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The WayBack Machine … and the Marihuana Problem in New York (circa 1944) – updated with the OFAC Fentanyl Drug Trafficking Organization Designation of August 21, 2019

One of the greatest investigative tools available today is the Internet Archive, a “non-profit library of millions of free books, movies, software, music, websites, and more” – https://archive.org/. The best tool in this online library is the WayBack Machine. It is described as follows:

The Internet Archive has been archiving the web for 20 years and has preserved billions of webpages from millions of websites. These webpages are often made up of, and link to, many images, videos, style sheets, scripts and other web objects. Over the years, the Archive has saved over 510 billion such time-stamped web objects, which we term web captures.

We define a webpage as a valid web capture that is an HTML document, a plain text document, or a PDF.

domain on the web is an owned section of the internet namespace, such as google.com or archive.org or bbc.co.uk. A host on the web is identified by a fully qualified domain name or FQDN that specifies its exact location in the tree hierarchy of the Domain Name System. The FQDN consists of the following parts: hostname and domain name.  As an example, in case of the host blog.archive.org, its hostname is blog and the host is located within the domain archive.org.

We define a website to be a host that has served webpages and has at least one incoming link from a webpage belonging to a different domain.

As of today, the Internet Archive officially holds 273 billion webpages from over 361 million websites, taking up 15 petabytes of storage.

Here’s an example of how the WayBack Machine can be used. In a federal criminal complaint unsealed on August 15, 2019 in the case of United States v Manish Patel (Eastern District of California, case no 19-MJ-0128), the affidavit supporting the complaint provided that the defendant had business cards that showed he was the CEO of The Sentient Law Group PC in New York City, but the website for that entity – http://www.sentientlawgroup.com – as accessed on August 5, 2019 did not show him as CEO.  But by simply typing that URL into the WayBack Machine’s search bar you find every instance of that website that was captured by the WayBack Machine. Viewing the first and last captures (on April 13, 2017 and February 12, 2019) shows the defendant Patel as the CEO, his practice focus areas (including cannabis law, which is ironic given that Patel was charged with multiple counts involving possession with intent to distribute marijuana).  This tool is particularly helpful in online child pornography cases, where defendants move and change websites, and was instrumental in a number of post-9/11 cases, where the English language Al Qaeda website changed dramatically after 9/11 … but its historical web pages remained accessible, thanks to the Internet Archive and its WayBack Machine.

OFAC Designation of the Zheng Drug Trafficking Organization – August 21, 2019

Another great example of the power of the WayBack Machine can be found in a series of federal criminal cases that culminated in OFAC designating the criminal defendants as Foreign Narcotics Kingpins. See the Treasury press release at https://home.treasury.gov/news/press-releases/sm756

One of those designated, Fujing Zheng, was indicted in federal court in Ohio in August 2018 (US v Zhang et al, Northern District of Ohio, case 18CR00474). In that 86-page indictment, the Government alleges that the Zhang organization used a website to market its illegal drugs – www.globalrc.net

What has happened to www.globalrc.net?

If you search for that URL today, you get the following:

As it shows, that domain has been seized by the DEA and is no longer accessible. But the WayBack Machine has captured and saved that website 65 times between April 8, 2009 and February 15, 2019:

And simply by selecting any of the 65 dates, you can access the captured website. An example is from January 6, 2017:

You can see the actual website used by the Zheng DTO back in 2017. A powerful investigative tool!

But there is more to be found on the Internet Archive. The twenty or so archived collections are incredible sources. Here is an example of a document from the “Journals” collection:

https://archive.org/details/TheMarihuanaProblemInTheCityOfNewYork-19441973Edition/page/n19

In 1944, Legendary New York Mayor F.H. LaGuardia commissioned a report to look into “The Marihuana Problem in the City of New York.” The forward is interesting. It provides:

“As Mayor of New York City, it is my duty to foresee and take steps to prevent the development of hazards to the health, safety, and welfare of our citizens. When rumors were recently circulated concerning the smoking of marihuana by large segments of our population and even by school children, I sought advice from The New York Academy of Medicine, as is my custom when confronted with problems of medical import.”

“The report of the present investigation covers every phase of the problem and is of practical value not only to our own city but to communities throughout the country. It is a basic contribution to medicine and pharmacology.”

“I am glad that the sociological, psychological, and medical ills commonly attributed to marihuana have been found to be exaggerated insofar as the City of New York is concerned. I hasten to point out, though, that the findings are to be interpreted only as a reassuring report of progress and not as encouragement to indulgence, for I shall continue to enforce the laws prohibiting the use of marihuana until and if complete findings may justify an amendment to existing laws. The scientific part of the research will be continued in the hope that the drug may prove to possess therapeutic value for the control of drug addiction.”

Try out the Internet Archive!

Is the Clinical Cannabis Catch-22 Coming to Closure?

The Scottsdale Research Institute case may be a significant step forward in the normalization of cannabis. And it may address one of the most vexing clinical cannabis catch-22 situations there is today.

Schedule I of the Controlled Substances Act lists drugs that are both harmful and have no currently accepted medical use. Marijuana or cannabis was included in Schedule I since the passage of the Controlled Substances Act in 1970, and has remained there, notwithstanding great public, political, and other pressure to reschedule or even deschedule it.

Congress has the ability to reschedule marijuana. Let’s assume that they’re not prepared to act anytime soon: that would take courage and compromise, two things that appear to be lacking in this Congress. But the DEA also has the ability to reschedule marijuana, but it has not done so, and various DEA publications have indicated that it won’t do so because of a dearth of clinical trials demonstrating currently accepted medical use, or medical efficacy. One of the reasons for the dearth of clinical trials is a lack of availability of approved research-grade cannabis. Under the Controlled Substance Act, the DEA controls who gets to product cannabis for clinical trials. Currently, there is one such approved facility, the University of Mississippi. And the cannabis produced by that facility is, by most accounts, not very good (the picture here is from the Scottsdale Research Institute court filing, mentioned below). So why aren’t there more facilities approved to grow cannabis for medical research?

The DEA controls that, too. From 1970 (when the CSA was passed and cannabis was included in Schedule I), dozens of applications to produce cannabis for medical research were filed, and none were approved. In late 2015 a federal law was passed that compelled the DEA to act on these applications – to approve or deny them – within 90 days. Again, dozens of applications have been filed. And none have been acted on.

An interesting case is now before the US Court of Appeals (District of Columbia) called In re: Scottsdale Research Institute, LLC, District of Columbia Court of Appeals, case No. 19-1120, where a medical research company is seeking to compel the DEA to act on its application to produce pharmaceutical-grade cannabis. The facts are important …

A doctor in Arizona, Dr. Suzanne Sisley, has the necessary federal approvals to run a clinical trial to determine whether cannabis is effective in treating veterans’ PTSD (as Dr. Sisley writes in her Declaration supporting the petition, she “struggled for seven years [from 2009 to 2016] to get approval from four different federal agencies to conduct clinical trials of cannabis as a treatment for PTSD symptoms in veterans.”). But she cannot begin those trials without pharmaceutical grade cannabis, which the only approved supplier cannot provide. In 2016 she (actually, her company and the appellant in this case, Scottsdale Research Institute, LLC, or “SRI”) submitted an application to grow her own cannabis for her clinical trials, but the DEA hasn’t acted on that application, notwithstanding the law that says it has to. Without pharmaceutical-grade cannabis to run her FDA-approved clinical trials, she was stuck. This petition, called a Writ of Mandamus, was brought to compel the DEA to act. Notably, the Writ of Mandamus does not seek to compel the DEA to grant the application to produce cannabis for research: as SRI writes in its petition, “mandamus here will not divest the agency of its discretion. It simply allows the process contemplated by the statute to begin, not end. The agency still maintains discretion to deny or delay the application.”

So let’s sum up:

  • The DEA won’t consider rescheduling cannabis without clinical trials.
  • Clinical trials require approved, pharmaceutical-grade cannabis.
  • The DEA decides who produces pharmaceutical-grade cannabis.
  • The only DEA-approved producer of pharmaceutical-grade cannabis cannot produce pharmaceutical-grade cannabis.
  • Since 2016, the DEA has been required by law to either approve or reject applications to produce cannabis for medical research within 90 days of receiving the application.
  • The DEA has received dozens of applications from entities seeking to produce pharmaceutical-grade cannabis.
  • The DEA has neither approved nor rejected any of those applications in the 3+ years it has been compelled by law to do so.
  • SRI is bringing a federal court action to compel the DEA to consider its application.

As Dr. Sisley and SRI’s petition to the District of Columbia Court of Appeals provides:

“Millions of Americans believe cannabis holds the key to ending their pain and suffering, making the need for clinical trials acute no matter the outcome of SRI’s clinical trials. If those studies show that thirty-eight states (and counting), doctors, legislators, and the American public are all wrong—i.e., that cannabis lacks medical utility—then we must know this now. Those using cannabis to treat conditions like PTSD may be jeopardizing their health and welfare. But in the more likely alternative— i.e., SRI’s studies prove that cannabis has medical value—DEA’s delay inexcusably deprives combat veterans and others of a treatment option necessary to ease their pain. Either way, more delay is unconscionable.”

The Court of Appeals issued a preliminary ruling on July 29th regarding SRI’s June 11th petition: the DEA has 30 days to file a response, and SRI then has 14 days to file a reply to that response. Notably, after receiving SRI’s 284-page petition, the Court of Appeals has limited the DEA’s response to 7,800 words, and SRI’s reply to 3,900 words. (This article is 800 words long, by the way).

I doubt that clinical trials will prove that cannabis lacks medical utility – but whether something has medical utility isn’t really the question. Many non-approved, and unapprovable, products have some medical utility, but can’t be safely used as federally-approved medicines. Let’s allow the clinical researchers to do their jobs. Let’s allow – perhaps we need to compel – federal regulatory agencies to do their jobs. And wherever and however this comes out at the end, at least we will know what safe and appropriate medical uses there are for cannabis, or components of cannabis.

One in Two Cannabis Dispensaries is Robbed or Burglarized? Perhaps not …

Are there any good studies on robbery and burglary rates of cannabis related businesses as compared to other businesses? Are cannabis related businesses robbed or burglarized at higher rates than other cash intensive businesses?

These questions may not be answered – I know I haven’t found good answers, and I have looked. Two written statements by the Credit Union National Association (CUNA) and American Bankers Association (ABA) provide two very different answers.

