U.S. banks exist to provide financial services to the community they serve. Bank charters are granted and continuously monitored by regulators to ensure that banks fulfill the needs of their communities. Pennsylvania has legalized the production and sale of medical marijuana. In time they will generate revenue which will be used to pay employees, pay vendors and more importantly pay taxes. But who will process these transactions? What happens when an industry has a desperate need for financial services but the local bank shuts its doors to providing help, even though that industry is operating legally and in compliance with all state and local laws? This is the conundrum facing traditional depository institutions: serve the needs of the community or risk regulatory enforcement actions by banking regulators or worse, criminal indictments by federal law enforcement.
This article first outlines the legal and regulatory landscape facing financial intuitions who want to service the cannabis industry. The remainder of the article focuses on some very limited solutions that are being considered in an attempt to provide short-term figures to this critical problem.
Legal and Regulatory Landscape
As of the writing of this article, 29 states, the District of Columbia, Guam and Puerto Rico now allow for comprehensive public medical marijuana. Of these states, nine of them allow for “adult use” or recreational purposes. Nonetheless, marijuana remains classified as a Schedule I substance under the Controlled Substances Act (CSA). The manufacturing, dispensing and use of marijuana remains federally prohibited and therefore any revenue generated and subsequently deposited into a federally insured banking institution would also violate federal law. At the time that Colorado became the first state to legalize marijuana; the Department of Justice (DOJ) issued policy statements and guidance to federal law enforcement officers as to enforcing CSA in in light of the state’s legalization of marijuana. At the same time, the Financial Crimes Enforcement Network (FinCEN), a division of the Department of Treasury Department, also issued its “guidance to clarify the Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services to marijuana-related businesses as well as guidance which aligned the information provided by financial institutions in BSA reports with federal and state law enforcement priorities.”
Yet despite its CSA classification, dispensaries are rapidly opening and are operational. However, they all operate in cash because they cannot accept credit cards, checks or any other forms of payment that require processing through a bank. Dispensaries cannot take any cash to the bank for deposit and their employees and vendors must also be paid in cash. Local, state and the federal taxes are paid in cash as well. It is a situation which is not sustainable.
Some relief came in 2013. Known as the Cole Memo, the DOJ outlined eight priorities department attorneys and law enforcement in order to determine whether the CSA was being violated for marijuana-related conduct. Those priorities were preventing the distribution of marijuana to minors, preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels, preventing the diversion of marijuana from states where it is legal under state law in some form to other states, preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity, preventing violence and the use of firearms in the cultivation and distribution of marijuana, preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use, preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands, and preventing marijuana possession or use on federal property. Under the Cole Memo, U.S. Attorneys were given discretion to use DOJ resources to enforce other more pressing criminal laws only if a state’s implementation of its cannabis program exhibited none of the DOJ’s priorities.
The Cole Memo, however, gave no real comfort to bank regulators who are required to supervise financial institutions for compliance with not only BSA but anti-money laundering (AML). Banks are required to file suspicious activity reports (SARs) with FinCEN following suspected incidents of money laundering or fraud. Therefore, any banking activity with marijuana-related businesses (MRB) requires the filing of a SAR. This requires the bank to do extensive due diligence which can be time-consuming and costly. Furthermore, just because a bank files the SAR does not relieve it of future liability with regulators or the DOJ. Therefore the risk to the financial institution is incredibly high. Yet despite these risks, by the end of 2017, over 400 banks and credit unions were servicing the cannabis industry both by accepting deposits and providing other financial services.
On Jan. 4, Attorney General Jeff Sessions issued a statement that the DOJ was “returning to the rule of law and rescinding previous guidance documents.” The DOJ press release further stated that: “It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance undermines the rule of law and the ability of our local, state, tribal, and federal law enforcement partners to carry out this mission. Therefore, today’s memo on federal marijuana enforcement simply directs all U..S Attorneys to use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis and thwart violent crime across our country.” FinCen however did not rescind its previous guidance and the Treasury Department has indicated that the DOJ’s reversal in policy was done without their input. Regardless, the DOJ’s action has had a chilling effect on a growing cannabis industry, which is expected to see sales top $20 billion by the end of 2021.
What Are the Solutions?
Banking regulators have stated all along that marijuana needs to be reclassified from a Schedule I narcotic under CSA. This seems to be the quickest and easiest fix but it will still require banks to establish extensive compliance procedures. While a CSA amendment will ease a bank’s liability especially criminal liability, the costs of managing and reporting an MRB’s activity, including the filing of SARs will still be expensive and those costs will be passed on to those MRB customers. We know that of the few banks that are willing to service MRBs, the monthly costs to do so are extremely high.
A short-term fix was found in the new federal spending package that was passed in March. The Leahy amendment (formerly the Rohrabacher-Farr amendment) extended the prohibition of the DOJ from using tax dollars to enforce federal law against state-legal medical cannabis patients and businesses. The new omnibus budget will continue to fund the government through the remainder of the fiscal year, which ends on Sept. 30. There are also several bills pending in Congress that would provide safe harbors from termination of federal deposit insurance for cannabis-related legitimate businesses.
Attorneys general in those states where marijuana is legal have asked to meet with Sessions to seek further clarity on how federal law enforcement will respond to the growing legalization trends. In a letter to Sessions, the attorneys general cited a shortage of banking services as the “greatest obstacle to developing a thriving, regulated marketplace.”
The other consideration is that of a state charted bank. In California, where expected revenues in that state alone will exceed $7 billion by the end of 2019, the state has introduced a bill, SB 930, for a limited-purpose state charter bank or credit union that would be privately financed and thus not required to seek federal deposit insurance. The measure would allow for cannabis firms to deposit money into the state bank that would in turn issue special purpose checks to the businesses for use in paying rent, paying employees and vendors as well as for paying taxes. Absent from the legislation is how the dispensary owner gets paid other than to provide the owner with the option of buying state and local bonds. Distributing or benefiting from the profits or revenue of the dispensary’s business may still be difficult. Massachusetts is also considering a state-run bank. The idea of cooperative banking systems among several states is also being discussed.
Several software applications have come into the market which purportedly allows dispensaries to “bank” their cash to an intermediary in exchange for “credits” and some are offering cryptocurrency or bitcoin. It is too early to tell whether these platforms are beneficial to dispensary owners. Furthermore the software company, accepting the cash, is still going to have the same difficulties as the dispensary owner in finding a bank who will accept the deposits from marijuana-related activity without significant costs.
Pennsylvania has not addressed the banking issue whatsoever. While the state legislature is using its political capital to enter into Phase II of cannabis licensing, no bills are pending which will address the growing problem of the lack of financial services. Until such time as either the state or the federal government act, the cannabis industry will continue to stumble and the ability of the financial institutions in this commonwealth to service the needs of the community will be nonexistent. To quote Alexander Hamilton, “The tendency of a national bank is to increase public and private credit. The former gives power to the state, for the protection of its rights and interests: and the latter facilitates and extends the operations of commerce among individuals. Industry is increased, commodities are multiplied, agriculture and manufacturers flourish: and herein consists the true wealth and prosperity of a state.”
Joann Needleman, senior counsel at Clark Hill, serves as a navigator to her clients seeking advice and guidance in the complex regulatory environment facing the financial services industry. She is chair of the banking subcommittee for the Philadelphia Bar Association‘s medical marijuana and hemp committee as well as her title as leader of the consumer financial services regulatory and compliance practice group.