Seth A. Goldberg, Duane Morris

Let’s say ABC LLC applied for and was granted permits to grow, process and dispense cannabis pursuant to its state’s medical marijuana regulations. ABC now operates a 120,000-square-foot cultivation facility and sells its cannabis-related products, which include THC and CBD vape oils, tinctures and pills, through three dispensaries. Because, as discussed below, marijuana is federally unlawful, ABC has been unable to obtain a bank account with a commercial bank. ABC’s workarounds to not having the same access to capital and daily banking services hinder its business and raise issues of public safety in ABC’s local communities.

To build its cultivation facility, ABC needed $20 million to finance construction. ABC was unable obtain a traditional construction loan from a commercial bank; prevailing interest rates for such loans were approximately 4.5 percent. ABC was instead forced to privately raise capital. High net worth individuals stepped in and agreed to finance the construction at an 18 percent interest rate, with a portion of the debt convertible to equity upon the achievement of certain licensing and sales milestones. ABC’s founders will lose everything if ABC does not succeed, and their ownership of ABC will be diluted even if it does.

Daily sales at each of ABC’s dispensaries average $8,000 for cannabis-related products, and average another $2,000 in merchandise. Having no credit card processing capabilities, ABC is paid in cash for all of its products. The cash is stored in safes inside each dispensary, and every Saturday approximately $150,000 is carried out of the dispensaries in duffel bags and driven to the home of one of the dispensary’s owners. There the cash is divvied up to pay ABC’s owners, 40 employees and various accounts payable, all in cash. The risks to physical safety resulting from dealing with such large amounts of cash and the possibility of theft, loss or other mismanagement are obvious.

With ABC’s sales having grown so quickly, and the cannabis space continuing to gain in popularity, the local branch manager of a federally regulated commercial bank reconsiders his earlier decision to turn ABC away. However, he is not able to openly bank for ABC because his bank has a policy of not banking cannabis. Instead, ABC creates a new entity, DEF LLC, which opens a checking account with the bank that ABC will use for all of its daily banking needs, including cash deposits, credit card processing, payroll and accounts payable. By turning a blind eye, the branch manager has potentially exposed his commercial bank to serious problems with the bank’s regulators, not to mention to potential violations of federal law for financial crimes.

Scenarios like these are common in the cannabis industry because the vast majority of federally regulated commercial banks refuse to accept deposits of funds derived from the manufacture, distribution or sale of marijuana, as those activities are unlawful under the Controlled Substances Act (CSA), 21 U.S.C. Section 801. Indeed, according to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), as of March 2017, just approximately 375 commercial banks had reported to FinCEN having provided banking services to a “marijuana-related business,” or MRB.

The dearth of banks willing to provide services to cannabis businesses results, primarily, from the obligations imposed under the Bank Secrecy Act of 1970 (BSA) and related regulations, which require financial institutions to file a suspicious activity report (SAR) where the financial institution knows, suspects or has reason to suspect that a transaction conducted or attempted by, at or through the financial institution: involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; is designed to evade regulations promulgated under the BSA; or lacks a business or apparent lawful purpose.

Between February 2014 and Jan. 4, 2018, the number of banks reporting banking a marijuana-related business had steadily grown as a result of guidance issued by FinCEN that sought to clarify “how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.” The main objective of the FinCEN guidance was to “enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” FinCEN’s banking guidance was necessary because by 2014 the number of states that had enacted legislation legalizing medical or adult-use marijuana had already grown to 20.

As both a result of that growth, and in further contribution to it, in August 2013, then-Deputy Attorney General James Cole issued a memorandum to all U.S. Attorneys, known as the “Cole Memo,” that set forth the government’s priorities (the Cole Priorities) with respect to the federal enforcement of marijuana-related activities in light of the growing number of state’s legalizing marijuana, as follows:

  • 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.

As each state’s marijuana program provides for criminal and civil penalties for violating the state’s marijuana laws, in issuing the Cole Memo the federal government explicitly deferred to the states the regulation and enforcement of marijuana-related activities outside of the Cole Priorities. Adherence to state marijuana laws and regulations by those operating pursuant to state-issued, marijuana-related licenses resulted in activities that did not implicate the Cole Priorities and were therefore, at least under the Obama administration, better regulated by the states.

