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OP-ED: Uncertainty for Banks and Marijuana-Related Businesses

March 2014

Published in the Daily Journal of Commerce

In light of the decriminalization of marijuana in Colorado and Washington, the U.S. Justice Department and Treasury Department recently issued guidance with respect to financial institutions doing business with marijuana-related businesses.

Initial media reports have often suggested that the guidance provided clarity and a green light to financial institutions that want to do business with marijuana businesses legal in these states. However, a thorough review of the guidance provided by the federal government suggests that financial institutions may still determine that dealing with marijuana-related businesses is more hassle than it is worth.

The guidance provided by the Justice Department is, in essence, a supplement to its prior guidance to the U.S. Attorneys on Aug. 29, 2013; it stated that the focus of enforcement activities with respect to marijuana would be: preventing distribution to minors; preventing revenue from marijuana sales from going to criminal organizations; preventing diversion of marijuana from states where it is legal in some form to other states; preventing marijuana activity legal in a state from being used as a front for the trafficking of other illegal drugs or other illegal activity; preventing the use of violence and firearms in the cultivation and distribution of marijuana; preventing driving under the influence and the exacerbation of other adverse public health consequences associated with marijuana use; preventing the growing of marijuana on public lands; and preventing marijuana possession or use on federal property.

The Justice Department's new guidance states that the U.S. Attorneys should determine whether to charge a financial institution under the Controlled Substances Act based on the eight enforcement priorities in the Aug. 29, 2013 guidance. The Justice Department emphasized the necessity of financial institutions to conduct appropriate due diligence with respect to their marijuana-related business customers, and pointed out that a business not in compliance with state regulatory and enforcement systems is more likely to fit into one of the eight prosecution priority categories.

The Treasury Department's guidance, issued the same day as the Justice Department's, and intended to be construed just as consistently, provides more explicit guidance as to the types of due diligence a financial institution should conduct in evaluating a marijuana-related business for purposes of opening an account with the financial institution. It includes: "(i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from the state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical vs. recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activities … and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk."

The financial institution is required to file a "marijuana-limited" suspicious activity report with the Treasury Department on activity involving marijuana-related businesses that are duly licensed under state law. The report is to include (i) identifying information on the account holder and related parties, (ii) addresses for such parties, (iii) the fact that the sole reason for filing is because the account holder is engaged in a marijuana-related business, and (iv) the fact that no additional suspicious activity has been identified.

However, if the financial institution believes from its due diligence that the marijuana-related business implicates one of the priorities set forth in the Justice Department guidance, they instead must file a "marijuana-priority" suspicious activity report, which should include details regarding the enforcement priorities implicated and details of the suspicious financial transactions.

The level of initial and ongoing diligence required of financial institutions, including the requirement to conduct ongoing searches of "public information" regarding these businesses, is likely to lead many financial institutions to determine that it is better to avoid entering into banking relationships with marijuana-related businesses.

This is exacerbated by the fact that these guidance letters do not have the force of law. As such, the Justice Department and Treasury Department can simply change their minds at any time and decide to prosecute financial institutions even though they have complied with the letter and spirit of this guidance.

The guidance provided by the federal government also focuses primarily on allowing financial institutions to open bank accounts for marijuana-related businesses, but avoids entirely a discussion of lending and, particularly, taking collateral related to these businesses. This means that the guidance does not give financial institutions the level of comfort necessary to make loans to marijuana-related businesses or their landlords.

The guidance provided by the Justice Department and Treasury Department may lead some financial institutions to enter into a banking relationship with marijuana-related businesses, particularly given the amount of cash these businesses promise to generate. But the combination of the obligations set forth in the guidance, the ambiguity of the guidance, and the potentially steep penalties for a financial institution failing to comply with the law and this guidance (including forfeiture of the financial institution's charter) suggests that many more conservative institutions will await a more permanent change in federal law. 

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