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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