The FinCEN guidance, issued just six months after the Cole Memo, was intended to align “the information provided by financial institutions in BSA reports with federal and state law enforcement priorities,” and explicitly referenced the Cole Priorities, establishing protocols for federally regulated banks that would allow them to provide services to MRBs whose state-lawful cannabis activities did not run afoul of the Cole Priorities. In particular, the FinCEN established three cannabis-specific SARs, “marijuana limited,” “marijuana priority” and “marijuana termination.” These new SARs provided financial institutions with a safe harbor to bank cannabis clients who were complying with the Cole Priorities.

The Cole Memo, and to a lesser extent the related FinCEN guidance, created a window of opportunity for the cannabis industry because the Cole Priorities established the swimming lanes for the federal government’s enforcement of cannabis-related activities. As a result, between FinCEN’s guidance in February 2014 and January 2017, another nine states and Washington, D.C., enacted legislation permitting or decriminalizing marijuana cultivation, processing and dispensing. Some analysts have reported U.S. sales of cannabis in 2017 reached $8 billion, and numerous analysts predict U.S. sales in 2018 to exceed $10 billion, and that U.S. sales will exceed $25 billion in just five years.

In an attempt to stifle the growth spurred by the Cole Memo, on Jan. 4, 2014, Attorney General Jefferson Sessions issued his own memo regarding cannabis activities, including those lawful under state cannabis legislation, that rescinded the Cole Memo in its entirety, doing away with the Cole Memo’s delineation of federal enforcement priorities. Under the Sessions Memo, U.S. Attorneys are to use their discretion in determining whether to take enforcement action against state-licensed cannabis activities.

In describing his reversal of the deferral to state authorities under the Cole Memo, Attorney General Sessions stated: “This return to the rule of law is also a return of trust and local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs.”

Importantly, the Sessions Memo took direct aim at the financial institutions and investors viewing the Cole Memo and the FinCEN guidance as a roadmap for banking cannabis, reminding its readers that state-lawful, marijuana-related activities are prohibited under the CSA and that violations of the CSA “may serve as the basis for the prosecution of other crimes, such as those prohibited by the money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act.”

Because the FinCEN guidance and the marijuana-related SARs established by FinCEN are bound up in the Cole Priorities, Sessions’ rescission of the Cole Memo has created confusion about whether the FinCEN guidance can still provide a safe harbor for banking cannabis. Consequently, banking remains the most significant impediment to doing business in the cannabis industry.

The scarcity of cannabis banking is a problem that has both inhibited the burgeoning growth of the cannabis market and transcended the cannabis industry. From an industry standpoint, cannabis businesses are being restrained in a way that businesses in no other industry are. As Michael Bronstein, founder of the American Trade Association for Cannabis and Hemp, explained: “Banking must be expanded to the legal cannabis industry and traditional access to the financial system is critical to keep businesses running. Remember, banking is not just an account, it’s commercial lending, being able to rent a property that has a mortgage on it, using credit and running payroll. These are issues that normal businesses take for granted that are not available to one of the quickest growing industries in the country. Operators just want a chance to be treated like any other business.”

Far from being limited to the cannabis industry, the cannabis banking problem raises issues of public safety. The BSA and similar regulations are intended to create transparency so authorities can prevent financial crimes. As the above scenarios demonstrate, the lack of banking prevents transparency, thereby undermining the laws and regulations intended to prevent money laundering and other financial crimes, not to mention the risks to physical safety resulting from tens to hundreds of businesses in a state storing and transporting millions of dollars in cash on a daily basis.

Given the rapid growth of the cannabis industry, which does not appear to be slowing down, notwithstanding the Sessions Memo, a legislated solution to the banking problem is necessary. As Bronstein put it: “It is just completely illogical from a public safety and business perspective that a state-legal, highly regulated marijuana business wouldn’t be able to access banking―especially now that the industry will quickly surpass $10 billion in state sales … The best way to get a solution to the banking issue is through Congress, which has the authority to grant access to cannabis banking.”

On April 13, President Donald Trump indicated he would support a states’ rights approach to cannabis legalization. On April 15, Sen. Cory Gardner, R-Colorado, and Sen. Elizabeth Warren, D-Massachusetts, announced they were joining forces to propose such legislation. Although it is too soon to know whether that legislation would change the scheduling of marijuana under the CSA, it seems likely that it would pave the way for a solution to the banking problem.

Seth A. Goldberg is a partner of Duane Morris. He counsels clients in business and litigation, with a particular emphasis in highly regulated industries, such as healthcare, pharmaceuticals and cannabis/hemp.