The Senate Committee on Banking, Housing, and Urban Affairs held a hearing on “Challenges for Cannabis and Banking: Outside Perspectives” on July 23, 2019. Both CUNA and the ABA had representatives provide written testimony and answers questions from the Senators. The written statement from the representative of CUNA included the following statement (which was picked up by one of the Senators during the question and answer session):

“A 2015 analysis by the Wharton School of Business Public Policy Initiative found that, in the absence of being banked, one in every two cannabis dispensaries were robbed or burglarized—with the average thief walking away with anywhere from $20,000 to $50,000 in a single theft.”

One in every two cannabis dispensaries is robbed or burglarized! That is a stunning statistic. Actually, it is really two statistics because of the significant difference between a burglary and a robbery. Without getting into legal minutia, burglary is entering into a structure or dwelling with the intent to commit a crime; robbery is taking something from a person using force, or the threat of force, to do it. Put another way, a burglary becomes a robbery if there is someone in the structure or dwelling and the perpetrator uses force or the threat of force to take something. Both are serious crimes, but robbery is much more serious than burglary, as it (the robbery) involves direct victims.

The written statement from the American Bankers Association included the following:

“In Denver, [the roughly 500] cannabis businesses make up less than 1% of all local businesses but have accounted for 10% of all reported business burglaries from 2012-2016. On average, more than 100 burglaries occur at cannabis businesses each year according to the Denver Police Department, and burglaries and theft comprise almost 80% of Denver’s cannabis industry-related crime.”

CUNA’s statement that one in every two cannabis dispensaries is robbed or burglarized caught me by surprise.  The ABA’s statement – that roughly one in five cannabis business is burglarized – seems more reasonable. Logically, if one in every two dispensaries was robbed or burglarized, there would be headlines. I can’t find them. So I looked into CUNA’s source for its one in two conclusion, what they called “the Wharton analysis.”

It doesn’t exist.

Here’s a link to the Wharton “analysis” … https://publicpolicy.wharton.upenn.edu/live/news/2214-cash-crime-and-cannabis-banking-regulations-in-an/for-students/blog/news#_edn2.

First, it is a 2017 student blog written by three students which bears the following disclaimer: “The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.”

This November 20, 2017 student blog – not a Wharton Public Policy Institute publication at all – is titled “Cash, Crime, and Cannabis: Banking Regulations in an Illegal Market”. Under the heading “Risky Business”, the three student authors write:

“Not only are cash businesses conducive to tax manipulation, they also hurt many individuals, because of the risk of crime. In 2015, one in two cannabis dispensaries were robbed or burglarized, with the average thief walking away with anywhere from $20,000 to $50,000 in a single act [citation]. Mitch Morrissey, district attorney of Denver, notes a direct increase in crime cases related to the marijuana industry, and sees the reasoning behind the robberies stating: ‘You hit a 7-Eleven, you’ll get 20 bucks. You hit a dispensary, you’ll get $300,000 on a good day’ [citation].”

The citation the students provide is http://www.sivallc.com/the-growing-need-for-a-cannabis-dispensary-security-plan-infographic/

That page is no longer available. But the citation is not to an article or study, but simply to the infographic, which they label “Dispensary Security Infographic” and the source is shown as “Bubulyan Consulting Group”.  Bubulyan Consulting Group is actually Bulbulyan Consulting Group, which was the original name of Siva Enterprises. Avis Bulbulyan is the CEO of Siva Enterprises (www.sivallc.com).

I haven’t reached out to Mr. Bulbulyan to ask him where he obtained the data for the inforgraphic, but it appears that the source was an NBC news story from February 4, 2014 (available at https://www.nbcnews.com/storyline/legal-pot/high-crimes-robber-gangs-terrorize-colorado-pot-shops-n20111). That story includes the following:

“In 2009, the Denver Police Department estimated that about 17 percent of marijuana retail shops had been robbed or burglarized in the last year. That was good news: a bit less than liquor stores (20 percent) and banks (34 percent), and on par with pharmacies. Today, however, a darker picture has emerged. There are about 325 marijuana companies in Denver, based on an analysis of licensing data done for NBC News by Marijuana Business Daily, a leading trade publication. (Most companies hold numerous licenses.) At the same time, there have been about 317 burglaries and seven robberies reported by these companies in the last two years, according to police data. That’s an annual robbery and burglary rate of about 50 percent, more than double what it was in 2009. While a Denver Police spokesperson disputed these figures, the department doesn’t have its own.”

As written above, there is a significant difference between a burglary and a robbery. Using NBC’s numbers from its 2014 story, “that’s an annual robbery rate of about 1% and a burglary rate of about 49%.”

So what is the experience of law enforcement and the cannabis industry?

Colorado statistics seem to paint a very different picture

The City of Denver has an “Open Data” effort that includes marijuana-related crime (“crimes reported to the Denver Police Department which, upon review, were determined to have clear connection or relation to marijuana.”). It is available at County of Denver Marijuana Crime . That data suggests that marijuana-related business burglaries peaked in 2013 at 101, and dropped to 74 for the first eleven months of 2018. That suggests a burglary rate of 12% – 15%. Marijuana-related business robberies peaked in 2014 at 5: they recorded 1 such event in 2018. That rate is between 0.2% and 1%. Notably, these statistics are not comparing the marijuana-related crime rates with overall crime rates. It may well be that marijuana dispensaries are burglarized and robbed at roughly the same rate as other cash intensive businesses.

In an October 2018 report by the Colorado Division of Criminal Justice on organized crime cases in Colorado, the DCJ wrote “there has been concern that, due to the cash-only nature of the industry, robbery would be prevalent, but this has not been the case.” This seems in keeping with the 2014 NBC story that anecdotally suggests a robbery rate of 1% for cannabis dispensaries (in the Denver area).

Some research also suggests that the crime/cannabis nexus isn’t as strong as the anecdotes suggest, and in fact state-legal cannabis dispensaries may help reduce crime.

In a paper published in May 2018 “High on Crime? Exploring the Effects of Marijuana Dispensary Laws on Crime in California Counties” (http://ftp.iza.org/dp11567.pdf) the authors looked at violent and property-related crimes in California on a county-by-county level, and concluded that:

“The results suggest no relationship between county laws that legally permit dispensaries and reported violent crime. We find a negative and significant relationship between dispensary allowances and property crime rates, although event studies indicate these effects may be a result of pre-existing trends. These results are consistent with some recent studies suggesting that dispensaries help reduce crime by reducing vacant buildings and putting more security in these areas.”

Although this study doesn’t refer to robberies or burglaries at cannabis dispensaries, it seems logical that if those dispensaries were being robbed or burglarized at a rate of 50%, the study would have pointed that out.

A study published in the Journal of Preventive Medicine in March 2018 https://www.sciencedirect.com/science/article/pii/S0091743517305078 by university researchers funded by the Centers of Disease Control and Prevention looked at “the geography of crime and violence surrounding tobacco shops, medical marijuana dispensaries [MMDs], and off-sale alcohol outlets in a large, urban low-income community of color” using data from 2014. The abstract provides:

“Results indicated that mean property and violent crime rates within 100-foot buffers of tobacco shops and alcohol outlets—but not MMDs—substantially exceeded community-wide mean crime rates and rates around grocery/convenience stores (i.e., comparison properties licensed to sell both alcohol and tobacco) …”

Conclusion

There is no doubt that cash intensive businesses – bars, restaurants, convenience stores, casinos, cannabis dispensaries – are more likely to suffer burglaries and/or robberies than those businesses that are not cash intensive. And it seems logical that cannabis dispensaries, which struggle to get and maintain banking relationships and are therefore more cash intensive than other businesses, and have a very valuable and largely untraceable product on their premises, are more likely to suffer burglaries and/or robberies at an even higher rate. But that combined rate is probably not 50%. It is probably closer to the ABA’s figure (from the Denver Police Department, apparently) of 20%, or even the County of Denver data that suggests a rate of 12% – 15%.  Regardless, public policy should be driven by accurately reported and cited information: citing a 2015 Wharton Business School study is very different than citing a 2014 NBC News report. Although the robbery rates and burglary rates may in fact be high, and the NBC News report accurate, we are all better served if the bases of our collective public policy decisions are known and accurate.

The Federal Government must step up and provide legislation, regulation, and regulatory guidance to the financial services industry so that cannabis businesses and cannabis related businesses can have access to the full suite of banking services – notably deposit accounts, cash management services, payroll services, merchant banking services, credit, and insurance. The SAFE Banking Act might be a good first step.

FinCEN Updates its Marijuana SAR Data… but Actionable Information is Still Needed!

I previously wrote about the FinCEN quarterly Marijuana Banking Report in an article published August 26, 2018: August 26, 2018 Article

The FinCEN Report is available at FinCEN Marijuana Banking Report.

FinCEN appears to be doing its best with the limited resources that the Administration has allocated and Congress has provided. If properly resourced with the needed technology, capability, and staffing resources, I expect that FinCEN could do much more with the valuable information that the 633 depository institutions are providing through the 81,725 marijuana-related SARs they have filed over the last 5 years.  Here’s hoping that the Administration and Congress step up.

Until those resources are deployed, it appears that the public will continue to receive some good data through the quarterly Marijuana Banking Reports, but not much usable information.  The raw data that was provided indicates that since the FinCEN Guidance introduced the “marijuana-related SAR” concept in February 2014, 493 banks and 140 credit unions have filed one or more of the three types of marijuana-related SARs. Leaving aside what constitutes each of the three types of marijuana-related SARs (the quarterly Marijuana Report doesn’t accurately describe the three types, as I discuss below), FinCEN reports that 81,725 marijuana-related SARs have been filed since Q2 2014. That is good data, but it would be useful information if, for example, that number was compared to the total number of SARs filed by depository institutions in the same period of time (according to FinCEN’s SAR data, that is 4,653,076 SARs) so that we would know that marijuana-related SARs make up 1.76% of all depository institution SARs and are being filed by about 5% of all depository institutions. Other examples of useful and useable (actionable) information include:

Actionable Information

  1. The size and locations of the banks and credit unions filing the marijuana SARs
  2. The locations of the Marijuana Related Businesses (MRBs)
  3. Whether the activity involves medicinal/medical or recreational/adult-use MRBs
  4. The types of MRBs: growers/cultivators, producers, manufacturers, distributors, testing labs, retailers, dispensaries
  5. How many MRBs are being reported and why
  6. Whether the MRBs are part of larger, national (or even international) companies that are coming to dominate the US cannabis industry.
  7. The types of marijuana-related SARs the banks and credit unions are filing: for example, how many banks are only filing Marijuana-Termination SARs, how many of the Marijuana-Limited SARs are 90-day follow-ups rather than net new customers.
  8. Quarter-over-quarter and year-over-year trends: e.g., from Q4 2018 to Q1 2019, the total number of marijuana-related SARs is up 12% but Marijuana Termination SARs are up 14% … what is FinCEN seeing in those filings that could be useful for depository institutions considering whether to provide banking services to MRBs?
  9. There are ten times as many Marijuana Limited SARs (61,036) as there are Marijuana Priority SARs (6,067), and three times as many Marijuana Limited SARs as Marijuana Termination SARs (19,368): why is that? How many of the Marijuana Limited SARs are “continuing activity” SARs (where FinCEN has instructed financial institutions to file a marijuana-related SAR every 90 days regardless of the nature of the activity)?
  10. Whether, and to what extent, the voluntary information sharing provisions of 314(b) and 31 CFR 101.540 are being used by these institutions?

