Under U.S. money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act (“BSA”) a financial institution is subject to criminal liability for engaging in transactions involving money generated from marijuana-related businesses. To alleviate the concerns of financial institutions, ensure financial transparency, and increase the availability of financial services to legal marijuana businesses, the DOJ along with The Financial Crimes Enforcement Network (FinCEN) issued guidance to financial institutions seeking to provide services to marijuana-related businesses. As part of their guidance the DOJ and FinCEN emphasize that a financial institution must conduct due diligence to ensure that a potential client is not in violation of the federal government’s priorities enumerated in the Cole Memo.
As part of its due diligence a financial institution must submit a Suspicious Activity Report (“SAR”) in any transactions involving a marijuana-related businesses.
Because federal law prohibits the distribution and sale of marijuana, financial transactions, involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law).
FinCEN lists three types of SARs specific to a marijuana-related business that must be filed within 30 days of the identification of a suspicious activity. “Marijuana limited” is filed for a marijuana-related business that a financial institutional reasonably believes does not implicate one of the Cole Memo priorities. “Marijuana priority” is filed for a marijuana-related business that a financial institutional reasonably believes does implicate one of the Cole Memo priorities. “Marijuana termination” is filed when a financial institution finds it necessary to terminate a relationship with a marijuana-related business in order to comply with anti-money laundering statutes.
Between February 14, 2014 and August 8, 2014, FinCEN received 1,110 marijuana related SARs from 105 financial institutions. Of these 502 were “marijuana limited” 123 “marijuana priority,” and 475 “marijuana termination.” Without further insight into the reasons behind each SAR classification it is impossible to determine whether the DOJ and FinCEN guidance is having its intended effect. Are financial institutions initially providing services to marijuana-related business, getting cold feet and terminating relationships? Are financial institutions denying service outright? Are these SARs coming from states with medical and/or legal recreational marijuana legislation or from “dry” states?
The DOJ and FinCEN guidance places a tremendous burden on a financial institution to conduct due diligence beyond what is required for a non-marijuana- related client. There is no mention that good faith compliance will mitigate potential criminal liability for a financial institution that inadvertently fails to identify or report marijuana related activities that violate the Cole Memo priorities. To add to the confusion, FinCEN classifies a financial institution’s engagement with a marijuana- related business as a “risk-based decision.” This has caused and will continue to cause financial institutions to deny the necessary services to ensure financial transparency within the legal marijuana industry. Until there is a definitive federal law authorizing financial institutions to freely provide services to marijuana-related businesses the industries growth will be stunted and forced to operate as an all cash economy.