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Legalized Marijuana, Part 4: Regulatory Filings

The FinCEN guidance provides substantial clarification around filing SARs and CTRs for marijuana-based businesses. In essence, the guidance states institutions should file SARs and CTRs as if the customer is an illegal business, though not necessarily terminate the account. This could easily cause some confusion, since this deviates from the normal practices; in most cases, an entity known to be operating illegally would be terminated along with the SAR filing.

The CTR requirements will probably be the least challenging for most institutions, since they are essentially standard operating procedure. The main difference is that these businesses will not qualify for an exemption. This could mean daily filing of CTRs for retailers and dispensaries, as many of them operate primarily on a cash basis—some reports suggest daily turnover well in excess of US$10,000 per day. Most organizations have robust procedures for managing the CTR process, and it will be doubly important to ensure these are followed if serving marijuana-based businesses.

SAR filing requirements were clarified, and in some ways simplified, in the guidance. The guidance essentially creates three new “categories” of SARs relying on the existing SAR infrastructure. These categories are “Marijuana Limited,” “Marijuana Priority,” and “Marijuana Termination.”

The “Marijuana Limited” SAR filing is the simplest and likely the most common for institutions serving such businesses. In this case, the SAR essentially acknowledges that the business is marijuana-related, but there are no indications the businesses is violating state laws or the priorities outlined in the Cole Memo. The content of the SAR narrative is very limited and does not require content beyond “Marijuana Limited,” along with notation that the SAR is being filed because the subject is involved in the marijuana business and that no suspicious activity was identified—a welcome simplification. Unsurprisingly, the guidance requires the usual SAR filing on continuing activity every 90 days and notes that changes in the business activity may lead to a “Marijuana Priority” SAR filing. While this is a substantially simplified requirement, it does mean filing at least four SARs per year for every marijuana-based business the institution serves. For some organizations, this could add up to a substantial additional compliance burden to manage and ensure the timeliness of the filings.

“Marijuana Priority” SARs are much more similar to a typical SAR filing and require a typically detailed narrative. There are two minor differences from a standard narrative—the inclusion of the term “Marijuana Priority” and the detail of any state laws or Cole Memo priorities the institution has reason to believe the business has violated. For most institutions, these SARs will be less common but conformant to existing procedures and generally familiar to compliance staff. Compliance staff should be trained in distinguishing when a “priority” SAR should be filed over a “limited” SAR and how to identify activity that may run afoul of the Cole Memo priorities. Gaining an understanding of the Cole Memo priorities, state laws, and the red flags in the guidance as well as training compliance staff will be the most important factors in serving these customers while maintaining compliance.

In some cases, institutions will identify behavior that leads to the termination of the business. In this case, institutions should file SARs as normal but include the term “Marijuana Termination” in the narratives. The guidance suggests taking advantage of their 314(b) information sharing abilities (if applicable) to alert other institutions to the behavior.

The implications of the new guidance may appear rather daunting, but for most institutions represent special cases of existing requirements and procedures and may not cause very much disruption. Organizations that choose to serve marijuana-based businesses should consider special training for compliance staff on the guidance, the Cole Memo, and the supply chain associated with both the legal and illegal production, distribution, and sale of marijuana.

In the following post, Legalized Marijuana, Part 5: Legal Marijuana Red Flags​, we break down the red flags in the guidance and the Cole Memo priorities in more detail, and discuss a framework for institutions to use the guidance should they choose to serve marijuana-based businesses. Don’t forget to review the first, second, and third posts in this series.