The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury that is responsible for receiving, maintaining, and analyzing the financial transactions data of businesses for law enforcement purposes, has issued guidance in order to clarify the Bank Secrecy Act (“BSA”) expectations for financial institutions which seek to provide banking services to marijuana-related businesses. The BSA requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering.
These updates have been made because there is has much confusion among the nation’s financial institutions on how to legally conduct business with marijuana-related businesses. As of 2016, certain marijuana-related activities have been legalized in 25 states and the District of Columbia.
The Cole Memo
At the same time, the U.S. Department of Justice Deputy Attorney General James M. Cole issued a memorandum (the "Cole Memo"), to provide guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances Act (“CSA”), which makes it illegal under federal law to manufacture, distribute, or dispense marijuana.
The memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels.
The U.S. Justice Department has offered assurances that it will not pursue criminal charges against marijuana-related businesses that are operating legally under state law. However, this non-enforcement stance has not guaranteed any protection for financial institutions.
Guidance for Financial Institutions
The FinCEN guidance clarifies how financial institutions can work with marijuana-related businesses while also making sure that their policies are inline with the marijuana enforcement activities of the U.S. Department of Justice under the CSA.
Financial institutions have been advised under the BSA to conduct due diligence for each customer to determine the risks of providing services to such business. The due diligence should include a thorough review of the business's registration and licensing with state authorities.
Financial institutions are also required to monitor these business on an ongoing basis and file suspicious activity reports ("SARs") where warranted. Three types of SARs may be filed, namely:
●“Marijuana Limited” SAR Filing. This report should be filed by the financial institution solely because the business is a marijuana-related entity and not because the business has violated state law or one of the Cole Memo priorities.
●“Marijuana Priority” SAR Filing. This report should be filed by the financial institution primarily in the case that the business violates state law or the priorities of the Cole Memo.
●“Marijuana Termination” SAR Filing. This report should be filed in the event that the financial institution wants to terminate the relationship with the business due to suspicion that illegal activity is taking place and to maintain the anti-money laundering compliance program of the financial institution.
Currency Transaction Reports ("CTRs") and Form 8300 are also required by FinCEN's regulations for financial institutions that offer services to any business that engages in marijuana-related activity.
Despite these updated guidelines, the fact that marijuana is still illegal under federal law but has been legalized in certain states has made almost all financial institutions outright reject doing business with marijuana-related businesses.
What Are the Banking Alternatives for Dispensary Owners?
At present, the majority of dispensaries are forced to pay their employees and vendors in cash while customers use an ATMs to obtain cash for purchases because of the conflicting laws for financial institutions. However, there is hope that the law may change in the near future.
The H.R.2029 - Consolidated Appropriations Act, 2016 bill, recently signed by President Obama, has a single sentence contained within the bill that says that the Department of Justice may not use money appropriated to it to prevent states from implementing laws regarding medical marijuana. However, banking reform was not specifically included within the bill.
In the meantime, alternative banking options are emerging for marijuana-related businesses that have been turned down by banks or do not meet the requirements of major financial institutions. Marijuana-related businesses can use online business directories and other industry resources to find payment solutions.
A number of payment processors have stepped up to provide transaction processing without the cash. Cashless ATMs for marijuana-related businesses are available from payment processors including Meta Payment Systems, Best Point of Banking, GreenStar Payment Solutions, Medical Cannabis Payment Solutions, and First American Merchant Funding.
Despite the fact that cryptocurrencies have been used in black market purchases of marijuana, they may also soon be used to help dispensary owners collect payments from customers. Cryptocurrencies, including Bitcoins, and PotCoins, are emerging as viable options for legal marijuana-related businesses.