Banks and Credit Unions Aren’t the Only SAR Filers, and What About Marijuana-related CTRs?

There are two other limitations on the Marijuana Banking Report that stand out to me.

First, the Report is limited to banks and credit unions, which, for FinCEN’s reporting purposes, are collectively “Depository Institutions”. Overall, Depository Institutions filed about 45% of all SARs in 2018: MSBs filed 40%, casinos filed about 2.5%, Broker/Dealers filed about 1.2%, and “Other” filed about 11%. It would be instructive to know what other reporting entities are filing marijuana-related SARs.

Second, the original FinCEN Guidance also referred to the two primary large cash transaction reports: CTRs for financial institutions and Form 8300s for non-financial trades and businesses. It would be instructive to know how many of these reports are filed on known marijuana related businesses (linkages between SAR data and CTR/Form 8300 data can be made by TIN or other identifiers on conductors and beneficiaries of the cash transactions).

The Quarterly Marijuana Banking Reports Misstate the 2014 Guidance

In addition, FinCEN should consider “cleaning up” the report. I re-offer (having originally offered in August 2018) four suggestions.

First, when describing the three marijuana SAR categories (Limited, Priority, and Termination), FinCEN refers to Cole Memo “red flags” … but none of the three Cole Memos (or the Ogden Memo) have any “red flags”. The red flags are actually set out in the FinCEN guidance – and there are 23 red flags to consider – and that original guidance correctly refers to the Cole Memo “priorities” when describing the three marijuana SAR types.  Although some may quibble with my distinction, the term “red flags” is a red flag for banking auditors and regulators … the Cole Memo has priorities, the FinCEN guidance has red flags.

Second, footnote 1 of this Report describes when to use each of the three marijuana SAR types. For the marijuana “Termination” SAR, FinCEN indicates that it is to be used when the financial institution has decided to terminate its relationship with the MRB because (1) the financial institution “has decided not to have marijuana related customers for business reasons” or (2) the MRB is not fully compliant with the appropriate state’s marijuana regulations, or (3) the MRB raises one or more of the Cole Memo red flags. (Note the use of the alternative “or”). This language is different than the 2014 guidance, which has nothing about deciding not to have marijuana related customers for business reasons.  I would like to see FinCEN provide the industry with guidance for not only exiting MRBs, but also about simply not providing banking services to marijuana related customers for business/risk reasons.  It is clearly needed if less than 650 of more than 11,000 banks and credit unions are knowingly or unknowingly providing banking services to MRBs.

Third, there is nothing in the 2014 guidance, nor in the FinCEN Marijuana Banking report, that defines a “marijuana related business”.  It is certainly implied that to be an MRB requires being subject to state marijuana regulations, but clear guidance would be helpful. Also, there are many businesses that do not have to be licensed and are not governed by state marijuana regulations, but are indirectly dealing with MRBs. Footnote 7 of the 2014 guidance referred to indirect services (“a financial institution could be providing services to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.”): but it did not differentiate between (what I’ll call) Direct MRBs (those that are required to be licensed under state marijuana regulations) and Indirect MRBs (those that capital, services, products, property to Direct MRBs).

Finally, the Marijuana Banking Report describes the marijuana Limited-Priority-Termination SAR categories as “three phases for describing a financial institution’s relationship to marijuana-related businesses.” That isn’t accurate: there is not a progression or phasing of these categories, and the original 2014 guidance didn’t describe them that way. A bank or credit union (or any filer) doesn’t have to start with a Limited SAR, then progress to a Priority SAR, then end with a Termination SAR: they are three distinct SARs, dependent on the circumstances of each case.

The Marijuana Data Is Good, But Actionable Information Would Be Better!

 

 

Cannabis Reform in America: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”

 

Winston Churchill – https://www.youtube.com/watch?v=pdRH5wzCQQw

Any Fast and Clean Solutions Will Be Slow and Sloppy to Implement

Advocates on both (all?) sides of the cannabis, marijuana, and hemp debates are looking for fast and sure solutions to whatever problems they feel are most pressing, whether decriminalization, descheduling cannabis, rescheduling cannabis, righting past societal and racial wrongs, etc. Whether it is the proposed STATES Act or the SAFE Banking Act, some advocates suggest that Congressional action will quickly and easily solve many of the issues around accessibility, safety, access to banking, etc.

But is it that simple?

Today, the cannabis and financial services industries, local, county and state governments, and law enforcement agencies and prosecutors, are all in limbo, waiting for Congress to pass, and the President to enact, federal legislation that will pave the way for regulations and regulatory guidance that will truly open up banking services to cannabis related businesses. But it will take time, as there is always “regulatory lag” between new legislation being passed, regulations being written, and regulatory guidance being published. And then it takes even longer for financial institutions to implement those regulatory changes: to build programs, write policies, implement new technologies, etc. So even if Congress acted today, all of the cannabis industry actors won’t have a clear path forward for (at least) a couple of years. Until then, many of those actors – notably financial institutions looking to provide safe and effective banking services to the industry – will manage the risks through luck and chance, not knowing whether, how, or when financial regulators or prosecutors could pounce on them for failing to do perfectly that which they didn’t know they had to do.

What must be done? Until there are legislative changes, the federal banking regulators need to provide more current, clearer guidance for banks and credit unions.  It has been more than five years since FinCEN issued its Valentine’s Day 2014 guidance, and none of the banking and credit union regulators have formally opined on it or provided written guidance. What has been said about the Guidance?

  • The Courts: I’m aware of one federal court judge who has commented on the FinCEN guidance. In a December 28, 2015 hearing in the Fourth Corner Credit Union v Federal Reserve Bank of Kansas City case (District Court of Colorado, 15CV01633), Judge Brooke Jackson responded to a statement by the credit union’s lawyer that the FinCEN guidance “authorized financial institutions to serve marijuana related businesses” by saying: “No, it didn’t do that, did it? … It seems to me that the DOJ and guideline people are just saying, well, maybe we can put our head in the sand and this will go away.” (Transcript of hearing, page 3). And later in the same hearing, Judge Jackson stated: “But in [the credit union’s] brief, in black and white, you say the FinCEN guidance authorizes banks to serve marijuana related businesses. I don’t agree with you. I don’t think it does.” (Transcript, page 63).
  • Federal Reserve: in a June 17, 2018 press conference, Federal Reserve Chairman Jerome Powell is reported (by MarketWatch) to have said: “This is a very difficult area, because many state laws permit the use of marijuana and federal law still doesn’t. So it puts federally-chartered banks in a very difficult situation … it puts the supervisor in a very, very difficult position. Of course, our mandate has nothing to do with marijuana … We just would love to see it clarified, I think.”
  • OCC: on January 17, 2019, OCC Comptroller Joseph Otting told reporters that Congress has “to act at the national level to legalize marijuana if they want those entities involved in that business to utilize the US banking system” and that he “hopes for resolution to marijuana banking issues in 2020” (quoting a PoliticoPro tweet).

Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer. 

History tells us that changes take place over many years

An abbreviated timeline of cannabis in America makes us appreciate that any changes do, in fact, take many years to come about. I’ve broken this timeline or history into six periods.

1600s – 1919 – Hemp is part of the culture

  • Hemp farming
  • 1914 Harrison Narcotics Tax Act re opiates, coca

1919 – 1933 – Prohibition

  • 1919 – 18th Amendment brought in Prohibition – exception for 200 gallons of house-made wine, and physicians could prescribe whiskey. Note the parallels with cannabis, where many states allow home grows and medicinal cannabis.
  • 1930 – creation of the Federal Bureau of Narcotics (became the DEA in July 1973). First Commissioner Harry Anslinger (Commissioner 1930 – 1962), then US Representative to the UN Narcotics Commission 1962-1964. Anslinger wrote “The Protectors” in 1964 which included: “marijuana is taken by musicians. And I’m not speaking about good musicians, but the jazz type.”
  • By 1931, 29 states outlawed marijuana use
  • 1933 – 21st Amendment ended Prohibition

1933 – 1970 – Criminalizing of Cannabis

  • 1937 – Marihuana Tax Act (note the spelling of marihuana: this is the way it has been spelled in all federal laws and the US Sentencing Guidelines. The act was overturned in 1969 in a US Supreme Court case (Timothy) Leary v US as a violation of the 5th Amendment because in order to get a tax stamp you had to incriminate yourself; repealed in 1970 by the Controlled Substances Act
  • 1952 – Boggs Act: mandatory sentences for drug possession, and for marihuana, 2 years
  • 1961 – UN Single Convention on Narcotic Drugs (one of three UN treaties on narcotics, the others in 1971 and 1988). US is a signatory. Cannabis must be either a Schedule I or II drug per 21 USC 811(d)(1). Affirmed in NORML v DEA, 559 F3d 735, 751 (DC Cir 1977)
  • 1970 – Foreign Bank Secrecy Act of 1970, PL 91-508 (October 26, 1970)
  • 1970 – Comprehensive Drug Abuse Prevention & Control Act of 1970, PL 91-513 (October 27, 1970). Title II is the Controlled Substances Act. Five schedules of drugs based on potential for abuse, accepted medical use, and safety and potential for psychological or physical addiction:

Schedule  Potential for Abuse  Accepted Medical Use  Potential for Addiction

       I                      High                               None                              High

      II                      High                               Yes                                 High

      III                     Potential                       Yes                          Moderate/Low

      IV                     Low                                Yes                                 Low

      V                       Low/Little                     Yes                            Little/None

1970 – 1996 – The War on Drugs

  • 1970 – National Commission on Marihuana & Drug Abuse (Schafer Commission) created by President Nixon (actually, it was created by PL 91-513 Title II, section 601). Nixon’s intent was to get support for the temporary scheduling of marijuana onto Schedule I by AG John Mitchell.
  • 1972 – Schafer Commission Report released, arguing for decriminalization of marijuana possession and removal of marijuana from Schedule I. Title of report: “Marihuana, A Signal of Misunderstanding”
  • 1972 – NORML petitioned the Bureau of Narcotics & Dangerous Drugs to reschedule marijuana. BNDD, then the DEA, didn’t hear the petition until 1986, and rejected the request in 1989.
  • 1973 – Oregon became the first state to decriminalize possession (< 1 ounce). Between 1973 and 1978, 13 more states followed
  • 1982 – Tax Equity & Fiscal Responsibility Act of 1982 added section 280E to the Internal Revenue Code. Prior to this, criminals could write off normal business expenses in determining the federal income tax on illegal proceeds. Section 280E restricted what a person or business could write off to only cost of goods sold, not operating or other expenses.
  • 1984 – Reagan’s War on Drugs – included the passage of the Comprehensive Crime Control Act of 1984
  • 1986 – Anti-Drug Abuse Act of 1986, PL 99-570 (October 27, 1986). Brought in sentencing guidelines, mandatory minimums, 3 strikes. Total of 15 titles, including Title I, the Anti-Drug Enforcement Act, which had 15 sub-titles, including sub-title H, the Money Laundering Control Act (MLCA), which criminalized money laundering.

