Recently, an amendment was sponsored to change a US Senate bill that, if approved, would provide some relief to both marijuana-related businesses and the financial institutions wishing to serve those businesses.

The Proposed Amendment

The amendment to the Safe and Fair Enforcement Banking Act was proposed by senators from Oregon, Alaska, Washington, Kentucky, Colorado, Massachusetts, Vermont, and California. Also known as the SAFE Banking Act, it effectively bans federal regulatory agencies from penalizing or otherwise punishing financial institutions that maintain accounts for marijuana-related businesses.

Specifically, under this amendment, federal regulatory agencies may not do the following:

• Terminate or limit deposit or share insurance solely because a financial institution serves marijuana-related businesses
• Prohibit, penalize, or otherwise discourage a financial institution from serving marijuana-related businesses
• Recommend, incentivize, or encourage a financial institution not to offer services to marijuana-related businesses
• Hold financial institutions and their officers liable for serving marijuana related businesses

Current Environment

Currently, very few financial institutions are willing to accept the risks associated with banking marijuana-related businesses, including the potential loss of their federal deposit insurance, charter, or both.

Institutions willing to take those risks have implemented stringent restrictions on the types of accounts and transactions marijuana-related businesses may use. They’ve also implemented near-constant, enhanced due diligence completed by Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) staff within the banking institution.

Because of this, marijuana-related businesses often operate with limited financial tools due to their inability to conduct banking business with established financial institutions. Many marijuana-related businesses are also required to operate solely in cash, which can be dangerous and difficult to manage.

Ultimately, without the assistance of monthly bank statements and the use of accounts payable, many operations are forced to use manual methods to track income and expenses and rely on money orders and cash payments to pay bills.

Additional Legislation

Cole Memo

On August 29, 2013, Department of Justice Deputy Attorney General James Cole issued a memo—now referred to as the Cole Memo—which directed prosecutors and law-enforcement agencies to focus on certain priorities regarding marijuana-related businesses. Those priorities included preventing the following actions:

• Distribution of marijuana to minors
• Revenue from the sale of marijuana going to criminal enterprises, gangs, and cartels
• Diversion of marijuana from states where it’s legal under state law to other states
• State-authorized marijuana activity being used as a cover or pretext for the trafficking of other illegal drugs or activities
• Violence and the use of firearms in the cultivation and distribution of marijuana
• Drugged driving and the exacerbation of other adverse public-health consequences associated with marijuana use
• Growth of marijuana on public lands as well as associated public-safety and environmental dangers posed by marijuana production on public lands
• Marijuana possession or use on federal property

Focus on these specific priorities made way for financial institutions and their regulatory agencies to more easily navigate working with marijuana-related businesses in a way that benefits both sides.

Financial Crimes Enforcement Network (FinCEN) Response

In February 2014, FinCEN responded to the Cole Memo with guidance on how financial institutions could provide financial services to marijuana-related businesses while still complying with the BSA.

The guidance indicated each financial institution should determine whether to maintain an account or provide services to a marijuana-related business based on the following criteria:

• Institution’s business objectives
• A risk assessment of relevant products and services
• Institution’s ability to manage the increased risks

The FinCEN guidance also provided a roadmap for financial institutions willing to take on the risk of banking marijuana-related businesses. The roadmap recommended that financial institutions complete thorough customer due diligence, including the following:

• Verifying a business is licensed and registered as a marijuana-related business and that it’s a business organized within the state
• Developing an understanding of the baseline account activity the business expects
• Completing ongoing monitoring of public sources of information and suspicious activity
• Conducting periodic reviews of account activity compared with expected baseline activity

Beyond the roadmap, the guidance recommended financial institutions review the priorities of the Cole Memo to ensure any marijuana-related businesses they took on as customers weren’t in violation of those priorities.

The FinCEN guidance further provided information regarding the following SAR filing types:

• Marijuana Limited. These are for marijuana-related businesses that don’t appear to violate any of the Cole Memo priorities.
• Marijuana Priority. These apply to marijuana-related businesses that do appear to violate any of the Cole Memo priorities.
• Marijuana Termination. These are for marijuana-related businesses for which the financial institution is terminating the banking relationship.

The guidance indicated that SARs should continue to be filed for all other individuals or organizations not identified by the institution as a marijuana-related business. Likewise, currency transaction reports should be filed without any exceptions for marijuana-related businesses.

Sessions Memo

For the past several years, the guidance from FinCEN along with the Cole memo provided some relief for financial institutions wanting to allow marijuana-related businesses to maintain accounts.

However, in January 2018, US Attorney General Jeff Sessions effectively rescinded the Cole Memo by issuing a memo indicating federal prosecutors should follow the principals set forth in the US Attorney’s Manual, Chapter 9-27.000, and disregard any previously provided guidance that interfered with the manual.

This new memo had the effect of creating renewed uncertainty regarding the banking of marijuana-related businesses for both those businesses as well as the financial institutions currently serving them or wishing to do so. 

Signs of Change

While the financial industry and marijuana-related businesses wait to see the result of the proposed legislation, its proposal can ultimately still be viewed as a sign of change within the federal government—one that will allow for a more-inclusive banking experience for marijuana-related businesses and less risk for financial institutions willing to become involved in the industry.

Financial institutions should decide whether or not their Board of Directors and senior management are willing to accept the increased risk of providing services to marijuana-related businesses. The risk may come with increased costs and implementation of variations on existing products and services that need to be tailored to serve the marijuana industry. 

Taking the Plunge

Once an institution has decided they’re willing to serve the marijuana industry in their area, research and due diligence should be completed to ensure that all local and state laws regarding how marijuana-related businesses are allowed to operate are considered as part of the onboarding process for these types of accounts. Before making a decision, determine if the potential accountholder is operating their marijuana-related business appropriately based on the local guidelines.

Banking institutions should then determine what types of products and services they will offer to these types of accountholders. These types of accounts will be considered high-risk based solely on their business type, so determining what high-risk products and services the institution is willing to provide will be based on the risk appetite of management.

For instance, institutions may decide not to allow high-risk operations like privately owned ATMs to be onsite, or they may require all deposits be made via courier to avoid excessive cash transactions with a teller during business hours. Additionally, the institution may decide to place documentary restrictions on transactions, such as requiring sales receipts for deposits, or invoices for payments to ensure that funds are being received and paid for legitimate business purposes only.

Last, institutions should determine how they’ll monitor these accounts. Ongoing account transaction monitoring and site visits can help ensure accountholders are holding up their end of the deal.

There are no low-risk options when it comes to banking marijuana-related businesses. However, with proper oversight and knowledge, financial institutions may be able to provide valuable options to an industry that desperately needs to develop banking relationships.

We’re Here to Help

For more information on banking marijuana-related businesses or how the Safe and Fair Enforcement Banking Act may affect your financial institution, contact your Moss Adams professional.