on behalf of the Department of Justice (“DOJ”) issued a memorandum (“Cole Memo”) to all U.S. Attorneys announcing that the DOJ would not be moving to block implementation. The Cole Memo further de-prioritized the enforcement of federal marijuana laws in states with robust marijuana regulations and specified eight enforcement priorities to help guide state lawmakers. These priorities included preventing distribution to minors, restricting funds to gangs, and minimizing gun violence. Interestingly, the priorities tacitly omit the sale or possession permitted by state law. By issuing the Cole Memo, the federal government adopted a strategy of non-enforcement concerning state legalized marijuana.21 The Cole Memo reinforced the historical reality that nearly all marijuana enforcement is at the local level. “Enforcement of state law by state and local law enforcement and regulatory bodies should remain the primary means of addressing marijuana-related activity.” The DOJ appears to have given states the go ahead to legalize medical (and recreational) marijuana.
In effect, if state regulations effectively prevented the harms identified by the DOJ, it would voluntarily refrain from intervention. This position is critical in both a historic and practical context: for most of American history the states have taken the preeminent position in marijuana enforcement. Now, the DOJ tacitly acknowledges that deferential relationship. The Cole Memo “expresses strong deference to state law, noting that the federal government has traditionally relied on states to police most forms of marijuana activity. Indeed, the Cole Memo suggests that states with robust regulatory schemes should be subject to less federal intervention than those with more limited programs.
Big Banks Ignore Justice Department
While the DOJ’s new policies have opened the door for medical marijuana businesses to open bank accounts in California, the banking industry lacks the confidence to seize this opportunity. The American Bankers Association (“ABA”) has stated that enforcement guidance alone cannot solve the inherent problem of federal prohibition. One leading bank official was quoted as saying, “We’re still not going to bank them.” Bank of America and Wells Fargo have reiterated their position: they do not offer banking services to medical marijuana businesses. They point out that federal law obligates financial institutions to ensure that wrongdoers are not accessing the banking system to further illegal activities.
The primary anti-money laundering statute is the Currency and Foreign Transactions Report Act of 1970 (commonly known as the Bank Secrecy Act or BSA). The BSA requires financial institutions to monitor client activity and file suspicious activity reports (“SARs”) on depositors. Lengthy SARs are filed when a depositor (i) appears to be evading federal law, (ii) involves over $5,000, or (iii) is an unusual transaction, which may signify money laundering or tax evasion. Financial Crimes Enforcement Network (“FinCEN”) is charged with enforcing the BSA. Under the BSA and Money Laundering Control Act of 1986, deposits from marijuana businesses are deemed ill-gotten gains from an unlawful activity. Under the CSA, any financial institution that accepts deposits from an unlawful activity can lose its FDIC coverage and be prosecuted. Violations of the BSA include both civil and criminal penalties of up to $500,000 or 10 years in prison.
Treasury Department and DOJ Permit Marijuana Businesses to Open Accounts
In contrast to the stern penalties cited by the BSA, Money Laundering Act, and CSA, the Cole Memo de-prioritizes prosecutions in states with robust regulations – a glaring contradiction. Financial institutions are then left uncertain whether other parts of the federal government might bring money-laundering charges under the BSA or if the Cole Memorandum would carry the day. In an October 2013 letter, the Federal Deposit Insurance Corporation (“FDIC”), the Comptroller of Currency, and the governors of Colorado and Washington appealed to the federal government to issue formal guidance for financial institutions to engage in normal banking transactions. The Obama administration announced in January 2014 that marijuana businesses should have access to banking services. On February 14, 2014, the DOJ and the Department of Treasury’s FinCEN released a pair of memos (“FinCEN Memo”) permitting financial institutions to accept marijuana depositors. “This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations ....” The memos were issued to offer comfort to the banking industry.
The 2014 memos both reiterate that prosecutors should apply the eight Cole Memo priorities when determining whether to charge financial institutions with violations of anti- money laundering statutes, the BSA, or the CSA.42 In short, the federal government has given assurances that financial institutions will avoid prosecution if they comply with the FinCEN procedures consistent with the Cole Memo priorities.
