Thursday, February 20, 2014

Marijuana Businesses and Banks – The Federal Government’s Non-Reassurance Reassurance

Recent headlines would seem to indicate that the Treasury Department and the Justice Department had given the green light to financial institutions to provide financial services, such as checking accounts and credit card services, to marijuana businesses that are licensed and legal under state law. The articles themselves, though, tell a different story. The light isn’t exactly green. In fact, the Colorado Bankers Association issued a statement which said in part:
“The guidance issued today by the Department of Justice and the U.S. Treasury only reinforces and reiterates that banks can be prosecuted for providing accounts to marijuana related businesses.
“‘In fact, it is even stronger than original guidance issued by the Department of Justice and the Treasury,’ said Don Childears, president and CEO of the Colorado Bankers Association. ‘After a series of red lights, we expected this guidance to be a yellow one. This isn’t close to that. At best, this amounts to ‘serve these customers at your own risk’ and it emphasizes all of the risks. This light is red.’”
Now that twenty states and the District of Columbia have legalized marijuana for medical use, and two states, Colorado and Oregon, have gone further and legalized it for recreational use as well, there is a glaring conflict between federal and state laws. As it stands, states cannot preempt federal law, and marijuana remains illegal under federal law. In fact, the U.S. Supreme Court in a 2005 case (Raich v. Gonzales) decided that the federal Control Substances Act (“CSA”) applied to the legal use of marijuana under California law with marijuana that was grown and used in California and thus had not entered into interstate commerce. (This was a strange case since it involved an issue in which conservatives are more likely to favor a strong government stance against drugs such as marijuana but also raised federalism questions, in which conservatives are usually on the side arguing for limits to federal government power. The three dissenters were Chief Justice William Rehnquist and Justices Sandra Day O’Connor and Clarence Thomas. The opinion of the Court was written by Justice John Paul Stevens. Justice Antonin Scalia wrote a concurring opinion.)
This situation poses a dilemma for the Obama Administration. Obviously, a significant portion of the public does not agree with federal law’s treatment of marijuana, and the Administration has decided not to go after marijuana businesses which have been licensed by state government authorities if certain conditions are met. If these businesses, though, are not able to obtain banking services and can only receive and make payments in cash (including tax payments), this is likely to increase crime. Banks, though, are reluctant to provide services to entities that they know are breaking federal law for fear that they would be violating federal law.
On February 14, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Treasury Department, issued guidance to financial institutions on what is expected of them when they do business with marijuana-related businesses. Banks have not been reassured by this guidance nor by a memorandum from Deputy Attorney James Cole to U.S. Attorneys (prosecutors) on “marijuana related financial crimes” the same day.
FinCEN administers the Bank Secrecy Act (“BSA”), a statute with a misleading name. The BSA does not protect customers by imposing secrecy requirements on banks but rather requires banks, among other things, to report suspicious activities of their customers to FinCEN. The secrecy is that the banks are prohibited from telling their customers that they have filed a report to FinCEN on their transactions. Some have, therefore, humorously called the BSA the “Bank Snitching Act.”
The Cole memorandum list eight areas of concern about state-licensed marijuana businesses. These are:
 Preventing the distribution of marijuana to minors;
• Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
• Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
• Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
• Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
• Preventing marijuana possession or use on federal property.
The memorandum goes on to state that “if a financial institution or individual offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, prosecution for these offenses may not be appropriate.” It is hardly surprising that bankers do not find that statement totally reassuring.
As for FinCEN, financial institutions that have marijuana-related customers are required to file with FinCEN suspicious activity reports (“SARs”) periodically on these customers’ transactions. If a financial institution “reasonably believes, based on its customer due diligence,” that the transactions of a marijuana-related business customer do “not implicate one of the Cole Memo priorities or violate state law,” it “should file a ‘Marijuana Limited’ SAR. If the financial institution subsequently has reason to believe “in the course of conducting customer due diligence (including ongoing monitoring for red flags)” that its customer is engaged in activity “that potentially implicate one of the Cole Memo priorities or violate state law, the financial institution should file a ‘Marijuana Priority’ SAR.”
It is perhaps not as well-known and appreciated as it should be that two Treasury Department entities, FinCEN and the Office of Foreign Assets Control (“OFAC”), which administers and enforces international economic sanctions programs, impose substantial burdens on financial institutions to perform what are essentially law enforcement functions. There can be substantial ambiguity concerning the degree of effort financial institutions are required in order to comply with FinCEN and OFAC regulations. Consequently, it has happened that when banks become worried because of high-profile enforcement actions against particular institutions, they have flooded FinCEN with SARs.

At the time I worked for about a year and a half at OFAC in the middle of the last decade, the policy was to be reasonable and somewhat forgiving with financial institutions that had made mistakes and were apparently earnestly trying to take corrective measures to reduce the risk of future mistakes. Financial institutions have reason to take OFAC and FinCEN regulations seriously.
In the current situation, therefore, it is rather strange that FinCEN and the Justice Department are hinting that it may be all right for financial institutions to facilitate violations of a particular federal law, but then again it might not be. That is probably more ambiguity than is comfortable for most bankers.

Furthermore, as the Colorado Bankers Association points out, there is uncertainty how the various bank regulators, which have a good deal of independence from the Administration, will view institutions they regulate having marijuana-related business customers. Also, of course, a future Administration could reverse the current Administration’s marijuana policy.
This is why the banks would like legislation to be enacted to clarify the situation. Representative Ed Perlmutter (D, CO) has introduced legislation that would clarify that financial institutions can provide services to “legitimate” marijuana-related businesses without fear of prosecution or other federal action. The bill (H.R. 2652) has 27 co-sponsors, only two of whom are Republicans (Mike Coffman of Colorado and Dana Rohrabacher of California). As such, there would seem to be very little chance that it gets passed by this Congress.

As far as the Administration is concerned, it probably could do more than it has. For one thing, it apparently has the authority to reclassify marijuana from a Schedule I drug under the CSA, which is reserved for the most dangerous drugs such as heroin, to a lower schedule, or it may be able to remove it from the controlled substances list altogether. President Obama has stated that only Congress can reschedule marijuana, but this is disputed. Rescheduling would seem to make the medical use of marijuana not illegal under federal law.
Opponents of legalization of marijuana use for recreational use will likely point to the Single Convention on Narcotics, a 1961 international treaty to which the U.S. is a signatory. The International Narcotics Control Board criticized Uruguay’s decision to legalize marijuana as a violation of its treaty obligations, but it has no real enforcement power. The treaty, not surprisingly, is ambiguous, and it is a subject of disagreement whether it requires criminal penalties for possession of marijuana for non-medical, personal use. It also appears that UNESCO’s Commission on Narcotic Drugs could remove marijuana from coverage by the treaty.

Finally, the conflict between federal law on marijuana and those of twenty states and the District of Columbia (which is interesting, since the DC government’s authority to enact laws derives from federal law), is untenable and, one way or another, will have to be changed. Financial institutions are right to be uncomfortable. It will be interesting to see how many, if any, financial institutions take the legal risk of accepting marijuana businesses as customers.

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