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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.

2005 Banking Agencies’ MSB Guidance = 2019 Banking Agencies’ MRB Guidance?

Here’s an idea to jump start the US banking agencies’ (inevitable) guidance on providing banking services for marijuana related businesses (MRBs). By the way, forget FinCEN’s Valentine’s Day 2014 guidance … by my count, and hearing from marijuana banking experts, no more than 40-50 banks and credit unions (out of ~12,000) have taken that guidance and become comfortable enough to actively run MRB programs and provide banking services to direct MRBs. The 2014 FinCEN guidance made the due diligence requirements so onerous, and the ~25 red flags so terrifying, that unless and until the 535 people in Congress and 1 person in the White House change the laws regarding marijuana, the vast majority of banks and credit unions simply don’t have the risk appetite, capacities, and interests in developing the program, policies, people, technologies, and processes to knowingly provide banking services to MRBs.

So … in the spirit of trying to kick-start the agencies’ efforts, I took their April 2005 Joint Release, “Guidance and Advisory Issued on Banking Services For Money Services Businesses Operating in the United States” and swapped out “Money Services” for “Marijuana Related” and “registered with FinCEN” for “registered with the FDA”.  The full 2005 Guidance document needs some work, and according to this, FinCEN will have to issue guidance to MRBs … but it’s a start. Thoughts?

Joint Release

Financial Crimes Enforcement Network
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
National Credit Union Administration
Office of the Comptroller of the Currency
Office of Thrift Supervision

NR 2005-40  2019-XX
FOR IMMEDIATE RELEASE
April 26, 2005 
Sometime in 2019

Guidance and Advisory Issued on Banking Services for Money Services Marijuana Related Businesses Operating in the United States

The Financial Crimes Enforcement Network (FinCEN), along with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision (collectively, the “Federal Banking Agencies”), today issued interpretive guidance designed to clarify the requirements for, and assist banking organizations in, appropriately assessing and minimizing risks posed by providing banking services to marijuana related businesses.

FinCEN also has issued a concurrent advisory to marijuana related businesses to emphasize their Bank Secrecy Act regulatory obligations and to notify them of the types of information that they will be expected to provide to a banking organization in the course of opening or maintaining account relationships.

While recognizing the importance and diversity of services provided by marijuana related businesses, the guidance to banking organizations specifies that FinCEN and the Federal Banking Agencies expect banking organizations that open and maintain accounts for marijuana related businesses to apply the requirements of the Bank Secrecy Act, as they do with all accountholders, on a risk-assessed basis. Registration with FinCEN, the Food and Drug Administration (FDA), if required, and compliance with any state licensing requirements represent the most basic of compliance obligations for marijuana related businesses.

Based on existing Bank Secrecy Act requirements applicable to banking organizations, the minimum compliance expectations associated with opening and maintaining accounts for marijuana related businesses are:

Apply the banking organization’s Customer Identification Program;

  • Confirm FinCEN FDA registration, if required;
  • Confirm compliance with state or local licensing requirements, if applicable; and
  • Confirm agent status, if applicable; and
  • Conduct basic risk assessment to determine the level of risk associated with the account.

Through the interpretive guidance, FinCEN and the Federal Banking Agencies confirm that banking organizations have the flexibility to provide banking services to a wide range of marijuana related businesses while remaining in compliance with the Bank Secrecy Act. While banking organizations are expected to manage risk associated with all accounts, including marijuana related business accounts, banking organizations are not required to ensure their customers’ compliance with all applicable federal and state laws and regulations.

The guidance contains examples that may be indicative of lower and higher risk within marijuana related business accounts to assist banking organizations in identifying the risks posed by a marijuana related business customer and in reporting known or suspected violations of law or suspicious transactions relevant to possible violations of law or regulation.

In addition, the guidance addresses the recurring question of the obligation of a banking organization to file a suspicious activity report on a marijuana related business that has failed to register with FinCEN the FDA, if required to do so, or failed to obtain a license under applicable state law, if required. The guidance states that a banking organization should file a suspicious activity report if it becomes aware that a customer is operating in violation of the registration or state licensing requirements. This approach is consistent with long-standing practices of FinCEN and the Federal Banking Agencies under which banking organizations file suspicious activity reports on known or suspected violations of law or regulation.