1996 – 2012 – The Beginning of  Decriminalization and Medicinal Use

  • 1996 – California Proposition 215 led to the Compassionate Use Act – first state to adopt medical marijuana law
  • 2000 – Conant v Walters, 309 F3d 629 (9th Circuit) affirmed a physician’s right to recommend, but not prescribe, marijuana
  • 2001 – US v Oakland Cannabis Buyers’ Cooperative, 532 US 483 – US Supreme Court rejected the medical necessity defense to CSA crimes notwithstanding the medical marijuana possession was legal under state law
  • 2001 – Congress petitioned the DEA to reschedule marijuana to Schedule II. Fifteen years later, in August 2016, the petition was denied by the US Department of Health & Human Services re “more research is needed”
  • 2005 – Gonzales v Raich, 545 US 1 – US Supreme Court held that the Commerce Clause grants the federal government jurisdiction over intrastate marijuana production, distribution, and use
  • 2009 – Ogden Memo (October 19) Subject: “Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana”. By this time, 13 states had medical marijuana regimes. The memo mentioned patients and caregivers, warned against for-profit, commercial enterprises. Listed seven indicators of “federal interest” including firearms, violence, minors, money laundering, and organized crime.
  • 2011 – Cole Memo (June). Subject: “Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use”. Repeated the Ogden language and warned against large-scale cultivation.

2012 – Present – Adult-Use Begins

  • 2012 – November: Washington and Colorado voter propositions approve adult-use marijuana (states 1 and 2)
  • 2013 – Cole Memo (Cole II – August 23). Press release specifically called out Washington and Colorado. Subject: “Guidance Regarding Marijuana Enforcement”. The accompanying press release specifically mentioned Colorado and Washington, which had passed the first adult-use laws. Set out 8 priorities: Preventing distribution to minors; Preventing revenue from marijuana going to criminal enterprises, gangs, cartels; Preventing interstate diversion; Preventing marijuana businesses from being covers for other illegal activities; Preventing violence, use of firearms, in cultivation and distribution; Preventing drugged driving and exacerbation of other public health consequences; Preventing growing of marijuana on public lands; and Preventing marijuana possession or use on federal property.
  • 2014 – Cole Memo (Cole III – February 14) and FinCEN Guidance, also February 14th. Cole III Subject: “Guidance Regarding Marijuana Related Financial Crimes”. Repeated Cole II, but noted that Cole II “did not specifically address what, if any, impact it would have on certain financial crimes for which marijuana-related conduct is a predicate.”The FinCEN (Treasury) Guidance had a Subject: “BSA Expectations Regarding Marijuana-Related Businesses” and “clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.” Repeated 8 priorities from Cole III. Set out 23 red flags. Required FIs to file three types of marijuana Suspicious Activity Reports: Marijuana Limited for all activity that doesn’t violate state law of any of the priorities; Marijuana Priority for all activity that either violates state law or one or more of the priorities; and Marijuana Termination for all activity that either violates state law or one or more of the priorities and the FI is going to or has exited the MRB relationship.
  • 2014 – November: Washington, DC, Alaska, and Oregon approve adult-use marijuana (States 3 and 4, DC)
  • 2014 – Rohrabacher-Farr Amendment to the Omnibus Federal Spending Bill, prohibiting the DOJ from using appropriated funds to target state legal medical marijuana programs (similar amendments in every federal spending bill since)
  • 2016 – November: California, Massachusetts, Nevada, Maine (states 5 to 8) approve adult-use marijuana
  • 2018 – January 4th AG Sessions memo.  Subject: “Marijuana Enforcement”. Three paragraphs and one page. Paragraph 1 indicated that the CSA carries significant penalties and can form the basis for other crimes including money laundering and BSA violations. Paragraph 2 provided that prosecutorial direction and discretion is set out in the US Attorney’s Manual. Paragraph 3 provided that specific memos on marijuana were unnecessary and therefore rescinded.

    Bottom Line: Treasury’s 2014 Guidance has resulted in ~50 banks and credit unions, out of more than 11,000, knowingly and actively banking marijuana related businesses. And former AG Jeff Sessions didn’t really rescind anything. Marijuana businesses and those financial institutions that provide banking services to them, do so at their own peril.

  • 2018 – November: Vermont and Michigan approve adult-use marijuana (states 9 and 10 plus DC)
  • 2019 – January: SAFE Banking Act introduced in Congress
  • 2019 – January: STATES Act introduced in Congress

But even with Congressional action, what issues could remain that need to be dealt with? Below are some observations on some issues to consider as these debates continue and, to some degree, are resolved.

Eleven Things to Consider in the Cannabis Debate

  1. Lotteries, casinos, and liquor stores are all examples of legalized vices that have been found to disproportionally harm, or at least not appropriately benefit, lower income and communities of color. Despite efforts to prefer local, minority, and women-run businesses, most local, county, and state regimes are becoming dominated by large, interstate (international) corporations financed by (white) male-dominated venture capitalists and private equity. More action needs to be taken to understand the problems that have arisen with lotteries, casinos, and liquor stores (and pawnshops) to understand whether and how cannabis production, manufacturing, processing, and distribution can result in similar problems, and then to prevent those problems. Let’s learn from what we know and be better for it.
  2. Cannabis and cannabis products are sold as either medicinal products or non-medicinal. Other products that are sold both as a “medicine” and as a non-medicine include toothpaste and tooth whiteners, deodorant and antiperspirant, and suntan lotion and sunscreen. But all of those products are first approved as either foods, drugs, or cosmetics. Currently, the same or similar products (cannabis flower, tinctures, edibles, lotions) are sold as non-approved adult-use products (and are taxed accordingly) or as non-approved medicinal products (and generally not taxed at all or as much). That creates confusion and opportunities for mischief.
  3. The medicinal cannabis industry does not appear to uniformly adhere to the “under the care of a physician” or “legitimate or bona fide physician/patient relationship” standards in all states’ medical/medicinal marijuana regimes. A simple review of online applications for, and customer reviews of, medicinal cannabis cards suggests that an online form and quick video chat “in ten minutes or less!” without any true follow-up isn’t a true physician patient relationship. And it has always seemed odd to me that a physician would recommend a medicine to a patient by telling them “here’s approval to buy as much of this medicine as you want, in whatever amount and strength you want, in any form you want, for a year.”  And then that patient gets his advice from a 20-something year old budtender, not an educated and licensed pharmacist. That’s essentially what a recommendation for medicinal cannabis is. It just doesn’t seem responsible to me. Some enhancements to this process are overdue.
  4. The 6-plant personal grow is a legacy of the California cooperative environment and may not be appropriate in a go-forward regime (apparently Illinois has recognized this, and its pending bill only allows limited home grows for medicinal cannabis patients). Six plants – up to 99 for Colorado and California medicinal cannabis – can produce as many as 30 joints a day (or up to 1,800 for 99 plants). Some argue that is excessive and goes against all the other strict production, labeling, and distribution laws and regulations otherwise in place. Home grows are a major concern of the DEA.
  5. Ownership and control of marijuana-related businesses: there are too many definitions, no central database (such as the Nationwide Multistate Licensing System for money transmitters and other state-licensed businesses). Those drafting cannabis laws and regulations should look at what the federal government did with money services businesses (MSBs) in Title IV of the Riegle Community Development and Consumer Protection Act of 1994. Title IV, known as the Money Laundering Suppression Act of 1994, called for uniform state licensing and regulation of MSBs, and a national registry of MSBs, while leaving authority over MSBs to those states with effective regulation and enforcement regimes. Not a bad model for marijuana related businesses (MRBs).
  6. Has there been a balanced look at whether the license fees and taxes actually cover the direct and indirect governmental costs, let alone any societal harms, that are a result of the cannabis regime?
  7. Everyone is focused on federal criminal laws around narcotics, but there have been virtually almost no convictions for true marijuana possession in the last ten years at the federal level (90%+ of the few thousand federal marijuana possession convictions are along the southern border, and the average weight of marijuana for those possession cases is over 40 pounds). It is a state issue. Solving criminal law issues (including the expungement of past convictions) at the federal level doesn’t address the real criminal law issues.
  8. The current production FAR exceeds demand in some states. Oregon’s supply of recreational marijuana is estimated to be 6.5 years (per the OLCC’s 2019 Recreational Marijuana Supply and Demand Legislative Report), and California has reported that as much as 11 million of the 13 million pounds of cannabis produced in California is diverted and not taxed. The states’ failure to address over-production (notably California and Oregon) could result in a federal crackdown.
  9. The last four Surgeons General have all said that there needs to be more clinical trials. Clinical trials take time.
  10. Continuing noncompliance is occurring in the industry. For example, the Oregon Liquor & Cannabis Commission reported on April 18, 2019 of “significant noncompliance by marijuana licensees failing to abide by the state’s laws and rules”.
  11. The current FinCEN guidance is not sustainable. Read literally – which is how any guidance or regulation is read when it is being used to sanction a bank – the guidance is impossible to follow in a commercially reasonable manner when the risks of noncompliance are unknown. I have advocated that any Marijuana Related Business (MRB) regulations and guidance should mirror the Money Services Business (MSB) regulations and guidance.

