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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.

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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.

FinCEN Updates its Marijuana SAR Data… but Information is needed!

The U.S. financial industry is in its 5th year of filing “marijuana” Suspicious Activity Reports (SARs) pursuant to guidance issued by FinCEN on February 14, 2014.  As FinCEN reports this week, 334 banks and 107 credit unions (out of approximately 11,000) are “providing banking services to marijuana-related businesses” or “actively providing banking services to marijuana-related businesses” or “actively banking marijuana-related businesses” (quoting from the title of chart 1 of the update, the text accompanying chart 1, and chart 2, respectively).  But I believe FinCEN’s descriptions are not accurate, as many financial institutions are not, in fact, knowingly providing banking services to marijuana-related businesses (MRBs). Instead, they consider these to be prohibited businesses that they do not knowingly bank, and if they uncover any MRBs through due diligence, monitoring, or surveillance, file a “Marijuana Termination” SAR and exit the relationship.

There is some good data in this report, but not much usable information.  For example, there is nothing on the size and locations of the banks and credit unions filing the marijuana SARs, which states are involved, whether the activity involves medicinal/medical or recreational/adult-use MRBs, or how many MRBs are being reported and why. Next quarter, I’d like to see FinCEN report provide some of this information.  In addition, FinCEN should consider “cleaning up” the report. I offer three 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”. Rather, the Cole Memos instruct federal prosecutors to “focus enforcement resources on persons or organizations whose conduct interferes with any one or more of the [eight] important priorities”.  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 recent 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 only 440 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 this 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).  The Small Business Administration has addressed these “indirect” MRBs – see the News from May 2, 2018, below. It would be great if FinCEN did, also.

Finally, this 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 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.

Marijuana Looping & Cash Structuring – the Sweet Leaf decision reveals a glaring weakness in states’ controls over their retail marijuana regimes

County of Denver v Sweet Leaf Final Decision 7-5-18

On July 5th the City/County of Denver revoked all 26 marijuana licenses held by 9 businesses operating as Sweet Leaf. For more than two years Sweet Leaf knowingly engaged in “looping” – the practice of making multiple one-ounce transfers of marijuana to the same customer within a single day. According to the Final Decision, “Sweet Leaf’s practice of artificially dividing a single transaction into multiple transfers of marijuana to the same customer was done for the purpose of evading quantity limitations on the sale of marijuana.”

Marijuana Looping: artificially dividing a single transaction into multiple transfers of marijuana to the same customer done for the purpose of evading quantity limitations on the sale of marijuana.

Cash Structuring: artificially dividing a single transaction into multiple transfers of cash by the same customer done for the purpose of evading reporting requirements on cash transactions.

In this case, Sweet Leaf fully acknowledged that it engaged in a looping scheme, but argued that it was simply exploiting a gap in the law limiting customers’ purchases to 1 ounce per day “as long as the customer left the premises and came back without the previously purchased marijuana.” The Final Decision offered some examples, including a medical marijuana patient who purchased 446 pounds of marijuana for more than $577,000 in 137 days over a six month period. In those 137 “loopy” days, Sweet Leaf’s medical marijuana patient purchased enough marijuana to roll about 300,000 joints … 

Critically, the hearing officer concluded that “Sweet Leaf’s actions have put all other marijuana businesses in Denver and Colorado at risk of federal enforcement.”

This case highlights a problem that California’s “pot czar”, Joe Devlin identified in a statement published in the Sacramento Bee on December 29, 2017: “How to enforce a new limit on how much pot a person can buy per day: ‘Does the dispensary have to create a customer account or do you just check ID? I don’t know how you prove you’re not exceeding the daily limit without creating a customer account.’”

No states (I’m aware of) require marijuana/cannabis dispensaries or stores to (1) record the identification of customers/purchasers, and (2) make those identifications available real-time to all retailers to prevent customers from “looping” … but when a dispensary knowingly engages in looping, it deserves to not only lose its license, and have its marijuana stock forfeited (As happened to Sweet Leaf), but there should be criminal actions taken – at both the state and federal level.  I would be surprised if the Colorado US Attorney’s office didn’t step in.

