Cannabis Banking Needs a True Legislative Fix, Not More Guidance

Authored By: Valerio Romano, Partner, Vicente Sederberg LLC

Valerio Romano

On February 14, 2014 the Financial Crimes Enforcement Network (“FinCEN”) issued guidance clarifying the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970 (31 U.S.C. 5311), commonly referred to as the Bank Secrecy Act (“BSA”), expectations for financial institutions seeking to provide services to cannabis-related businesses (the “FinCEN Guidance”). Until the FinCEN Guidance set due diligence and reporting obligations for such financial institutions, every one of this author’s Massachusetts cannabis business clients was using the bank they had banked with for years. None of them had any proceeds of cannabis sales yet as the Massachusetts market was just getting started, but the banks were aware of the purpose of the accounts and were generally receptive.

Following the FinCEN Guidance, every bank shut down prospective cannabis businesses’ accounts. Century Bank out of Medford, Massachusetts stepped up and now handles the banking for virtually all of the Massachusetts cannabis businesses. Century made a significant investment into the industry, creating a vault for cannabis cash (as if money is no longer fungible if used in a cannabis transaction), a compliance program to watch the operators, and policies and procedures for working with the operators.

On January 4th, 2018, United States Attorney General Jefferson Sessions, III, issued a Memorandum for All United States Attorneys: Marijuana Enforcement which rescinded 5 memoranda related to policy for prosecutions by United States Attorneys of cannabis businesses. Among the rescinded was the James M. Cole, Deputy Att’y Gen., Memorandum for All United States Attorneys: Guidance Regarding Marijuana Enforcement (Aug. 29, 2013) (“Cole Memo”). In short, the Cole Memo formally deprioritized for United States Attorneys the prosecution of state-compliant cannabis businesses unless they violated some other law enforcement priority. Without that protection, some banks are reluctant to provide services for adult-use cannabis businesses. And while medical cannabis businesses continue to be protected by the Rohrabacher-Blumenauer Amendment (formerly the Rohrabacher-Farr Amendment); which prohibits the Justice Department from spending funds to interfere with the implementation of state medical cannabis laws, there are no such protections for adult-use participants.

The Problem

Banks are traditionally conservative institutions, even those which provide financial services to the cannabis industry. In the absence of the Cole Memo’s law enforcement protections, bank executives are expressing reluctance to offer the same financial services for the adult-use market that they have been providing for the medical cannabis market.

The FinCEN Guidance mentioned the Cole Memo no less than 13 times.  It relied heavily on Cole, but fortunately also listed the Cole Memo’s law enforcement priorities in its own text.  Therefore the rescission of Cole did not invalidate the FinCEN Guidance.  It stands on its own.  Banks must consider the Cole Memo law enforcement priorities when deciding how to evaluate their clients: “[a]s part of its customer due diligence, a financial institution should consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law. . . .  A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a ‘Marijuana Limited’ SAR.” Department of the Treasury, Financial Crimes Enforcement Network: BSA Expectations Regarding Marijuana-Related Businesses (Feb. 14, 2014).

The type of federal reporting a bank is obligated to perform is directly related to the law enforcement priorities described in the Cole Memo. So now that the Cole Memo is no longer, where does that leave banks? Will the few banks that provide financial services continue to do so for both the medical and adult-use markets? What will it take for more banks to come online and provide full financial services to every state-compliant cannabis business in the country?

Relevant Concerns

The fact is that the FinCEN Guidance did not really accomplish its goal of easing access to banking. Most cannabis businesses do not have reliable access to robust financial services.  Mortgages for properties siting only cannabis businesses are difficult to obtain. The burden of oversight and reporting has made banks more reluctant to provide financial services, not less.

Cannabis businesses have an unlikely ally in United States Secretary of the Treasury Steven Mnuchin.  Speaking to Congressman Ed Perlmutter in February of this year, Secretary Mnuchin said, “I did not participate in the Attorney General’s decision (withdrawing the Cole Memo), but we are consulting with them now. We do want to find a solution to make sure that businesses that have large access to cash have a way to get them into a depository institution for it to be safe.”

Speaking to Congressman Dennis Heck during the same hearing Secretary Mnuchin said, “[A]s I mentioned, we are reviewing the guidance and we haven’t taken it down. We are looking at what justice is done, and as I said, we are sensitive to the issue of dealing with the public safety issue and also making sure the IRS and others have ways of collecting taxes without taking in cash.”

The security issues surrounding access to banking are well known. Collecting large amounts of cash without a bank to deposit it, and the inability to accept debit cards, make dispensaries less secure. Dispensaries with access to banking should be transparent and not take their banks for granted. Operators should be transparent with their banks in order to maintain their relationship and to help those banks fulfill their FinCEN due diligence and reporting requirements.

A Solution

The states’ rights issue created by the conflict between federal and some state laws has created unlikely alliances in Congress. Senator Elizabeth Warren and Senator Cory Gardner are teaming up to allow states with regulated cannabis markets to effectively opt-out of the Schedule I status of cannabis, making their activities legal under federal law. California Congressman Dana Rohrabacher and Oregon Congressman Earl Blumenauer co-sponsor legislation that prohibits the Department of Justice from spending funds to interfere with the implementation of state medical cannabis laws. California Congressman Tom McClintock and Colorado Congressman Jared Polis are pushing to expand Rohrabacher-Blumenauer to protect adult-use. Colorado Congressman Ed Perlmutter, Washington Congressman Denny Heck, and  Alaska Congressman Don Young, have introduced the Secure and Fair Enforcement Banking Act (SAFE Banking Act).

In addition to the bipartisan support, Democrats in the House and the Senate have proposed various pieces of legislation that would deschedule cannabis, including Sen. Cory Booker’s Marijuana Justice Act. Any expansive legislation which ends the federal prohibition on cannabis, and removes financial transactions in the cannabis industry from money laundering prosecutions, will allow banks to provide true financial services to cannabis businesses. The half-measures of FinCEN and its ilk have not solved the problem. In fact, the Massachusetts experience of operators losing their traditional bank accounts as a result of the FinCEN Guidance indicates that it did more harm than good.  This author continues to patiently wait for Congress to repeal the federal prohibition on cannabis and create a pathway for full financial services for cannabis businesses.

Valerio Romano, Esq.
Partner Vicente Sederberg LLC
Seaport East, 2 Seaport Lane, 11th Floor, Boston, MA 02210
T: (617) 934-2121 
|  F: (617) 514-0008

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