Seven Observations on the Proposed “Quick Fix” Solutions

Some advocates for Congressional action are suggesting that rescheduling or descheduling cannabis and passing a SAFE Banking Act or STATES Act will resolve many of the issues currently facing the cannabis industry. These suggestions are probably accurate, but certainly incomplete. It will take years, and many more steps, before the major issues are known and addressed. Some observations:

  1. Rescheduling Cannabis – if cannabis is rescheduled, to which schedule? If moved to Schedule III or lower, what about the US treaty commitments enshrined in law? Do doctor “recommendations” become “prescriptions” and require specific and DEA/FDA-approved dosage, duration, means of delivery, and FAERS-like reporting? And if rescheduled, what about DEA registration, inspection, Suspicious Order Reporting, etc., for growers, manufacturers, and distributors?
  2. Descheduling Cannabis – if descheduled, FDA approval would still be required (as for hemp), whether for medicinal use or as an additive to food. Also, the same foreign treaty issues (three UN conventions or treaties) apply as for rescheduling.
  3. Other Federal Laws – in addition to changes to the Controlled Substances Act in Title 21 of the US Code, many other laws would also need to be amended or rescinded, including those in Title 8 (Aliens and Immigration), Title 12 (Banks and Banking), Title 18 (Crimes and Criminal Procedure), Title 21 (Food and Drugs), Title 26 (Income Tax), Title 31 (Money and Finance), and Title 50 (War, for sanctions-related laws).
  4. Once federal legislation is enacted, it will take months/years for federal regulations, and years for regulatory guidelines, guidance, policy manuals to be revised. Also, for medical cannabis, it will take years for clinical studies then FDA/DEA approvals of new drugs.
  5. Federal Legalization brings federal taxation – like alcohol and tobacco. Depending on tax rates, the black market will thrive and survive.
  6. Interstate distribution – another area that hasn’t had much attention, but will require thoughtful and collaborative solutions. Which leads to:
  7. Amazon, Big Pharma and Big Tobacco – or combinations of them. Is there any way to stop them from taking over the production, manufacturing, and distribution of cannabis?

Conclusion and Path Forward

First and foremost, there has to be a change in the level of discourse. Like in the political arena, there appears to be a polarization of opinion so that neither side in the cannabis debate is prepared to even listen to, let alone compromise with, the other. I’ve seen examples of advocates for expunging all marijuana possession convictions employ ad hominin attacks on anyone who suggests that not all marijuana convictions are the same, and each should be looked at carefully. I’ve seen examples of advocates for preventing any medicinal uses of marijuana until full FDA approvals are in hand employ those same ad hominin attacks on anyone who suggests that, even without FDA approval, there are situations where compassion and common sense dictate medicinal uses of marijuana.  Even my list of eighteen things to consider and observations will no doubt elicit scorn, ridicule, condemnation, and name-calling. So be it.

Those most passionate are often the most vocal, and grab the most headlines, and those most passionate are sometimes the ones that aren’t listening to anyone who doesn’t share their passion. But there are also many – probably most – of the people along the spectrum of opinion that are not only willing to listen to all sides of an issue, but recognize there are many sides to an issue, and that solutions aren’t simple, and consequences are many. There are many strong advocates on both sides of the various marijuana/cannabis debates: let’s have those debates. Let’s put all of the possible issues on the table. Let’s have the courage to listen to those that present those issues and try to understand their perspectives and concerns. And let’s have the courage to compromise to get to solutions that at least do the least harm.

© 2019 – All rights reserved. No further distribution or use of this article is permitted without the express written approval of James Richards

Colorado: The Epicenter of Black Market Marijuana in the United States?

Forty-two Individuals Arrested In One Of The Largest Black Market Marijuana Takedowns In Colorado History

A two year investigation by dozens of federal, state, county, and local law enforcement agencies in the Greater Denver area culminated in the exercise of 255 search warrants on 247 homes and 8 businesses. The result was that law enforcement found 240 residential grows, arrested 42 individuals, seized 80,000 plants and 2.5 tons of finished marijuana. In 7 federal criminal cases and 6 federal civil forfeiture cases, the government is seeking forfeiture of 41 homes, $2.2 million in cash, and 25 vehicles – the 41 homes all had grow operations with at least 100 plants, many with more than 1,000 plants. Colorado law allows no more than 12 plants in home grows

Some of the statements of the lead agencies’ heads are telling:

  • US Attorney for Colorado: “Colorado has become the epicenter of black market marijuana in the United States … this investigation may be just the tip of the iceberg.”
  • DEA Special Agent in Charge (Denver): “this marijuana issue is out of control in Colorado.”
  • 18th Judicial District (Denver) District Attorney: Colorado is becoming “the wild west of weed.”

Looking at the names of the 15 defendants in the 7 federal criminal cases, my guess is that these cases will have similar fact patterns to the US v Li case from March 2019 filed in the Central District of California. See the story from March 14, 2019 https://regtechconsulting.net/uncategorized/illegal-cannabis-grows-shell-companies-straw-buyers-border-searches-beneficial-owners-and-gtos/.

The US Attorney’s press release is at https://www.justice.gov/usao-co/pr/forty-two-individuals-arrested-one-largest-black-market-marijuana-takedowns-colorado

Illegal cannabis grows, shell companies, straw buyers, border searches, beneficial owners … and GTOs?

US v Li et al, CD CA 19-MJ-00867

https://www.justice.gov/usao-cdca/pr/three-socal-men-arrested-scheme-which-chinese-money-allegedly-funded-seven-inland

On March 7th the US Attorney for the Central District of California announced the arrests of three men for running an illegal marijuana grow and distribution operation out of eight homes in San Bernardino County.

This case reads like an ACAMS or ACFCS exam question, with even dollar wires from China, cash purchases of homes by straw buyers, linked shell companies, false leases, even border searches of cell phones (yes, when you enter the United States the Government can not only search your luggage, it can search your cell phone and laptop).

You may be asking yourself – if the homes were purchased with “all cash”, were they covered under FinCEN’s real estate-related Geographic Targeting Orders (GTOs)? The four GTOs require title insurance companies to report all cash purchases by legal entities of residential real estate over $300,000 in certain markets. The original January 2016 GTO affected only Miami and New York (and properties over $1 million in Miami and $3 million in New York). The GTO was renewed and expanded in July 2016 to cover LA County (properties over $2 million), and in November 2018 the GTO was expanded to twelve cities/counties and in all twelve the purchase price was set at $300,000.

Were any of these properties covered by the GTOs? No. San Bernardino County isn’t covered, and all eight properties were originally purchased by individuals. Even if San Bernardino County was covered, the four that were transferred to LLCs were all in amounts below the $2 million threshold and before the threshold was reduced to $300,000 in November 2018.

What if real estate agents had BSA/AML reporting requirements? Would the real estate agents in these deals recognized any red flags? No. One real estate agent handled all eight transactions: he is the lead defendant and set up the straw buyers, shell companies, etc.

The press release included the following quote from United States Attorney Nick Hanna: “In states that have decriminalized marijuana, we have seen an influx of foreign money used to establish grow operations, with much of the marijuana being destined for out-of-state consumers”. But seven of the eight properties used as grow houses were purchased before California passed the November 2016 proposition approving adult-use cannabis, and seven of the eight were set up as grow operations before the adult-use cannabis regime began in January 2018. However, there may be a connection to the adult-use cannabis regime: the first grow operation began in November 2016, then the next six were set up between August and October 2017. It appears that the defendant Li (through his wife) bought a house in September 2016 and immediately converted it to a grow operation (house #3 above). Once that was running, he then took six houses that had been purchased by Chinese nationals between 2013 and 2015, perhaps as investments and as means to get funds out of China and that were sitting empty, and converted them to grow operations.

There is no indication in the criminal complaint – which runs 120 pages – that the named banks identified any of the activity and filed Suspicious Activity Reports. There were certainly red flags aplenty:

  • Newly established LLC account received four incoming wire transfers from a Guangdong, China trading company in a one month period for $199,960.13, $299,960.13, $249,960.13, and $349,960.14;
  • Newly established personal account for a Chinese national on a tourist visa received nine incoming wires in a two week period, all at or just under the $50,000 limit on individual transfers from China and all referencing “tuition” or “education training”. Less than two weeks after the last wire, the account holder wired the funds to a title company and received a “second home” mortgage from the same bank;
  • Newly established personal account for a Chinese national on a temporary visa, opened with a $15 deposit, received two incoming wires from a Chinese company for more than $300,000 each in a five-day period, immediately followed by a $10,000.00 payment to a title company; and
  • A Chinese national with an account in a US bank received four incoming wires from her account at a Hong Kong bank within six days for $120,000.00, $110,000.00, $120,000.00, and $100,000.00 followed two days later by a wire transfer for $445,000.000 to a title company.

A careful review of the LLCs shows that there are common addresses (including mail drops at UPS Stores), and common managers, agents for service of process, and officers. However, all of the activity occurred prior to May 11, 2018, so the beneficial ownership rule was not yet in force.

#cannabisgrows #beneficialowner #strawbuyer #shellcompany

(Note: as of March 14 the case is not available on PACER)

 

There Are No Drug Cartels in California, and 97% of WA Cannabis Businesses Have Checking Accounts … What We Learned in the House Hearing on Cannabis & Banking – Updated

The House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing on February 13, 2019 titled “Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses”.

There were two panels of witnesses. The first panel was the Honorable Ed Perlmutter, Member of Congress (D. CO), the primary sponsor of the SAFE Banking Act of 2019. He testified passionately and with purpose on his many-years’ of effort to reform marijuana/cannabis laws, up to the just-introduced SAFE Banking Act of 2019. The second panel was made up of:

The video of the hearing – available at https://www.youtube.com/watch?time_continue=1547&v=kW7fWM04Uyc ran for a total of 4 hours and 50 minutes, less 26 minutes at the beginning when the hearing was slightly delayed and a one hour and twenty-three minute recess at the 1 hour 40 minute mark (all of this – and the time tags to follow – are for the benefit of those that may choose to watch the video of the hearing!).

First, some highlights of the written testimony of the witnesses.

California Treasurer Ma’s testimony included the following:

“The well understood Cole Memorandum offered some sense of comfort to those financial institutions skilled enough to properly know their customer, apply appropriate due diligence to the business activities of those customers, and to safeguard their banks as well as the nation’s payment system from known bad actors who violated the eight basic tenets set forth in that Memo. Unfortunately, the Cole Memorandum has been rescinded and now these financial institutions are left without even the most basic safe harbor mechanisms to guide their business decisions.”

I’d point out that this statement isn’t quite accurate. The poorly understood (in my opinion) Cole Memoranda (there were three of them) offered no sense of comfort to financial institutions, skilled or otherwise, didn’t provide a safe harbor, and remains part of the FinCEN Guidance. This was all corrected by the (excellent) written testimony of Ms. Pross:

“The compliance framework Maps utilizes to serve canna-businesses is based on the U.S. Department of the Treasury’s Financial Crimes Enforcement Network BSA Expectations Regarding Marijuana-Related Businesses (“FinCEN Guidance”). Though the February 2014 Cole Memorandum from the Department of Justice (“Cole Memo”) was rescinded in January of 2018 by Attorney General Sessions, the guidelines of the Cole Memo remain in place as part of the FinCEN Guidance.”