FinCEN’s Marijuana SAR Update …

FinCEN doesn’t seem keen on publicizing these updates … and the media doesn’t seem keen to pick them up. But there is some interesting information …

Since it’s Valentine’s Day 2014 guidance for banks to (not) bank marijuana-related businesses (MRBs) and to file the three types of “marijuana” SARs, FinCEN has been tracking the numbers and types of SARs filed and how may banks and credit unions are banking MRBs (based on the SAR filings). https://www.fincen.gov/sites/default/files/shared/277157%20EA%202nd%20Q%20MJ%20Stats_Public.pdf

  • Limited Marijuana SARs are those where the bank is simply reporting the existence of an MRB – no Cole memo or other red flags. There have been 37,885 of these since 2Q 2014 and they are going up linearly.
  • Priority Marijuana SARs are those where one or more red flags is/are triggered but the bank is not exiting the MRB. There have been 3,809 of these since 2Q 2014 and they are going up linearly.
  • Termination Marijuana SARs are those where one or more red flags is/are triggered and the bank is exiting or has exited the MRB. There have been 12,331 of these since 2Q 2014 and they are going up linearly.

That’s a total of ~52,000 marijuana-related SARs filed since 2Q2014. To put that number in perspective, in that same period, depository institutions filed just over 3.7 million SARs … so marijuana SARs filed by depository institutions accounted for 1.4% of all depository institution SARs.

Another (more) interesting fact. FinCEN reports that, based on SAR filings, about 310 banks and 100 credit unions are “actively banking” marijuana businesses. That’s about double the number from three years ago, but only about 20 higher than a year ago (suggesting that those institutions that are going to actively bank marijuana businesses have already decided to do so, and the rest will sit on the sidelines until the regulatory and criminal prospects are more settled). But it’s still a small fraction of the total number: using FDIC and NCUA data from June 2015 (roughly the middle of the “marijuana SAR” period and published in FinCEN’s final rule for beneficial ownership), there are ~6,350 banks and ~6,165 credit unions. So … just less than 5% of banks and 2% of credit unions are “actively banking” marijuana businesses, according to FinCEN.  But those numbers may be high – those institutions that are filing “Termination” SARs may not, in fact, be knowingly, actively banking marijuana related businesses, but exiting those it finds through monitoring and surveillance – or they may be low – it’s possible that not all banks and credit unions that are “actively banking” marijuana businesses are actively filing Marijuana Limited SARs. It’s hard to tell, since FinCEN seems reluctant or unable to publish detailed, actionable information.

SBA’s new Marijuana Business Policy – Is SBA-backed lending to the budding indirect marijuana industry up in smoke?

On April 3rd, the US Small Business Administration issued a benignly-titled policy notice that could have a profound impact on the “budding” marijuana industry. Title “Revised Guidance on Credit Elsewhere and Other Provisions”, the policy notice essentially extends the prohibition on banks using SBA-backed loans from just direct marijuana businesses to indirect marijuana businesses.  The notice notes that the prohibition “currently provides that businesses engaged in any activity that is illegal under federal, state or local law are ineligible for SBA financial assistance. SBA is issuing additional guidance to specifically address businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana.”

What is meant be “businesses … that support the end-use of marijuana”? These are defined as “Indirect Marijuana Businesses”, which is “a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to support the use, growth, enhancement or other development of marijuana. Examples include businesses that provide testing services, or sell grow lights or hydroponic equipment, to one or more Direct Marijuana Businesses. In addition, businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with marijuana are ineligible if the products are primarily intended or designed for such use or if the business markets the products for such use.”

So what small businesses could derive any of their gross revenue from products or services sold to direct marijuana businesses? The list is long and varied: garden supply companies (you need to read about Hawthorne Gardening Company’s marijuana-related business … and Hawthorne is a subsidiary of Scott’s Miracle-Gro, SMG on NYSE), lawyers, architects, engineers, web designers, etc.

And the Notice forges on, specifically calling out commercial property owners that have the temerity to have tenants such as lawyers, architects, engineers, web designers, etc.,  …

“Leasing Part of a Building Acquired with Loan Proceeds (13 CFR § 120.131). Chapter 2, Paragraph V.F.1.g) (page 131). Currently, this SOP paragraph provides that, during the life of an SBA-guaranteed loan, the borrower may not lease space to a business that is engaged in any activity that is illegal under federal, state or local law. For consistency with the changes identified above regarding marijuana-related businesses, Lenders are advised that, during the life of the SBA-guaranteed loan, a borrower may not lease space to the ineligible businesses described above because the collateral could be subject to seizure and because payments on the SBA loan would be derived from illegal activity. If a borrower does lease to an ineligible marijuana-related business, SBA District Counsel should be consulted to determine what action should be taken.”

So it looks like SBA-backed lending to the budding indirect marijuana business industry may be up in smoke! But as indicated above, whether and how this policy could be enforceable, other than on an after-the-fact basis, is doubtful. At best, hedge funds, private equity lenders, and as always lawyers, stand to do well.

The policy is available at:

https://www.sba.gov/sites/default/files/resource_files/SBA_Policy_Notice_5000-17057_Revised_Guidance_on_Credit_Elsewhere_and_Other_Provisions.pdf