Despite changing public sentiment and state-level marijuana legalization proposals, cannabis is still illegal under federal law. In fact, the drug is classified as a Schedule 1 Drug, the strictest classification.
Understandably, many businesses are wary of entering the industry. Even common business services, such as banking, credit card processing, leasing, and insurance, can be difficult to obtain when marijuana is involved.
To help alleviate some of the legal uncertainty, the Obama Administration has provided some guidance. Last summer, the Department of Justice (DOJ) released a memo stating that prosecutors would not pursue marijuana growers and sellers who comply with local laws, provided that state laws address federal "enforcement priorities" such as preventing interstate smuggling operations, distribution to minors, and "adverse public health consequences."
Most recently, the Department of the Treasury issued guidance to banks that conduct business with state-licensed marijuana businesses. It clarifies when the Bank Secrecy Act (BSA) requires financial institutions to file “suspicious activity reports” (SARs). In order to align “the information provided by financial institutions in BSA reports with federal and state law enforcement priorities,” the memo distinguishes between the SARS reporting required for businesses that operate legally under state law and those that do not.
The Treasury memo also offers guidance for assessing the risk of providing services to a marijuana-related business, noting that banks should conduct customer due diligence that includes:
- Verifying with the appropriate state authorities whether the business is duly licensed and registered;
- Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- Requesting from state licensing and enforcement authorities available information about the business and related parties;
- Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
- Monitoring on an ongoing basis publicly available sources for adverse information about the business and related parties;
- Monitoring on an ongoing basis for suspicious activity; and
- Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
Because the guidance leaves a lot of grey areas and offers no guarantees, many banks in states like Colorado are calling for more definitive regulations. They point to the Marijuana Businesses Access to Banking Act, which was introduced last summer by Reps. Ed Perlmutter (D-Colo.) and Denny Heck (D-Wash.). The federal legislation would provide safe harbor for banks that deal with state-legal marijuana businesses and protect them from both criminal prosecution and administrative penalties, including loss of federal deposit insurance.
If you have any questions about the business risks associated with the marijuana industry or would like to discuss the options for your business, please contact me, Robert Marisco, or the Scarinci Hollenbeck attorney with whom you work.