The Financial Crimes Enforcement Network (FinCEN) and U.S. Department of Justice (DOJ) released guidance for financial institutions on servicing marijuana-related businesses in early 2015. While no doubt appreciated by the banking community, it may not make financial institutions more confident in servicing these businesses. The New York Times did a nice article on the guidance, explaining what it means for banks and the government’s perspective, but the situation should be broken down in more detail specifically for banks and credit unions. I won’t debate the question of whether legalization is good or bad, but since it is here in some form in 20 states and Washington, DC, financial institutions need to deal with it.
At the heart of the issue is the disharmony between state and federal laws. This means that while these states won’t pursue prosecution (within the bounds of what the state law has defined as legal production, distribution, and use), the federal government still has jurisdiction to enforce the federal law in those states. In 2013, the DOJ issued guidance to U.S. states’ attorneys outlining specific priorities in the DOJ’s enforcement of the federal law, most of which center around public safety (e.g., criminal supply chains, sale to minors, drugged driving). The guidance also states the following:
In jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of marijuana, conduct in compliance with those laws and regulations is less likely to threaten the federal priorities set forth above.
In essence, if the state law provides for regulation and enforcement inconsistent with the entirety of the federal law but consistent with key DOJ priorities, the states (and the marijuana companies in them) have little to worry about.
What does all this mean for financial institutions?
- It is not an “all clear” for institutions to serve these businesses, and they could still find themselves in hot water if they are not diligent.
- The DOJ could change its mind, especially when there is a new administration.
- Institutions can choose to services these businesses, but they must be rather careful about it.
One of the finer points of the FinCEN guidance is that it really does want these organizations’ activities to be more transparent and in the legitimate banking sector. This makes it easier to spot anomalous activity, collect and verify taxes, and manage larger-scale investigations. It is advantageous to have these businesses operating out of the shadows and in the well-regulated banking sector.
Financial institutions certainly benefit by serving these customers with cash handling (e.g., for dispensaries), commercial lending (e.g., for grow operations), and a variety of other services. As a potentially lucrative customer segment, many institutions are facing a tough decision.
Here are some of the things institutions should think about when making a company-wide or individual-customer decision:
- Is the potential risk of making a process mistake or a change in the DOJ’s position worth the potential increased revenue and profit?
- Do the laws, regulations, and enforcement activities in the state where the bank operates align to the DOJ’s priorities?
- Can the organization effectively develop risk assessments, policies, and procedures to serve such a customer base?
- Can the organization handle an increased customer due diligence and Suspicious Activity Reporting (SAR) burden associated with serving these clients?
- Do the technology systems support enhanced monitoring for such clients?
These are not easy questions, and some institutions will choose to move ahead and serve this segment—others won’t. The Credit Union National Association (CUNA) released a comment suggesting that credit unions may not want to move ahead. Other institutions will find a differentiator and a new client base. For some organizations, it may be possible to structure a product with higher fees that offset the additional compliance costs for these businesses.
In Legalized Marijuana, Part 2: Regulatory Guidance and CDD, we look a little more deeply at the specific compliance obligations, risks, and methods to mitigate those risks.