tain an effective anti-money laundering program” (this might
be the only situation where FinCEN acknowledges derisking
as acceptable for managing AML risk). If the bank does end its
relationships with the business, then it reports that to FinCEN
using the marijuana termination SAR. If the bank knows that the
company has moved to another bank, FinCEN also encourages
the bank to take advantage of the 314(b) information sharing
process to notify the successor bank that it terminated its relationship with the business.
With the 2014 guidance, FinCEN included a number of red
flags for banks to consider when conducting due diligence on a
marijuana-related business. None of the red flags are conclusive of
illegal activity but each one merits further evaluation. Among the
red flags FinCEN identifies: activity or revenue inconsistent with
the business or its competitors, excessive cash deposits or withdrawals, structuring, rapid movement of funds, deposits by third
parties unrelated to the business, excessive commingling of funds
with other accounts of the owners, or a sudden surge in activity.
The FinCEN guidance raises two key questions. If, as the consensus seems to believe, that the guidance applies to businesses that
deal directly with the plant, then what of the landlords, suppliers
and employees of these businesses? This second tier of businesses
and individuals are deriving a substantial portion of their income
from activity that is still illegal at the federal level, meaning that
their funds are tainted. The FinCEN guidance doesn’t explain how
to file a SAR on this activity. What should a bank do?
The second, and more important question raised by the FINCEN
guidance is what it means for federal bank supervisors. When an
examiner evaluates the safety-and-soundness of a bank, it considers whether the bank is operating in accordance with laws and
regulations. Despite state law, if a bank is allowing customers to
launder money through its accounts, does that call into question
its safety-and-soundness? The federal banking regulators have said
nothing about the challenges banks face when it comes to banking
marijuana-related businesses. Informally, when bankers raise the
question during meetings with representatives of state delegations,
the banking regulators indicate that the FinCEN guidance is the
“gold standard” for compliance in this area. And so, for the time
being, the FinCEN guidance is all banks have to follow.
The Definitional Challenge
As pointed out, the question that faces every bank is how to identify whether or not a business is a marijuana-related business.
FinCEN didn’t provide an answer and neither have the federal
banking agencies. Is it, as the consensus suggests, only those busi-
nesses that deal directly with the plant? Or does it include their
employees? Their landlords? Their vendors or suppliers? One
approach might be to consider the income stream of the business
and whether a certain percentage of its income is derived from
marijuana processing or production.
However, resolving this problem is important. For example,
one banker suggested that a bank that operates in a state that has
legalized marijuana for both medicinal and adult use could have
up to 90% of its customers affected by this one-step removed
calculation. And, even if a bank operates in one of the states that
has not legalized marijuana in any form, the chances that it has
customers that are suppliers to a marijuana business operating
in another state, or that it has a customer that is deriving his or
her income from a state-legal marijuana enterprise continues to
grow. To further compound the problem, companies that derive
their primary income from marijuana businesses are starting to
trade on the United States securities exchanges. What does a bank
do if its customer is an active investor who also happens to invest
in one of these securities?
Recently, the Small Business Administration (SBA) did tackle the
definitional issue. Under SBA Standard Operating Procedures, any
activity that is illegal under federal, state, or local law is ineligible for
SBA financial assistance. Even though this guidance is limited to
eligibility for SBA assistance, it should be taken into consideration.
The SBA has made the determination that marijuana-related businesses not only include those that deal directly with the plant, but
also include hemp products and any indirect business, including
those that derive any revenue from a business that deals directly
with the plant. The SBA includes vendors such as those that provide testing services, grow lights and hydroponic equipment. The
SBA takes a very broad interpretation that goes far beyond direct
relationship to the plant. The unknown question is whether this
application will become more widespread.
The Attorney General Drops a Bombshell—Or Did He?
Shortly after recreational or adult use became legal in California,
the Attorney General of the United States took steps that altered
the landscape. And, his action got a lot of attention in the press.
What, then, did the Attorney General do?
First, the Attorney General rescinded all the prior guidance that
had been issued to help federal prosecutors determine when and
if to investigate or prosecute a case involving state-legal marijuana,
including the eight priorities. While the DOJ press release emphasizes the “return to the rule of law,” it still emphasizes the discretion
that individual prosecutors have when determining how to apply
the Department’s finite resources. What is interesting, though, is
that since prosecutors exercise their own discretion in making
the determination whether to proceed, the prior guidance was
deemed “unnecessary.” And so, federal prosecutors continue to
exercise discretion as they always have, only without the guidelines
that were in place to help them make those decisions.
Companies that derive their primary income from marijuana businesses
are starting to trade on the United States securities exchanges.
What does a bank do if its customer is an active investor who also
happens to invest in one of these securities?