State-Licensed Medical Marijuana Businesses Need Basic Banking Services
Marijuana businesses are currently denied access to banking services, in particular, checking accounts. According to Aaron Smith, the executive director of the National Cannabis Industry Association, banking access is the “most urgent issue facing the legal cannabis industry today.” A recent first-of-its-kind survey conducted by Marijuana Business Daily, found that up to 81% of companies operating in the cannabis industry do not have bank accounts. Without bank accounts, they are also unable to accept credit or debit cards as forms of payment.
accept cash payment. Armed cash transport services are also retained with the additional expense of insured and bonded storage facilities. If credit lines or loans are needed, they are almost always short-term and at high-interest rates.
Lacking appropriate and professional banking services, medical marijuana businesses are forced to pay their employees and third parties, including the Franchise Tax Board and Internal Revenue Service, with cash or money orders purchased through nonbank outlets. Payment of quarterly payroll taxes in cash rather than by wire are assessed an additional 10% penalty by the IRS. These nonbank outlets drive up the transactional costs, including the additional salaried time for someone to process them. Because of these high operational costs, state-licensed medical marijuana businesses should be amenable to banking services that come with fees.
Pyrrhic Search for Federal Approval
Big banks will not do business with medical marijuana depositors unless and until there is passage of more comprehensive and reliable legislation. The political divisions have spilled over into this arena and Congress must “bless” what the executive branch has done.
For sure, the U.S. Congress has responded and shown its willingness to change its marijuana policy. In July 2014, the U.S. House of Representatives approved the Heck Amendment, H.R. 5016, seeking to prevent the Treasury Department and FinCEN from taking action against financial institutions that do business with marijuana businesses. It is awaiting Senate approval and momentum may be building. In December 2014, U.S. Congress passed and the President signed the Rohrabacher (R-Huntington Beach, California) Amendment. It specifically prohibits the DOJ from spending funds to prevent the implementation of state medical marijuana laws, such as raids on medical marijuana businesses. A Marijuana Policy Project director heralded the momentous passage of the Rohrabacher Amendment by stating, “[w]e are nearing a point now where the United States Congress is essentially ready to end marijuana prohibition.” The Rohrabacher Amendment may be interpreted to prevent prosecution of financial institutions by the DOJ.
Frustrated by the lack of a ‘comprehensive’ solution, private and state actors have attempted a run-around. In the private sector, Fourth Corner Credit Union in Colorado has attempted the route of opening a new state-chartered credit union specifically catering to marijuana businesses. While its state charter was approved, the Federal Reserve and NCUA have denied it access to the national payment and insurance systems and Fourth Corner has appealed for relief in federal court. Relief is not expected anytime soon.
Senator Bob Hasegawa in the state of Washington has been advocating for the establishment of a state bank. But the legislation has gone nowhere, as any bank would still need approval from the Federal Reserve and FDIC. The boldest effort has been by Colorado in 2014 creating a cooperative to provide banking services to the marijuana industry. The cannabis credit cooperative does not require FDIC insurance. Yet, the co-op still requires approval by the Federal Reserve to gain access to the national banking system. This has not occurred and no marijuana business has applied to join.
With each run around, the credit union, cooperative, and states seek the approval of a federal agency. No federal agency will “bless” the acts of a business activity that is still illegal at the federal level. But that does not mean that NO path is available for medical marijuana businesses.
Reporting Shall Set You Free
Some smaller banks and credit unions are already opening bank accounts with state- licensed medical marijuana businesses. As of August 2014, 105 financial institutions across one- third of the United States provide banking services to marijuana businesses. FinCEN has received over 1,000 SARs. FinCEN Director Jennifer Shasky Calvery cites this progress as an accomplishment “from our perspective the guidance is having the intended effect. It is facilitating access to financial services, while ensuring that the activity is transparent and the funds are going into regulated financial institutions responsible for implementing appropriate AML safeguards.” FinCEN has “declare[d] the guidance a success in opening the doors for marijuana banking.”
