As we have blogged, there is perplexing, significant and ongoing uncertainty regarding just how federal criminal and Bank Secrecy Act laws will be – or will not be – enforced against financial institutions providing banking services to marijuana-related businesses (“MRBs”). As our blog has discussed, recent bipartisan efforts in the 116th Congress to

We are pleased to offer the latest episode in Ballard Spahr’s Consumer Financial Monitor Podcast series — a weekly podcast focusing on the consumer finance issues that matter most, from new product development and emerging technologies to regulatory compliance and enforcement and the ramifications of private litigation.

In this podcast, we review the many recent

The state-legal marijuana industry in the United States continues to grow – as does support for it. Ten states and Washington, D.C. have legalized recreational adult use and 23 other states allow some form of medical cannabis. According to recent polling, 65% of Americans favor legalization of marijuana. Although interest and investment in state-legal cannabis show no sign of slowing, marijuana still remains classified as a Schedule I drug under the federal Controlled Substance Act (“CSA”).

Because marijuana remains illegal under federal law, banks, credit unions, and other financial institutions that provide even basic banking services to marijuana-related businesses (“MRBs”) face signficant regulatory risk, even if the real-world chances of any criminal enforcement currently appear very remote. For this reason, although some credit unions and state-chartered banks are opening accounts for MRBs, most financial institutions, including the largest banks, remain reluctant to do so.

As we previously blogged, the conflict between state and federal law and the uncertainty regarding how federal laws will be enforced against financial institutions leave most MRBs operating on a cash-only basis. Operating solely as a cash business raises obvious safety and security concerns for both the MRBs and the communities in which they operate, and causes regulatory and tax compliance challenges. Additionally, MRBs may struggle to obtain access to financing needed for operations and expansion.

Recognizing these issues, Congress is taking action — possibly.  We discuss here two proposed cannabis reform efforts, the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”) and the Strengthening the Tenth Amendment through Entrusting States Act (“STATES Act”). If passed, both bills would provide federal protections to financial institutions servicing MRBs, thereby signficantly increasing MRBs’ access to the banking system. Both bills have received broad bipartisan support, along with support from affected industry groups.  Either of these bills, if passed, would represent a major change.

(Please also check out our related podcast on financial services and the cannabis industry, which more generally reviews the many recent developments in this area, including state approaches to banking services, the status of hemp legalization, the interplay between federal and state cannabis law, FinCEN guidance on Bank Secrecy Act expectations, the status of federal regulatory and enforcement activity.)
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Federal legislators continue to struggle over the growing disconnect between increasing State legalization of the cannabis industry, and the continued illegality of cannabis under federal law. This struggle represents an increasingly pressing question for financial institutions, given the burgeoning market involving cannabis-related products – including third parties who provide services and equipment to growers and distributors – and its need for safe, traditional banking services. The latest chapter in this struggle was a hearing, entitled “Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses,” held by the House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions on February 13. The recorded webcast is available here.

We previously have blogged about the unsteady regulatory ground on which financial institutions have been operating with regard to cannabis-related businesses, an industry legalized in many states but still in violation of federal drug laws and thus exposing its financial service providers to potential Bank Secrecy Act (“BSA”) violations and federal money laundering charges. The terrain grew only more perilous at the beginning of 2018 with then-Attorney General Sessions’ decision to rescind the Cole Memo, and with it the prior limited assurance that the DOJ would not make prosecution of persons working in or with state-licensed cananbis businesses a DOJ priority.

The 2018 midterm elections, however, changed the landscape yet again. This post will discuss last week’s hearing and the growing opportunities and stubborn obstacles which it highlighted.
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Public Risks Posed by Unbanked and Cash-Heavy Industry Deemed Insufficient to Outweigh Federal Law Concerns

As we just blogged, the New York State Department of Financial Services (“NYDFS”) has 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[,]” thereby identifying New York as a state friendly to financial services for marijuana-related businesses. In stark contrast, Ed Leary, Commissioner of the Utah Department of Financial Institutions (“UDFI”), recently articulated the polar opposite position, thereby exemplifying the increasingly bewildering patchwork quilt of approaches to banking and anti-money laundering (“AML”) policy in regards to state-licensed marijuana businesses.

