Anti-Money Laundering, Bank Secrecy Act, DOJ

Will Congress Clarify Regulation of Marijuana-Related Business?

By John Han and Katherine Lamberth. President Trump piqued the interest of participants in and observers of the marijuana industry when he stated in early June that he would “probably” support recently proposed bipartisan legislation aimed at removing the federal prohibition on certain marijuana-related activity. President Trump’s statement is significant because it:

  • indicates presidential support for the bill, which other legislative attempts at reforming federal marijuana laws have generally lacked, and
  • signals a shift from the strict enforcement position taken by the United States Department of Justice (“DOJ”) in January 2018.

President Trump’s statement acknowledges that all stakeholders would generally benefit from clarifying the legal framework applicable to certain marijuana-related activities. While much too early to predict how the bill will fare in Congress, the fact that it has bipartisan congressional, and potentially presidential, support tends to bode well for the passage of legislation that will clarify federal treatment of marijuana-related activities.

In addition to alleviating concerns of businesses engaged in marijuana-related activity (“marijuana-related businesses” or “MRBs”), successful passage of the bill would also impact the regulatory requirements imposed on financial institutions that are considering providing services to such businesses, particularly with respect to due diligence and suspicious activity reporting obligations under the Bank Secrecy Act (“BSA”) and its implementing regulations.

Prior DOJ and FinCEN Guidance Left Too Many Unanswered Questions

DOJ Guidance

Until January 2018, the DOJ had an informal policy pursuant to which marijuana-related activities that were legal under state law would generally not be subject to prosecution under the Controlled Substances Act (“CSA”), unless such activities violated one or more federal enforcement priorities. This policy was established by Deputy Attorney General James M. Cole, who, in response to the increasing number of states enacting legislation to legalize certain marijuana-related activities, issued a memorandum on August 29, 2013 (“the Cole Memo”) directing prosecutorial resources towards marijuana-related violations of the CSA that implicated one or more of the DOJ’s eight enforcement priorities, such as preventing money laundering activities.

Although it reiterated that the distribution and sale of marijuana remained illegal under federal law, the Cole Memo nevertheless announced that the DOJ would generally refrain from prosecuting MRBs or other persons engaged in marijuana-related activity if compliant with applicable state law, absent the implication of an enforcement priority.

On February 14, 2014, Deputy Attorney General Cole issued a subsequent memorandum (“Cole Memo II”) stating that the eight enforcement priorities outlined in the Cole Memo would also guide the DOJ’s enforcement of financial transactions involving proceeds from marijuana-related activities under the federal money laundering statutes and the BSA.

FinCEN Guidance

Concurrent with the release of the Cole Memo II, the Financial Crimes Enforcement Network (“FinCEN”) issued a memorandum of its own (“the FinCEN Memo”), containing guidance regarding how financial institutions can provide services to MRBs consistent with their anti-money laundering (“AML”) obligations under the BSA.

Pursuant to the BSA and its implementing regulations, a covered financial institution is required to file a suspicious activity report (“SAR”) with FinCEN to report any transaction with a value in excess of $5,000 if the financial institution knows, suspects or has reason to suspect that it:

  • involves funds derived from illegal activities or is intended to hide or disguise funds derived from illegal activities;
  • is designed to evade any requirements of any regulations promulgated under the BSA; or
  • has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage.

The FinCEN Memo provides that the obligation to file a SAR is generally unaffected by state legalization of certain marijuana-related activities. Accordingly, financial institutions continue to be required to file SARs regarding transactions that (1) involve funds derived from marijuana-related activity, even if legal under applicable state law; or (2) are an attempt to disguise the nature of funds derived from marijuana-related activity. However, the FinCEN Memo also sets forth the following framework for filing SARs on MRBs:

  • “Marijuana Limited” SAR Filings. If a financial institution reasonably believes, based on customer due diligence, that an MRB’s marijuana-related activities do not implicate one of the DOJ’s enforcement priorities or violate applicable state law, the financial institution must file a “Marijuana Limited” SAR.
  • “Marijuana Priority” SAR Filings. If a financial institution reasonably believes, based on customer due diligence, that an MRB’s marijuana-related activities implicate one of the DOJ’s enforcement priorities or violates applicable state law, the financial institution must file a “Marijuana Priority” SAR.
  • “Marijuana Termination” SAR Filings. If a financial institution deems it necessary to terminate a relationship with an MRB in order to maintain an effective AML compliance program, the financial institution must file a “Marijuana Termination” SAR and note in the narrative the basis for the termination.