The concurrently issued FinCEN advisory to marijuana related businesses emphasizes the importance of compliance with Bank Secrecy Act regulatory requirements by marijuana related businesses. The advisory is designed to assist marijuana related businesses by outlining the types of information that they should have and be prepared to provide to a banking organization in the course of opening or maintaining account relationships. The advisory also makes clear that marijuana related businesses that fail to comply with the most basic requirements of the Bank Secrecy Act, such as registration with FinCEN the FDA, if required, will be subject to regulatory and law enforcement scrutiny, and that continued non-compliance will likely result in the loss of banking services.

Related Links

Medical Marijuana – the DOJ Won’t Come Knocking … but Recreational Marijuana? Perhaps not so lucky …

The November 29, 2018 US Tax Court decision in the Harborside case provides some excellent background on the state versus federal marijuana/cannabis brouhaha (see 151 T.C. No. 11, PATIENTS MUTUAL ASSISTANCE COLLECTIVE CORPORATION d.b.a. HARBORSIDE HEALTH CENTER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; Docket Nos. 29212-11, 30851-12, 14776-14. Filed November 29, 2018 available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11828).

The decision was all about the infamous section 280E of the Internal Revenue Code. That section was added to the Code after a series of cases found that criminals could deduct “all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.”Section 280E was added to prohibit businesses engaged in illegal activity from deducting business expenses such as payroll, employee benefits, and rent, from gross income for the purposes of determining federal income tax. In this Harborside case, the Court found that (i) a state-licensed medical marijuana distributor is in the business or trade of trafficking a controlled substance, and (ii)since Harborside’s sole trade or business was trafficking in a controlled substance, IRC s. 280E prevented it from deducting business expenses. At pages 48-49, the Court wrote that “all taxpayers – even drug traffickers – pay tax only on gross income, which gross receipts minus the cost of goods sold … which  is the costs of acquiring inventory, through either purchase or production.”

There are some interesting facts and observations around Harborside’s “booming business” that “generated a gusher of revenue.”  That aside, at pages 17-18 the Court addresses the conflict between federal and state law and, in a footnote, makes the very interesting– and for adult-use cannabis and/or recreational marijuana advocates, perhaps a chilling – observation that only medical/medicinal cannabis regimes and businesses, not adult-use regimes and businesses, have some protection against prosecution by the Department of Justice. The Court wrote:

The conflict between federal and state law went to the Supreme Court in 2005 when two California medical-marijuana users tried to enjoin the U.S. Attorney General and the Drug Enforcement Agency from enforcing federal marijuana law against them. See Gonzales v. Raich, 545 U.S. 1, 7(2005). The Court upheld the federal prohibition on marijuana sale and possession with respect to medical-marijuana users, both under the Commerce Clause, U.S.Const. art. I, sec. 8, cl. 3, and the Supremacy Clause, U.S. Const. art. VI,cl. 2. Raich, 545 U.S. at 22, 29.

One might think the Supremacy Clause would have stifled the spread of state attempts at legalizing what remained illegal under federal law.But one would be wrong. And Congress complicated the situation by enacting a series of appropriations riders that prevent the Department of Justice (DOJ)from using any funds “to prevent * * * [States that permit medical-marijuana use] from implementing their own laws that authorize the use, distribution,possession, or cultivation of medical marijuana.”  Consolidated Appropriations Act, 2017, Pub. L.No. 115-31, sec. 537, 131 Stat. at 228; see also Consolidated Appropriations Act,2016, Pub. L. No. 114-113, sec. 542, 129 Stat. at 2332-33 (2015); Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113-235, sec. 538,128 Stat. at 2217 (2014). When interpreting such a rider, the Ninth Circuit said that DOJ prosecutions of individuals who complied with state medical-marijuana laws interfered with the implementation of such laws and were therefore impermissible. United States v. McIntosh, 833 F.3d 1163, 1177-78 (9thCir. 2016). [Footnote 13 – see below]. So, medical marijuana is illegal under federal law, but the statutes criminalizing it may not be enforced–at least not by the DOJ.