There is only one authorized path by which banks can establish depositor relationships with medical marijuana businesses: follow the FinCEN Memo procedures in conformity with the Cole Memo priorities. In a joint August 2014 letter, the Federal Reserve, FDIC, National Credit Union Administration (“NCUA”), and Office of the Comptroller of the Currency (“OCC”) all acknowledged that the “DOJ is primarily responsible for the interpretation and enforcement of federal criminal laws related to marijuana.” FDIC’s inclusion in this letter is significant because it was previously silent.
The FinCEN Memo requires that financial institutions first conduct an extensive background check before opening a bank account with a state-licensed medical marijuana business. This means having the business fill out an application form, submit certain additional materials, and meet with a specialized compliance officer that specializes. As the review is so intrusive, it is standard to sign a non-disclosure agreement to protect the reputations of both parties. This initial review can involve phone calls, in-person meetings, and a site visit to the business with detailed notes addressing the FinCEN procedures. Detailed descriptions may then be written up highlighting the FinCEN procedures, as they relate to the Cole Memo priorities. If the state-licensed medical marijuana business passes the initial background check, and before opening the account, the financial institution must immediately file its first SAR. Similar to reports required by the BSA for cash transactions, there are, however, new categories.
FinCEN requires a financial institution to file every 120 days, a continuing activity report that also updates the amounts of deposits, withdrawals and transfers made since the last SAR filing. The first is a “marijuana limited” SAR, which acknowledges to the federal government that this is a medical marijuana business. When any activities appear to implicate the Cole Memo priorities or violate state law, a more extensive “marijuana priority” SAR is filed. To make such a determination banks are required to do further due diligence with their medical marijuana customers by verifying licenses, registrations, and applications; understanding their products and customers; reviewing publicly available sources for adverse information; and other red flags as described in the FinCEN Memo. The financial institution is always free to terminate the relationship with the medical marijuana business by filing a “Marijuana Termination SAR.” If there is any indication that the medical marijuana business has violated a Cole Memo priority, the financial institution should immediately terminate the relationship.
The voters have spoken. The DOJ has elected non-enforcement. The Federal Reserve, FDIC, NCUA and OCC all defer to the DOJ. And, as the Treasury Department in its FinCEN Memo encourages banking services for marijuana businesses, early pioneers will capitalize on the burgeoning cannabis industry. Entry will significantly grow a financial institution’s depositor base, and permanently right its balance sheet, at a time when reserves are so critical.
Financial institutions are ill equipped to handle these detailed, factor-driven, evaluations required by the FinCEN Memo procedures.80 Banking personnel do not have sufficient expertise to evaluate all the information they must collect under the Cole Memo. At the same time, the paperwork is so extensive and complicated that, according to the ABA’s Center for Regulatory Compliance, a financial institution would need an embedded employee to comply with the DOJ and FinCEN guidance.
Banking pioneers will be in a unique position to select the “winners” and “losers” in the industry. Most reputable actors welcome compliance and reporting requirements, aggressive transparency, legitimate barriers and fees to access, so as to distinguish themselves from the few bad apples. Over time, the states will most likely seek to regulate fewer, highly professional businesses rather than persist with the Wild West landscape of 2015. Those that are accepted as depositors, for their transparency and propriety, will gain an edge against the competition.
But small banks and credit unions need to look beyond the limits of their staffing, like the 105 financial institutions accepting marijuana depositors, and retain compliance experts. SARs are nothing new; the FDIC use to maintain a “high-risk” list of businesses requiring these reports, such as for unlawful Internet gambling and tobacco sales. For banking, marijuana is just the next tobacco crop. Ultimately, factor tests, such as the FinCEN Memo procedures, are the purview of the judicial system. Factor tests are quite common in legal cases and court rulings and provide reliable case precedent.
A clear path reconciling the federal government’s treatment with state and local government now exists. The long-rooted disparate treatment of marijuana amongst these branches of government appears to be moving toward the direction of alignment. But without the private sector to follow the path, and putting it into practice, the changes remain pyrrhic.