Despite the pronouncements of FinCEN and the DOJ, the federal legal uncertainty surrounding the provision of financial services to MRBs, including those that operate in accordance with applicable state law, continues to present heightened regulatory and compliance risks that are unacceptable to many financial institutions. This uncertainty was further exacerbated in January 2018 when the DOJ officially rescinded previous guidance on marijuana enforcement, including the Cole Memos. Accordingly, many financial institutions are hesitant, or even unwilling, to provide services to MRBs, particularly those directly involved in the manufacturing or distribution of marijuana.

The STATES Act Would Significantly Reduce Regulatory Uncertainty

Dubbed the “Strengthening the Tenth Amendment Through Entrusting States Act” or the “STATES Act,” Senate Bill 3032 (along with its identical companion, H.R. 6043) would amend the CSA by exempting from its scope any person engaged in the manufacture, production, possession, distribution, dispensation, administration or delivery of marijuana in compliance with applicable state law,[1] subject to a handful of exceptions.[2] Accordingly, in states where certain marijuana-related activities have been legalized, such activities would also generally be legal under federal law. It was introduced on June 7, 2018 by Senators Cory Gardner (R) and Elizabeth Warren (D). Its companion bill was also introduced that same day by Representatives Earl Blumenauer (D) and David Joyce (R). As noted above, President Trump stated on June 8 that he “probably will end up supporting” the bill.

Significantly, the STATES Act stipulates that funds derived from covered marijuana-related activities conducted in compliance with applicable state law “shall not be deemed to be the proceeds of an unlawful transaction” under the federal money laundering statutes, i.e., 18 U.S.C. §§ 1956 and 1957. As a result, the STATES Act would remove many of the obstacles and concerns that currently face financial institutions regarding the provision of services to marijuana-related businesses in states that have legalized such activities.

Unlike the Cole Memos, which merely de-prioritized the federal prosecution of certain marijuana-related activities that comply with applicable state law, the STATES Act would exempt those activities from the scope of the CSA altogether, thereby rendering them legal under federal law. As a result, much of the uncertainty regarding the provision of financial services to MRBs would be eliminated.

Helpful Clarity, but Vigilant Due Diligence and Monitoring Still Required

The STATES Act would be a significant step towards clarifying the legal framework applicable to certain marijuana-related activities. But even assuming the STATES Act is enacted in its current or a similar form, financial institutions would nevertheless have to remain vigilant when contemplating providing services to MRBs, particularly given the state-by-state approach to legalization. Specifically, financial institutions would need to understand the provisions of, and monitor any changes to, relevant state marijuana laws, as well as the scope of the STATES Act’s enumerated exceptions.

Additionally, financial institutions’ customer due diligence processes should be sufficiently robust to assess whether an MRB is operating in compliance with state law. Further, while SARs would no longer be required to be filed on transactions involving proceeds of marijuana-related activity conducted in compliance with applicable state law, financial institutions would be required to closely monitor the activities of those MRBs and file a SAR upon detecting any change in activity that would indicate illegality. Finally, SAR filing obligations will remain unchanged with respect to transactions involving the proceeds of marijuana-related activity conducted in states where such activity is not legal.

If the STATES Act or similar legislation is passed, state law will have an important role beyond whether marijuana is legal in a particular jurisdiction. For example, state chartered institutions considering whether to do business with MRBs would have to assess any applicable state banking law and regulation. State money laundering law and enforcement would have to be analyzed as well.

Accordingly, even if the STATES Act is enacted, financial institutions should continue to thoughtfully approach the provision of services to MRBs with care regarding the assessment and management of related risks.

[1] The bill also covers activities that have been decriminalized by a federally-recognized Indian tribe, but only if the tribe’s jurisdiction is located within a state that has also decriminalized such activities.

[2] For example, the general exemption from the CSA would not apply to anyone who employs or hires a minor to engage in marijuana-related activities.

John Han

About John Han

John Han focuses his practice on regulatory advice, counseling and defense for broker-dealers and investment advisers. Immediately prior to joining the firm, John served as in-house counsel at LPL Financial, a registered investment adviser and one of the largest broker-dealers in the country. Prior to that, he spent a decade as an enforcement attorney at the Financial Industry Regulatory Authority. John began his career as a criminal prosecutor at the New York County District Attorney’s Office. *Licensed in New York. Practicing in North Carolina pursuant to Rule 5.5(e) of the North Carolina Rules of Professional Conduct.


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