Ms. Pross also testified (@3:06:20) that “the FinCEN Guidance is not a safe harbor.” This is an accurate statement. And Mr. Deckard, representing the Independent Community Bankers Association, had this to say about the FinCEN Guidance:

“FinCEN Guidance (described below) does provide some assurances that a bank is complying with anti-money laundering rules if it follows the agency’s heightened SAR guidelines. However, without a statutory safe harbor, bankers rationally fear that the politics could shift against cannabis in an instant. It is telling that banks that choose to serve cannabis-related businesses are required to have an exit plan to unwind their loans, a requirement that does not exist for any other category of lending”.

The “all cash” aspects of cannabis related businesses was a central theme of the hearing. In his written testimony, Major Franklin wrote:

“Current conditions, which require all-cash transactions in every aspect of the business encourage tax fraud, add expensive monitoring and bookkeeping expenses, and – most importantly – leave legitimate businesses vulnerable to theft, robbery, and the violence that accompany those crimes.”

It may be that current conditions require all-cash transactions, but there are dozens (more than fifty have been identified by myself and others) payment providers, Point-of-Sale system providers, credit and debit card and merchant services providers that have developed end-runs around the merchant identification code requirements, card network rules, etc., in order to allow – albeit improperly – consumers to swipe or insert their AmEx, Visa, Mastercard, and Discover branded cards at cannabis dispensaries and retailers. Almost every cannabis store you will walk into accepts some sort of electronic payment – either in a closed-loop system, masked as an ATM withdrawal, masked as a cryptocurrency purchase, or using a false or deceptive Merchant Identification Code to get around the issuing banks’ controls and the network rules. Ms. Pross’s written testimony touched on this issue:

“Cannabis businesses are frequently bombarded with proposals for payment “solutions” that are unregulated (and therefore not subject to Bank Secrecy Act compliance), and their “solutions” are often very clearly a form of money laundering. We have heard of proposals involving everything from cryptocurrency to cashless “chit” mechanisms to the use of prepaid gift cards—none of which would provide the Federal government any valuable information on cannabis-related financial activity or the movement of cannabis within the United States.”

One thing that re- or de-scheduling of cannabis and cannabis-related banking reforms could accomplish is to get these unregulated and sometimes less-than-transparent businesses out of the cannabis banking environment completely. That would be a positive for everyone (except those providers of end-run, head-fake payments services).

Ms. Pross, representing the Credit Union National Association, also included quite a lot of detailed information on her credit union’s cannabis program. Her written testimony included the following:

“our organization has come to provide banking services to five hundred Oregon sanctioned cannabis businesses. That makes the cannabis banking program at Maps one of the largest in the United States … In 2017 and 2018 alone, Maps received well over $529 million in cash deposits from cannabis businesses …”.

There are roughly 250 business days in a year, so over 500 business days, Maps received, on average, over $1 million in cannabis-related cash deposits from some or all of its 500 cannabis related business members (credit unions don’t have “customers”, they have “members”). That is a lot of cash for a 250 employee, 10-branch credit union in Salem, Oregon. As Ms. Pross correctly pointed out, that is $529 million that was taken off the street and entered the banking system: she and her colleagues at Maps Credit Union should be commended for that.

Ms. Pross continued:

“To put some numbers around this compliance program, Maps filed over 13,500 individual reports related to cannabis business accounts in 2017 and 2018 alone. For more context around those numbers, Maps has filed 2,770 Suspicious Activity Reports since January 1, 2017, and 90.2% of those SARs were directly due to our filing obligations for cannabis businesses.”

Based on this, and her testimony at 4:21:05, in two years Maps Credit Union filed 11,000 CTRs over approximately 500 business days, or an average of 22 CTRs per day on an average of $1 million in cannabis-related cash deposits (not all of which would have hit the $10,000.01 threshold for filing a CTR).

But the SAR testimony is more interesting. Although Ms. Pross verbally testified that “in the past two years we’ve filed nearly 3,000 marijuana-related SARs to FinCEN” and that of the 3,000, “90% related to cannabis businesses” (4:21:05), the written testimony may be more accurate. There, 90.2% of 2,770 is 2,500 SARs. The FinCEN Guidance requires banks and credit unions to file a Marijuana-related SAR every 90 days. So, if Maps has 500 CRB customers – and assuming that they had 500 CRB customers through the course of those two years, that would mean that they should have filed 500 SARs every 90 days, or 4,000 SARs in 2017-2018. They filed 2,500. Ms. Pross may need to provide some detail on the number of CRB customers it had through 2017 and 2018: simply based on this written testimony and the statement that they had 500 CRB customers, the math doesn’t seem to work.

Update – Ms. Pross did provide an update on February 14th. She wrote: “To clarify the SAR numbers, this is a growing program, so we have not had 500 cannabis business accounts for the past two years.  In fact, as of January 2017, we had 133 such accounts.  Also, it’s important to note that SAR filing requirements are effectively a 120-day reporting timeframe.  There is 90 days of activity to report and an additional 30 days to file the SAR.  While a financial institution may still report at the 91 day mark, we have an additional 30 days past the reporting timeframe to utilize as necessary.  Thanks again!”

Shifting gears, a number of the Republican Congressmen (notably Mr. Luetkmeyer (R. MO), Mr. McHenry (R. NC) and Mr. Posey (R. FL)) brought up Operation Choke Point and what they saw as an oddity that bank regulators were discouraging banks from banking certain federally legal businesses (the Choke Point issue) yet in this case there is an encouragement (through the proposed SAFE Banking Act) to bank federally illegal businesses. Mr. Deckard’s written testimony referenced Operation Choke Point. Mr. Deckard wrote:

“The memories of Operation Choke Point are still fresh. Even legal, legitimate, long-established businesses were, and unfortunately remain, subject to examiner coercion, both subtle and direct. ICBA [Independent Community Bankers Association] appreciates the ongoing work of Ranking Member Luetkemeyer and others on this committee to being an end to Operation Choke Point, just as we now seek your help in creating a safe harbor for legal cannabis businesses.”

Mr. Luetkemeyer had this interesting comment (32:42) that summarized his thinking and what appears to be lack of support for the SAFE Banking Act: “Until we modernize the BSA and anti-money laundering regulations, it would be irresponsible to open up our financial institutions to another major challenge.”

There was an interesting exchange between Mr. Tipton (R. CO) and California Treasurer Ma (3:24 – 3:27) aroudn cannabis and organized crime. Mr. Tipton stated that drug cartels can gain access to legitimate marijuana businesses, and that in Colorado, organized crime cases had tripled in the five years since legalization.[1] Treasurer Ma answered as follows (3:27:10): “The cartels actually don’t come to California anymore because of Proposition 215 [1996] and because of Proposition 64 [2016] that passed, so the legislation in our State has actually made it safer.”

Leaving aside whether the California cannabis-related legislation has actually made California safer, I don’t believe the statement “the cartels actually don’t come to California anymore”, whether because of the 1996 and 2016 propositions or not, is an appropriate statement to make. I trust that Treasurer Ma will formally retract that statement – unless, of course, it is true that drug cartels no longer come to California.

Update: On February 11, 2019 the Governor of California announced that he was pulling California’s National Guard troops from the southwest border. To effect that he issued General Order 2019-01, which among other things “authorizes up to 100 service members with critical skills to that the California National Guard can focus vital and exclusive support on combating transnational criminal organizations …”. In his state-of-the-state speech that same day, the Governor stated that he was redeploying troops to northern California “to go after illegal cannabis farms, many of which are run by cartels …”. 

Miss Porter (D. CA) asked Treasurer Ma about California’s cannabis-related tax revenue, and whether the banks that accept that revenue should also be required to provide banking services to cannabis-related businesses. Treasurer Ma replied (4:04:30) that California does business with eight banks, and “marijuana tax proceeds go into one national bank.” I was waiting to hear which national bank that was, but she neither volunteered the information nor was she asked.

For those interested, Representative Alexandria Ocasio-Cortez (D. NY) is a member of the Subcommittee and had her five minutes of time (beginning at 4:11:58). Her commentary and questions focused on what she described as the “racial wealth gap”.

Overall, I thought the introduction of the proposed SAFE Banking Act of 2019, the written testimony, and the thoughtful and respectful questions and answers, all advanced the dialogue on moving forward with responsible legislation to address the state/federal cannabis issues. As I have written many times, and most recently on January 17, 2019 (www.regtechconsulting.net/news):

“Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer.”

[1] Mr. Tipton referenced a Denver Post article that referred to a Colorado government report from October 2018. That report from the Colorado Division of Criminal Justice, found that the number of court filings charged with the Colorado Organized Crime Control Act that were linked to one or more cannabis charges had gone from 31 in 2012 to 119 in 2017. Lost in the headline, though, is that the number of COCCA charges linked to marijuana dropped in 2013 to 15, and dropped again to 1 in 2014 before increasing to 40 in 2015, 81 in 2016, and 119 in 2017.

Here is Cannabis, Where is Congress? Without Laws, Regulations, and Clear Guidance, the Financial Sector Is Rightfully Reluctant to Bank Cannabis Businesses

President Donald J. Trump – Will Congress ever present him with a cannabis bill or bills to sign?

On September 12, 2018 I posted an article titled “Cannabis, Congress, and Courage – Why Banks are not Banking Marijuana Related Businesses”. It is available at:

https://regtechconsulting.net/uncategorized/cannabis-congress-and-courage-why-banks-are-not-banking-marijuana-related-businesses/

It’s been four months since I wrote that article, and not much has substantively changed. Yes, Jeff Sessions has gone, and William Barr looks like he will be confirmed as the new Attorney General. What differences could we see? Under AG Sessions, there was hard talk and no action. In a speech then AG Sessions gave in March 2017 (https://www.justice.gov/opa/speech/attorney-general-jeff-sessions-delivers-remarks-efforts-combat-violent-crime-and-restore ) he stated:

“ … we need to focus on the third way we can fight drug use:  preventing people from ever taking drugs in the first place. I realize this may be an unfashionable belief in a time of growing tolerance of drug use.  But too many lives are at stake to worry about being fashionable.  I reject the idea that America will be a better place if marijuana is sold in every corner store.  And I am astonished to hear people suggest that we can solve our heroin crisis by legalizing marijuana – so people can trade one life-wrecking dependency for another that’s only slightly less awful.  Our nation needs to say clearly once again that using drugs will destroy your life.”

Yet neither AG Sessions nor any of the 90+ US Attorneys have taken action against state marijuana regimes. What about a Department of Justice under AG Barr? In his January 15, 2019 Senate confirmation hearing, AG nominee Barr testified as follows:

“I’m not going to go after companies that have relied on Cole memorandum. However, we either should have a federal law that prohibits marijuana everywhere, which I would support myself because I think it’s a mistake to back off marijuana. However, if we want a federal approach – if we want states to have their own laws – then let’s get there and get there in the right way.”

