Khurshid Khoja says he tries to play by the rules.
The Greenbridge Corporate Counsel founder advises state-legal marijuana-related businesses. He knows the sector they all work in is legally murky. California rolled out its licensed recreational market on Jan. 1, but the federal government still considers marijuana an illegal drug.
Khoja says he operates by certain business principles. His clients do not pay in cash. Deposits into the law firm’s state bar-required trust account are identified by their source and visible to the bank. Every client must comply with Obama-era guidance—since rescinded by U.S. Attorney General Jeff Sessions—designed to minimize the chances of federal prosecution.
Khoja says he was surprised when his bank, Umpqua Bank, last fall started demanding information about clients. Were they in direct contact with marijuana plants? What were their names? How much business did Greenbridge do with them?
After Khoja asked for more time to get his clients’ consent to release that information—he said the bank gave him two business days to do so—Umpqua abruptly told him it was closing his firm’s accounts in 30 days.
“Our first duty as attorneys is to our clients and the ethical rules that apply to us,” he told The Recorder in an interview. “We are licensed by the state and it’s our duty to protect confidentiality and to keep our clients safe.” He added: “We can’t have banks interfering with that.”
As California’s green rush begins, Khoja’s experience offers some perspective for lawyers who are in the industry—and those who want to take part. Marijuana dispensaries and growers have historically struggled to find banks willing to open and maintain accounts for them. That struggle can extend to companies providing services to those businesses, including law firms.
Despite projections of a $7 billion state marijuana industry, major banks and credit unions are still wary of attracting the scrutiny of federal regulators if they accept deposits tied to cannabis-related businesses—even those that never touch a plant.
That puts lawyers in a quandary. Abide by professional requirements with escrow accounts and banks may start asking questions about clients and their money. Maintain ethical duties to protect client information and banks may dump their accounts.
Large firms that have big-dollar, long-term relationships with banks may not have a problem if their “regulated industries” practices constitute a tiny fraction of their work. Smaller shops that openly cater to marijuana clients are taking a much bigger risk, according to lawyers who have clients in the cannabis industry.
“Marijuana attorneys finding themselves excommunicated from their banks are incapable of paying staff, taxes and utilities,” said Steven Schain, the Pennsylvania-based chair of Hoban Law Group’s financial service and banking practice. And if their banks drop them, they could be stuck with only a cashier’s check representing their clients’ escrow account deposits—with no other bank willing to accept them—in violation of their fiduciary duty, he said.
The U.S. Department of Treasury’s Financial Crimes Enforcement Network in 2014 advised financial institutions they can serve marijuana-related businesses and still comply with federal Bank Secrecy Act obligations if they follow certain compliance guidelines.
As of Sept. 30, approximately 400 banks and credit unions across the country reported providing services to marijuana-related businesses, according to federal records. The number has risen steadily since 2014 but still represents just a small fraction of the total number of financial institutions in the United States.
Many of those banks act only as simple depositories for marijuana clients, charging thousands of dollars in fees each month while offering few additional services, such as lending, that other businesses expect.
California Explores Banking Options
California regulators have explored state-based options to bank the industry. The Business, Consumer Services and Housing Agency in December floated the idea of setting up a private network of state-monitored depositories to handle marijuana receipts. And in late January, Treasurer John Chiang said he would commission a study to explore how a state bank might be created.
Chiang said Sessions’ decision to revoke the Cole memo gave new urgency to the search for alternatives to private banks. Obama-administration guidelines for financial institutions serving the marijuana industry remain in effect, although the Financial Crimes Enforcement Network’s guidance relied on adherence to Cole memo principles.
“Jeff Sessions has taken us steps backwards,” Chiang told reporters in late January. “It’s crystal clear that we’re going to have to face some additional challenges.”
The ideas have yet to catch fire with major banking institutions..
“We hear all these proposed solutions being offered up” by state officials, said Beth Mills, spokeswoman for the California Bankers Association. “Really, the solution is at the federal level.”
State courts and bar associations have offered lawyers a wide range of ethical guidance for serving marijuana entrepreneurs. But they’ve said little about maintaining their fiduciary responsibilities to such clients.
A paragraph in proposed changes to California’s rules of professional conduct, awaiting state Supreme Court approval as of press time on Feb. 5, suggests how lawyers can counsel clients when state and federal laws conflict. The bar, however, has offered no advice for lawyers trying to hang on to professionally mandated bank accounts.
Chief Justice Tani Cantil-Sakauye recently told reporters that a Judicial Council committee will likely handle any complaints about marijuana-related litigation, licensure and business issues. The council could then consider policy changes or possibly supporting legislation “to help clear up this area.”
“It’s going to be a quagmire where we are and to what extent the federal [government] seeks to enforce its laws in California,” Cantil-Sakauye said.
‘Your Business Isn’t Welcome’
How often banks boot lawyers like Khoja who provide legal services to marijuana clients is difficult to say. The names of banks willing to do the federally mandated work to vet cannabis customers—or simply not ask probing questions—circulate quietly among those in the industry.
“It’s definitely frequent that they kick marijuana businesses out,” said Brian Vicente, a partner in Vicente Sederberg in Colorado and a veteran of marijuana legalization efforts in that state. “And it’s definitely not uncommon for them to kick out lawyers who work with marijuana businesses.”
Vicente remembers scrambling years ago to find a bank simply willing to open a campaign account for a local pro-marijuana ballot measure. Even though Colorado voters legalized marijuana statewide, he’s still been dumped by three banks since he started practicing exclusively in the cannabis sector.
“It’s honestly humiliating,” he said. “You’re told your business isn’t welcome there.”
Khoja first suspected trouble when employees at his Umpqua Bank branch in San Francisco started asking this fall about his volunteer service on the state treasurer’s Cannabis Working Group. For a year, the group, which included cannabis industry representatives, government officials and bankers, studied the problem of marijuana businesses’ lack of access to banking.
Not long after the questions started, Khoja said he got a questionnaire from Umpqua Bank’s Sacramento office. Executives wanted to know detailed information about his marijuana clients, including their names, addresses and activities.
In a letter to Umpqua, a copy of which was provided to ALM, Khoja said he could not reveal some of the information sought by the bank without client consent—something he said he may never be able to obtain from them and certainly something he could not obtain in two days.
Khoja instead asked bank officials to identify any specific deposits that troubled them so he could try to get information from those clients. He noted the rules he requires his clients to comply with, his work with the National Cannabis Industry Association and his efforts to change federal laws that scare banks from the state-legal marijuana industry.
“I hope you agree that Greenbridge is the type of client that Umpqua should welcome and support, rather than subjecting to unreasonable scrutiny and disclosure demands,” he wrote.
Days letter Khoja received another letter from his bank.
“Umpqua Bank has determined that maintaining your deposit account relationship is no longer mutually beneficial and has decided to exercise our right to terminate your banking relationship,” according to the letter, also provided to ALM. The letter offered no explanation. Umpqua gave Khoja 30 days to find a new bank before it closed his two accounts.
Khoja said he managed to find another financial institution, which he declined to identify, to take his business before the one-month deadline arrived. He said he does not see a solution—no lasting one anyway—to his and other professionals’ banking challenges until Congress acts to ease banks’ fears.
“The salient point here is attorneys need to be be able to do their jobs and still protect attorney-client privilege,” he said.