New York State Encourages Banking for State-Licensed Medical Marijuana Businesses – Whereas a Maine Company Runs Into Trouble, Despite State Law Legalizing Medical Marijuana
To state the obvious, growing and dispensing marijuana is still illegal under federal law. As a result, being involved in even a state-licensed marijuana business can be risky. Moreover, obtaining financial services for such a business is sometimes impossible, primarily due to the federal anti-money laundering (“AML”) obligations imposed upon financial institutions by the Bank Secrecy Act (as we have blogged).
This post discusses two recent developments related to state-licensed medical marijuana operations, which serve as contrasting bookends to the spectrum of potential risks and opportunities presented by such businesses. On the risk-end of the spectrum, we discuss the recent difficulties encountered by a Maine business, and how dubious the seeming safe harbor of state legalization of marijuana can be in some cases. On the opportunity-end of the spectrum, we discuss recent guidance issued by the New York Department of Financial Services, which has declared its support and encouragement of state-chartered banks and credit unions to offer banking services to medical marijuana related businesses licensed by New York State.
The fact that a state has legalized medical uses of marijuana is the beginning of a risk analysis regarding participation in the marijuana industry, not the end of such an analysis. At least in the eyes of federal law enforcement, state licensing of marijuana activity can attract individuals allegedly seeking to use the seeming legitimacy of a state program as cover for engaging in more traditional drug distribution activities. Such individuals can undermine and endanger the efforts of more compliance-oriented businesses.
A Maine company growing medical marijuana recently came under fire for the alleged association of its owner, Kevin Dean, with an individual named Brian Bilodeau. According to the Bangor Daily News, Bilodeau, who currently is facing illegal firearm possession and marijuana trafficking charges in federal district court in Maine, was a business associate of Dean, who ran a licensed growing operation under Maine’s Medical Marijuana program.
Dean’s association with Bilodeau has left him open to allegations of both non-compliance with Maine’s medical marijuana laws and federal money laundering, as well as drug trafficking. Some of Dean’s properties are now subject to civil federal forfeiture and his business is under investigation by federal officials, according to this recent federal civil forfeiture complaint. Dean also allegedly lost a $8.3 million deal from a Canadian firm to buy his marijuana growing business.
Of course, any form of marijuana growing and distribution is illegal under federal law — and related financial transactions presumably represent federal money laundering violations — regardless of any state legalization. But this cautionary tale from Maine illustrates how alleged non-compliance with state law can provide the opportunity and motivation for federal law enforcement officials to pounce. Prosecution by federal officials, especially for money laundering, is one of the top concerns for marijuana-related businesses and the financial institutions that serve them. The prior, seemingly stable federal prosecution policy which offered some protections to the burgeoning state marijuana industries was suddenly upended in January 2018 when the Department of Justice (“DOJ”) withdrew the 2013 so-called Cole Memo, about which we have blogged. Now, it is unclear how the federal government will treat marijuana businesses that are legal under state law. Further, if actual compliance by a business with state law is debatable, or if the business is being misused for other alleged crimes, that crack may invite unwelcome federal attention. Although federal law enforcement theoretically could pursue almost any state licensed marijuana business or financing activity, the reality is that it will tend to focus its limited resources on the most inviting targets.
NYDFS Guidance for Offering Financial Services to the Medical Marijuana Industry
New York has tried to quell some of those concerns for its legal marijuana industry, and identify New York as a state friendly to financial services for marijuana-related businesses. On July 3, 2018, the New York State Department of Financial Services (“NYDFS”) published guidance to “clarify the regulatory landscape and encourage” New York, state-chartered banks and credit unions to “offer banking services” to “marijuana related businesses licensed by New York state.”