So former AG Sessions has stated that he “rejects the idea that America will be a better place if marijuana is sold in every corner store” and the presumptive AG Barr has said “I think it’s a mistake to back off marijuana”. AG Sessions didn’t take any action, and presumptive AG Barr seems reluctant to do so.

So where does that leave the cannabis and financial services industries? I believe they are still in limbo, waiting for Congress to pass, and the President to enact, federal legislation that will pave the way for regulations and regulatory guidance that will truly open up banking services to cannabis related businesses. But it will take time, as there is always “regulatory lag” between new legislation being passed, regulations being written, and regulatory guidance being published. And then it takes even longer for financial institutions to implement those regulatory changes: to build programs, write policies, implement new technologies, etc. So even if Congress acted today, financial institutions won’t have a clear path forward for (at least) a couple of years. Until then, we will remain in limbo, not knowing whether, how, or when financial regulators or prosecutors could pounce on a bank or credit union.

Let’s take a look at how we got to the state of limbo. Let’s go back and take a look at the now-famous Cole Memo guidance and, more importantly, former AG Sessions’ apparent rescission of that guidance. It is those two things that are driving the discussion on whether and how financial institutions can provide banking services to marijuana related businesses.

In January 2018, Attorney General Sessions “revoked Obama-era guidance that had effectuated a hands-off approach to state-legalized cannabis businesses.” This quote from an online National Law Journal article (see https://www.law.com/nationallawjournal/2018/09/11/feds-should-be-banging-the-drum-the-loudest-for-cannabis-industry-banking/?slreturn=20180812164053) and others like it, have been used by both (all?) sides of the marijuana argument currently embroiling America.

But what, exactly, did AG Sessions revoke? Was there a “hands-off approach” by the Feds to state-legalized cannabis businesses? And what does the Sessions memo do, if anything, for financial institutions looking to provide services to marijuana-related businesses?

If there are answers to those questions, we need to first go back almost 10 years to the first DOJ memo on marijuana. But an interim stop is warranted, to March 2017 with President Trump’s Executive Order 13777 calling for federal agencies to establish Regulatory Reform Task Forces to identify regulations for potential repeal, replacement, or modification. At that time the President, and (fairly) some others felt that American society was over-regulated. It was time to take a look at all the regulations, and repeal, replace, or modify those that were out-dated, redundant, inefficient, or simply bad. In response, the Department of Justice formed a task force and began its work identifying regulations, rules, and anything that looked like and acted like a regulation or rule.

On November 17, 2017 the DOJ task force’s early work was made public when the Attorney General issued a memo prohibiting the DOJ from issuing so-called guidance memos going forward and providing notice that a DOJ task force would be looking at existing memos to recommend candidates for repeal or modification. This memo-against-memos provided, in part:

“Today, in an action to further uphold the rule of law in the executive branch, Attorney General Jeff Sessions issued a memo prohibiting the Department of Justice from issuing guidance documents that have the effect of adopting new regulatory requirements or amending the law. The memo prevents the Department of Justice from evading required rulemaking processes by using guidance memos to create de facto regulations.

In the past, the Department of Justice and other agencies have blurred the distinction between regulations and guidance documents.  Under the Attorney General’s memo, the Department may no longer issue guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch.

The Attorney General’s Regulatory Reform Task Force, led by Associate Attorney General Brand, will conduct a review of existing Department documents and will recommend candidates for repeal or modification in the light of this memo’s principles.”

On December 21, 2017 the DOJ announced that “pursuant to Executive Order 13777 and [AG Sessions’] November memorandum prohibiting certain guidance documents, he is rescinding 25 such documents that were unnecessary, inconsistent with existing law, or otherwise improper.” None of the “marijuana memos” were on the list of twenty-five.

But on January 4, 2018, AG Sessions issued a memo, tersely titled “Marijuana Enforcement” which, among other things, rescinded five marijuana-related memos:

  1. Ogden Memo – October 19, 2009: David W. Ogden, Deputy Attorney General, “Memorandum for Selected United States Attorneys: Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana”. This was issued at a time when only a handful of states were embarking on early medical marijuana programs.
  2. Cole I – June 29, 2011: James M. Cole, Deputy Attorney General, “Memorandum for United States Attorneys: Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use”
  3. Cole II – August 29, 2013: “Memorandum for All United States Attorneys: Guidance Regarding Marijuana Enforcement”. Note that Cole II set out the eight enforcement priorities that were picked up in FinCEN’s February 14, 2014 Guidance (see below), but it said nothing about financial institutions, financial crimes, or the Bank Secrecy Act.
  4. Cole III – February 14, 2014: “Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes”. The title of this memo is important: unlike Cole I, Cole II brought in marijuana related financial crimes, the obligations of financial institutions, and the specter of those institutions violating federal law by knowingly providing services to marijuana-related businesses. In fact, Cole II noted that the Cole I guidance “did not specifically address what, if any, impact it would have on certain financial crimes for which marijuana-related conduct is a predicate.” Cole II addressed those impacts.
  5. Wilkinson Memo – October 28, 2014: Monty Wilkinson, Director of the Executive Office for U.S. Attorneys, “Policy Statement Regarding Marijuana Issues in Indian Country”.

Cole III needs to be read with the FinCEN Guidance issued the same (Valentine’s) day. I won’t repeat the FinCEN Guidance here (you can find it here https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses) but its authors intended that it “clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.” The FinCEN Guidance heavily relied on and quoted the Cole II eight priorities, and set out requirements for risk assessments, customer due diligence (seven distinct requirements), a requirement that “financial institutions should consider whether a marijuana-related business implicates a Cole priority or violates state law, twenty-five “red flags” for monitoring and surveillance of marijuana-related businesses, and how to (and shall) file Suspicious Activity Reports on every marijuana-related business customer, regardless of whether their activity is suspicious or not. It is important to note that, almost five years after that guidance was published, 95%+ of financial institutions have interpreted that to mean they cannot knowingly, actively provide services to marijuana-related businesses and meet their BSA obligations.[1]

But back to Attorney General Sessions and his “rescission of the Cole memo”. The terse title of his memo sends a clear message: “Marijuana Enforcement”. It was not titled “Managing Competing State and Federal Obligations In A Way That Advances The Positives Aspects of Marijuana Reform While Addressing Possible Negative Societal and Economic Harm”. Attorney General Sessions’ intent was clear from the outset: it was about enforcement.

Who was AG Sessions thinking about when he wrote his “Marijuana Enforcement” memo? He directed that enforcement at banks, credit unions, and money remitters, among others. His memo began with a statement about the “significant penalties” for the “serious crimes” of cultivating, distributing, and possessing the “dangerous drug” marijuana in violation of the Controlled Substances Act. He then stated that these activities “also may serve as the basis for the prosecution of other crimes”, and he listed three such crimes: (1) those prohibited by the money laundering statutes under Title 18, sections 1956 and 1957; (2) the unlicensed money transmitter statute under Title 18, section 1960; and (3) the Bank Secrecy Act under Title 31, section 5318.

For banks, section 5318 of Title 31 is the “program” requirement: section 5318(h) provides that “in order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs …”. Failure to have an effective program or being found to have a program that doesn’t contain all the necessary “pillars” or attributes required, can result in billion-dollar fines and penalties. Knowingly providing banking services to marijuana-related businesses can expose banks to program violations.

The result? As written above, five years after the FinCEN guidance, and without having received any written guidance from their regulators, 95%+ of financial institutions have interpreted the FinCEN guidance and Sessions’ rescission of the Cole Memo to mean they cannot knowingly, actively provide services to marijuana-related businesses and meet their BSA obligations.

What must be done? Until there is legislative changes, the federal banking regulators need to provide more current, clearer guidance for banks and credit unions.  Only the National Credit Union Association has responded to FinCEN’s February 2014 Guidance (by way of a July 18, 2014 letter from the NCUA’s Director of Examinations that his office had provided the FinCEN Guidance to NCUA field examiners “who are responsible for determining the compliance of financial institutions that provide services to marijuana-related businesses”). This need for updated guidance was recognized by the Treasury Department’s Office of Inspector General in an October 16, 2017 memo he wrote to Treasury Secretary Mnuchin. In one of the four challenges facing the Treasury Department – anti-money laundering, terrorist financing, and Bank Secrecy Act enforcement – the Inspector General wrote that “FinCEN is also challenged with providing clarifying guidance to financial institutions that are reluctant to do business with State-legalized marijuana dispensaries.”

It has been almost five years since FinCEN issued its guidance, and none of the banking and credit union regulators have formally opined on it or provided written guidance. There have been some informal comments and other statements, but nothing rising to the level of written guidance that can be relied upon. Some examples include the following:

I’m aware of one federal court judge who has commented on the FinCEN guidance. In a December 28, 2015 hearing in the Fourth Corner Credit Union v Federal Reserve Bank of Kansas City case (District Court of Colorado, 15CV01633), Judge Brooke Jackson responded to a statement by the credit union’s lawyer that the FinCEN guidance “authorized financial institutions to serve marijuana related businesses” by saying

“No, it didn’t do that, did it? … It seems to me that the DOJ and guideline people are just saying, well, maybe we can put our head in the sand and this will go away.” (Transcript of hearing, page 3). And later in the same hearing, Judge Jackson stated: “But in [the credit union’s] brief, in black and white, you say the FinCEN guidance authorizes banks to serve marijuana related businesses. I don’t agree with you. I don’t think it does.” (Transcript, page 63).

In a June 17, 2018 press conference, Federal Reserve Chairman Jerome Powell is reported (by MarketWatch) to have said:

“This is a very difficult area, because many state laws permit the use of marijuana and federal law still doesn’t. So it puts federally-chartered banks in a very difficult situation … it puts the supervisor in a very, very difficult position. Of course, our mandate has nothing to do with marijuana … We just would love to see it clarified, I think.”

On January 11, 2019, West Virginia’s Attorney General issued an opinion on whether the state could safeguard financial institutions that provide access to businesses operating under West Virginia’s marijuana laws from potential liability under federal law. He concluded that financial institutions providing services to those entities “may be at risk of federal civil or criminal liability. He described the FinCEN guidance as “unofficial” and “informal” and concluded:

“ … providing banking services to cannabis businesses carries some inherent risk of federal civil or criminal action even in states where medical marijuana is legal. The current state of federal law and agency guidance creates a safe harbor for financial institutions to provide these services, but the potentially temporal nature of these protections must be factored into any assessment of enforcement risk.”