In a presentation on August 17, 2018 to members of the National Association of Industrial Banks and the Utah Association of Financial Services, Commissioner Leary advised that UDFI will not ask any financial institutions regulated by his department to provide banking or payment processing services to cannabis-related businesses. To the contrary, if any examination conducted by UDFI identifies evidence of cannabis-related banking activities, UDFI will cite the conduct as an apparent violation of federal law.
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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.
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Attorney General Sessions Announces Rescission of Obama Administration Policies on Marijuana Enforcement; Financial Institutions Lose Grounds to Permit Financial Transactions with Marijuana Businesses

In a single-page memorandum issued today, Attorney General Sessions tersely rescinded a string of DOJ enforcement policies announced during the Obama Administration — chief among them the “Cole Memo,” described below — which collectively had indicated that although marijuana was still illegal under federal drug laws and the DOJ would continue its enforcement of those laws, the DOJ also would defer to state governments that had developed regulatory regimes legalizing marijuana under defined circumstances.  Although Attorney General Sessions is well known for his personal distaste for marijuana-related activity, he previously had not been entirely clear as to exactly what position his DOJ would take in regards to the Cole Memo and related enforcement.

Although this policy change has many potential implications, its primary relevance to Anti-Money Laundering (“AML”), the Bank Secrecy Act (“BSA”), and money laundering issues is that the Cole Memo had provided the support for the federal government to issue guidance that, under very defined circumstances, financial institutions could provide services to state-licensed marijuana businesses.
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Part Three of a Three-Part Series

In the third and final part of this series on marijuana-related businesses (“MRBs”), we explore how the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) have commenced actions against MRBs and operators for allegedly fraudulent and deceptive securities practices.  The sample of such actions which we discuss here serve to demonstrate not only the risks the investing public may face in investing in MRBs, but also as a reminder to MRBs seeking to capitalize on the industry’s explosive growth of the exacting standards of the securities laws and the government’s commitment to enforcing them in this industry.

Although the cases we discuss here are not tied specifically to AML/BSA enforcement cases, but rather to traditional allegations of securities violations, the practical point is that anyone who is considering wading into this industry should remember that there are multiple federal agencies which may pursue their own enforcement agendas relating to MRBs. Although we previously have noted during this series that the Financial Criminal Enforcement Network issued guidelines giving banks the go-ahead to work with MRBs, and although the 2013 DOJ Cole Memo seems to suggest that financial institutions can serve MRBs under certain circumstances, our discussion here reflects that there still are other government agencies which may have their own notions regarding what is acceptable conduct by a MRB.  As to the SEC specifically, these actions also are consistent with the recent trend of the SEC inserting itself into AML-related enforcement.
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Part Two of a Three-Part Series

In the second part of this series, we explore the practical effects of the FinCEN and DOJ guidance documents on industries attempting to serve marijuana related business (“MRBs”). On June 27, 2017, the Tenth Circuit issued an interesting and divided opinion showing us how difficult it can be to square the prohibitions in the federal Controlled Substances Act (“CSA”) and money laundering statutes with state legislation legalizing certain MRB activity and the seemingly permissive nature of the FinCEN and DOJ guidance documents.
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Part One of a Three-Part Series

We begin this week with a three-part series on banking and the marijuana industry. States continue to pass medical and recreational use marijuana legislation despite that the fact that the substance remains classified as a Schedule I drug subject to the federal Controlled Substances Act.  Thus, the medical and recreational marijuana industries continue to struggle with access to banking and credit, and those who attempt to serve these industries find themselves subject to the Bank Secrecy Act (“BSA”) and the criminal money laundering provisions.  As we will detail this week, the struggle for financial institutions attempting to service the marijuana industry comes not only from the BSA and AML provisions, but in other forms.  We start this week with an overview of the guidance documents issued by the federal government which identify the enforcement priorities and also potential windows for financial institutions to service the marijuana industry.  We will follow up with a discussion of a recent federal court decision illustrating the practical difficulties of squaring the prohibitions of the federal drug laws with permissive state laws and the federal guidance documents.  We will conclude with an exploration of how federal agencies beyond the Department of Justice (“DOJ”) and the Financial Crimes Enforcement Network (“FinCEN”), such as the Securities and Exchange Commission (“SEC”), can further muddy these waters by staking out their own regulatory and enforcement priorities.  –Priya Roy
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