Generally, New York passed laws from 2015 to 2017 which now allow for (i) registered entities to produce and dispense medical marijuana, and (ii) pilot projects conducting industrial hemp research in New York. The NYDFS guidance acknowledges that marijuana remains listed on Schedule I under the Federal Controlled Substances Act, which makes it very difficult for marijuana-related businesses to obtain banking relationships with financial institutions, and which results in the widespread use of large amounts of currency. Not only does this situation invite robbery and violent crime, but:
. . . . [L]arge scale cash operations impede tracking funds for tax and anti-money laundering purposes. None of this is necessary. Positions taken by the federal government are only exacerbating these problems, rather than remedying them. New York must act.
New York quickly could become the premier banking hub for marijuana-related businesses.
The NYDFS guidance is straightforward and practical. New York has advised its state-chartered banks and credit unions to continue to follow the guidance published in 2014 by the Financial Crimes Enforcement Network (“FinCEN”), which FinCEN issued shortly after the Cole Memo to clarify how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations. FinCEN did not categorically sanction such behavior; rather, it provided a formula for assessing risk. FinCEN provided the following checklist of the “customer due diligence” that financial institutions should engage in to assess the risk of providing services to such businesses:
- verification with appropriate state authorities that the business is licensed and registered
- review of the submitted license application and related document
- request for information about the business and related parties from state licensing and enforcement authorities
- comprehension of normal and expected activity of the business – products, types of customers, etc.
- ongoing monitoring of public sources for adverse information re: business and related parties
- ongoing monitoring for suspicious activity and “red flags”
- periodic updates of this information (with frequency to be “commensurate with the risk”)
- consideration of whether the marijuana-related business either implicates a Cole Memo (now rescinded, as noted above) priority or violates state law
Further, and because financial transactions involving a marijuana-related business generally would involve funds derived from activity prohibited under federal law, FinCEN provided that financial institutions working with such businesses must file a special form of a Suspicious Activity Report (“SAR”): either a “Marijuana Limited” SAR, a “Marijuana Priority” SAR, or a “Marijuana Termination” SAR. Finally, FinCEN provided a non-exhaustive list of “red flag” scenarios that indicate possible implication of a Cole Memo priority or violation of state law by a marijuana-related business. Thus, FinCEN attempted to provide a path to AML compliance for financial institutions serving state-licensed marijuana businesses, albeit a path without complete clarity and containing potential landmines.
Even though DOJ rescinded the Cole Memo, FinCEN has not rescinded to date its 2014 guidance, and the Secretary of the Treasury has suggested publically that he supports the ability of the marijuana industry to have access to the traditional financial sector, stating that “I assure you that we don’t want bags of cash . . . . We want to make sure that we can collect our necessary taxes and other things.” Further, the Department of the Treasury has stated that it is “consulting with law enforcement” about whether to maintain its 2014 guidance, and that the guidance remains in effect while the administration weighs whether to revoke it.
Despite the potential ambiguities and landmines at issue, the NYDFS guidance, by incorporating the prior FinCEN guidance, allows and indeed appears to encourage financial institutions regulated by New York State to enter into formal banking relationships with compliant, state-licensed marijuana businesses. NYDFS has reasoned that its guidance is necessary not just to deal with the uncertainty of federal law, but for another purpose as well: as noted, New York is concerned that the use of large amounts of currency makes marijuana industry employees and owners, who sometimes transport many thousands of dollars in currency, into likely victims of violent crime.
New York marijuana-related businesses clearly stand to benefit from this guidance. Encouraging formal banking relationships hopefully will lower the risk of violent crime and theft, legitimize marijuana-related businesses, and allow owners to open bank accounts for their businesses—instead of using personal accounts or opening accounts through third-parties. The guidance also stands to benefit the state, making it simpler to track funds to be taxed and bringing more marijuana-related business to the state. Finally, state-charted banks and credit unions stand to benefit because they will be able to open new lines of business with marijuana-related companies without immediate concern that New York will try to shut them down, assuming compliance by all involved with applicable state laws and the guidance. Of course, and as exemplified by the cautionary tale from Maine discussed above, financial institutions still must be on the look out for suspicious activity and conduct that potentially crosses the line into drug activity not sanctioned by state law.
New York quickly could become the premier banking hub for marijuana-related businesses.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.