And as recently as January 17, 2019, OCC Comptroller Joseph Otting told reporters that Congress has “to act at the national level to legalize marijuana if they want those entities involved in that business to utilize the US banking system” and that he “hopes for resolution to marijuana banking issues in 2020” (quoting a PoliticoPro tweet).

The Treasury Inspector General’s challenge to FinCEN to provide clarity to financial institutions must be taken up by FinCEN and the banking regulators. Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer. Congressional and Executive Branch compassion without the necessary collaboration and courage to act will not resolve this crisis.

[1] FinCEN’s SAR data suggests that ~485 of the ~12,000, or about 4% of, US credit unions and banks are providing financial services to marijuana-related businesses. The number of credit unions has been steady over the last three years at about 110; the number of banks has slowly risen to about 385. IT remains unknown how many of those 485 are actively banking MRBs, where they have assessed the risks, accepted the risks, and built a program to manage the risks.

California Chaos – Not Only do California’s Cannabis Regulations Make Banking Cannabis Businesses Almost Impossible, They Squandered a Perfect Opportunity to Embrace Regulatory Innovation

There is a big push in the FinTech/RegTech (SupTech) space to digitize regulations. One of the biggest hurdles to doing so, however, is the “Jenga Tower” of existing regulations and regulated entities’ systems that would certainly topple over if you tried to replace any single analog piece with a new digital piece.

But what if you didn’t have a legacy regulatory regime – or even a legacy industry – that didn’t have existing regulations and systems?  You wouldn’t have the Jenga Tower problem at all.

The US (state-by-state) cannabis or marijuana regimes are a perfect example of an industry and regulatory regime that is being built from the ground up. Given that few states have put in a regime, now is the time to act … you have a clean slate: it’s a perfect environment to prove the  hypothesis that regulations can be digitized.

California might be the best example of squandering a great opportunity to create a fully digitized, harmonious regulatory regime for its nascent cannabis regime. But it may be too late for California … as I’ve written on LinkedIn, they couldn’t have a designed a more complicated, anti-business and anti-banking regulatory regime if they had tried. What evidence do I have to make that statement?

Under the California cannabis legislation – the Medicinal and Adult Use Cannabis Regulation and Safety Act, or MAUCRSA – there are three main government agencies that regulate different parts of the industry:

  1. the Bureau of Cannabis Control (Bureau) is the lead agency. The Bureau is charged with licensing, regulation, and enforcement of the following types of commercial cannabis businesses: distributors, retailers, microbusinesses, temporary cannabis events, and testing laboratories.  The BCC’s regulations are in Title 3 of the California Code of Regulations.
  2. the Manufactured Cannabis Safety Branch, a division of the California Department of Public Health (CDPH), is responsible for regulating and licensing manufacturers. The CDPH regulations are in Title 17.
  3. CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture (CDFA), is responsible for licensing cultivators and implementing the Track-and-Trace system. The CDFA’s regulations are in Title 16.

Rather than provide a single, public-facing agency that best serves cannabis businesses and consumers, which would require the multiple government regulators and regulatory agencies to cooperate and collaborate in the background in order to make it easy for the businesses and consumers, those government agencies decided to serve themselves and their needs, and force businesses and consumers to navigate multiple agencies. They know it’s a problem (see below) but decided it wasn’t in their best interests to do what is in the best interests of Californians.

One of the issues may be found in the membership of the California Cannabis Advisory Committee, a 22-person committee created to advise these agencies (and the Governor’s office): none of the twenty-two represent technology/fintech/financial services (half the committee is made up of representatives from the cannabis industry, labor organizations, and social/community equity groups). The Subcommittee on Licensing Application (which, by the way, should be the plural “applications” because there are three different applications, depending on the type of cannabis business) is chaired by a policy analyst from a labor organization and neither of its members appear to have strong technology, regulatory, fintech, or financial services backgrounds. So perhaps it simply didn’t occur to the CAC members, or any of the 39 State Government people listed on the CAC website (including the Governor) to consider a digitized regulatory regime and to have a single Application and single definition of “owner” of a cannabis business …

But the CAC has been busy, and issued its 2018 report on January 8th. Here are some excerpts:

“The overarching reality after one year of legal cannabis sales is that the regulatory process to licensure insufficiently incentivizes unlicensed businesses to seek licensure and insufficiently de-incentivizes the illegal unlicensed underground market in order to effectively ‘protect public health and safety while ensuring a regulated environment for commercial cannabis activity.’ The variety of issues contributing to this include, but are not limited to, the following: equity issues, small business issues, microbusiness issues, excessive regulatory burden, banking issues, enforcement issues, compassionate use issues, public education issues, taxation issues, regulatory fragmentation issues.”

That may be a Government Committee Hall of Fame sentence. I’ve read that sentence 11 times and still can’t follow it, but I think what they’re trying to write is that “we’ve made the licensing requirements so onerous and complicated, and the taxes so high, that there’s little if any incentive for unlicensed cannabis businesses to get licensed.” (they make that point in other places – pages 3, 30, and 31). See https://www.bcc.ca.gov/about_us/documents/cac_annual_report_2018.pdf

And as to excessive regulatory burden:

“Excessive Regulatory Burden — Small businesses are having difficulty emerging from their historically underground status due to the inability to modify regulations to meet local conditions, the fragmentation of regulations among the different agencies and local jurisdictions, and the amount of upfront capital required to comply with the regulations.

  • The dual nature of the licensing process (i.e., state and local) has created a bottleneck in licensing at the local municipal level where unless a local municipality actually issues a license, permit, or other authorization, businesses are not able to apply for a state license. Therefore, as willing and able as the state agencies are to issue licenses, unless a qualified applicant has successfully navigated the licensing process at the local level, the state agencies are left out of the process.
  • The majority of local municipalities are either not issuing licenses or are slow in rolling out their cannabis programs. Of the municipalities issuing licenses, most are not issuing retail licenses.
  • Patchwork ordinances at the local level is creating a patchwork system that is not always in line with state requirements and is lacking in uniformity on a statewide level.”

None of these should have been surprises, and many of them are self-inflicted. As to “the fragmentation of regulations among the different agencies”, they admit that “The need for licensees to interact with three separate regulatory agencies (Bureau, CDPH and CDFA) is burdensome. Increasing coherence by providing one single point of contact would be advantageous for business operators. Current regulatory agency structure and oversight is over complicating licensing processes without clear enough direction and authority.”

Granted, the CAC cannot legislate or regulate, but can only make recommendations to the legislators and regulators.

The best example of the excessive regulatory burden – and something that could practically block many banks from banking cannabis businesses even if the Feds get around to providing some legal and regulatory clarity – is the multiple definitions of “owner” from the three different regulations (see below). There are subtle, major, and minor differences, between the three, and all have some terrible language (for example, the word “any” in the phrase “any of the following” means one, some, or all (according to Merriam Webster)). It makes no sense to have different definitions of “owner” depending on the type of license, particularly where many businesses have multiple license types. Also, in addition to having different definitions of “owner”, the Applications are all different.

It’s madness. California has squandered an opportunity to have a 21st century regulatory regime for a 21st century industry. But if they were trying to deter banks from providing products and services to the commercial cannabis industry, they seem to have succeeded.

California State Agency California Regulation Regulated Cannabis Business Type(s) Definition of Owner
Department of Public Health California Code of Regulations, Title 17
Division 1 Chapter 13.
Manufactured Cannabis Safety
SUBCHAPTER 1.  General Provisions and Definitions
Manufacturers §40102. Owners and Financial Interest Holders.
(a) An owner shall mean any of the following:
(1) Any person that has an aggregate ownership interest, other than a security interest, lien, or encumbrance, in a commercial cannabis business of 20 percent or more;  (A) If the owner identified in subsection (a)(1) is an entity, then the chief executive officer and members of the board of directors of the entity shall be considered owners.
(2) The chief executive officer of a commercial cannabis business;
(3) If a non-profit entity, each member of the Board of Directors;
(4) Any individual that will be participating in the direction, control, or management of the licensed commercial cannabis business
(5) The trustee(s) and all persons that have control of the trust and/or the commercial cannabis business that is held in trust
Department of Food and Agriculture CALIFORNIA CODE OF REGULATIONS TITLE 3. FOOD AND AGRICULTURE DIVISION 8. CANNABIS CULTIVATION CHAPTER 1. CANNABIS CULTIVATION PROGRAM Cultivators § 8103. Owners and Financial Interests Holders.
(a) “Owner” means any of the following:
(1)  A person with an aggregate ownership interest of twenty (20) percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, or encumbrance;
(2)  The chief executive officer of a nonprofit or other entity;
(3)  A member of the board of directors of a nonprofit;
(4)  An individual who will be participating in the direction, control, or management of the person applying for a license.
(b)  An owner who is an individual participating in the direction, control, or management of the commercial cannabis business includes any of the following: (1)  A partner of a commercial cannabis business that is organized as a partnership; (2)  A managing member of a commercial cannabis business that is organized as a limited liability company; (3)  An officer or director of a commercial cannabis business that is organized as a corporation.
Bureau of Cannabis Control BUREAU OF CANNABIS CONTROL
TEXT OF REGULATIONS
CALIFORNIA CODE OF REGULATIONS TITLE 16
DIVISION 42. BUREAU OF CANNABIS CONTROL
Distributors
Testing Labs
Retailers
Microbusinesses
Cannabis Events
§ 5003. Designation of Owner
(a) All applicants for a commercial cannabis license shall have at a minimum one individual who meets the definition of “owner” under Business and Professions Code section 26001(al) and who will submit the information required of owners under section 5002 of this division.
(b) “Owner” means any of the following:
(1) A person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, or encumbrance.
(2) The chief executive officer of a nonprofit or other entity.
(3) A member of the board of directors of a nonprofit.
(4) The trustee(s) and all persons who have control of the trust and/or the commercial cannabis business that is held in trust.
(5) An individual entitled to a share of at least 20 percent of the profits of the commercial cannabis business.
(6) An individual who will be participating in the direction, control, or management of the person applying for a license. Such an individual includes any of the following: (A) A general partner of a commercial cannabis business that is organized as a partnership. (B) A non-member manager or managing member of a commercial cannabis business that is organized as a limited liability company. (C) An officer or director of a commercial cannabis business that is organized as a corporation.
(c) When an entity is an owner in a commercial cannabis business, all entities and individuals with a financial interest in the entity shall be disclosed to the Bureau and may be considered owners of the commercial cannabis business. For example, this includes all entities in a multi-layer business structure, as well as the chief executive officer, members of the board of directors, partners, trustees and all persons that have control of a trust, and managing members or non-member managers of the entity. Each entity disclosed as having a financial interest must disclose the identities of persons holding financial interests until only individuals remain.