Footnote 13Note as well that these appropriations riders limit DOJ prosecutions of activity that would be legal under medical-marijuana laws. Thirty-three states now allow medical marijuana use: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware,Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan,Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico,New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,Utah, Vermont, Washington, and West Virginia. Nat’l Conference of State Legislatures, State Medical Marijuana Laws, Tbl. 1 (last updated Nov. 8, 2018),http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx.So do the District of Columbia, Guam, and Puerto Rico. Id. Thirteen states permit medical use of some low-potency marijuana products: Alabama, Georgia,Iowa, Indiana, Kentucky, Mississippi, North Carolina, South Carolina,Tennessee, Texas, Virginia, Wisconsin, and Wyoming. Id. Tbl. 2. Alaska,California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont,Washington, the District of Columbia, and the Northern Mariana Islands have repealed bans on recreational marijuana use. Id. Tbl. 1. No case law on how these appropriations riders will affect federal enforcement of federal law in these states has yet emerged.

So the US Tax Court has recognized that current law – the annual federal spending bill – prevents the Department of Justice from using any funds to prevent States that permit medical-marijuana use from implementing their own medical marijuana laws, and at least one federal appeals court has extended that protection to individuals who comply with those state medical-marijuana laws. But there is nothing in the law – statute or case law – that extends these same prohibitions and protections to states’ recreational marijuana laws, and to individuals who are complying with those laws.

Cannabis, Congress, and Courage – Why Banks are not Banking 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. In response, the Department of Justice formed its 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 Attorney General announced that “pursuant to Executive Order 13777 and his 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.” [Note that most financial institutions have interpreted that to mean they cannot provide services to marijuana-related businesses and meet 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. Again, the vast majority of financial institutions have chosen not to knowingly bank marijuana-related businesses.[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.

And 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? 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 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.”

That challenge 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[2]without the necessary collaboration and courage to act will not resolve this crisis.

[1] FinCEN data suggests that ~400 of the ~12,000, or about 3% of, US credit unions and banks are knowingly providing financial services to marijuana-related businesses.

[2] I’m not sure we’ll see much compassion for marijuana adoption from AG Sessions. In a speech he 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.”

Veterans Medical Marijuana Safe Harbor Act introduced in U.S. Senate – September 5, 2018

Democratic Senators Bill Nelson (Florida) and Brian Schatz (Hawaii) have introduced S3409 – the Veterans Medical Marijuana Safe Harbor Act. Although the text of the bill is not yet on the Congress website (www.thomas.loc.gov), it is available through Senator Nelson’s site: https://www.billnelson.senate.gov/sites/default/files/Medical%20Marijuana%20for%20Veterans.pdf

The bill is smartly conceived and plainly written. It provides a temporary 5-year safe harbor for VA doctors in the 30 states (and DC) with medical marijuana laws to recommend, complete forms for, or register veterans for participation in a treatment program. It also appropriates $15 million for VA studies on the use of medical marijuana for pain and as an alternative for opioid use.

This follows on an August 30, 2018 letter from the Senate Committee on Veterans Affairs to VA Secretary Robert Wilkie encouraging him to use his authority “to conduct a rigorous clinical trial into the safety and efficacy of medicinal cannabis for veterans with PTSD and chronic pain.”

I would recommend that the bill also consider whether the VA doctors should have a FAERS-like reporting regime. FAERS – the FDA’s Adverse Event Reporting System – is a database that contains adverse events reports, medication error reports, and product quality complaints resulting in adverse events that were submitted to the FDA. The database is designed to support the FDA’s post-marketing safety surveillance program for drugs and therapeutic biologic products. Requiring FAERS-like reporting would provide much-needed data on the efficacy and safety of marijuana.

Oregon’s Marijuana Regime is “Out of Control” according to its US Attorney

Almost three weeks before FinCEN’s quarterly marijuana update, the United States Attorney for Oregon described Oregon’s marijuana regime as “out of control”. He noted that his office is “alarmed by revelations from industry representatives, landowners, and law enforcement partners describing the insufficient and underfunded regulatory and enforcement structure governing both recreational and medical use” and that “overproduction is rampant and the illegal transport of product out of state—a violation of both state and federal law—continues unchecked.” He concluded with “it’s time for the state to wake up, slow down, and address these issues in a responsible and thoughtful manner.”  The press release is available at https://www.justice.gov/usao-or/pr/us-attorney-statement-release-2018-hidta-marijuana-insight-report

If I was, or was providing guidance to, an Oregon marijuana-related business or someone looking to invest in or provide banking services to an Oregon MRB, I would be very, very concerned that the US Attorney sees the regime and its actors as being out of control.