Banking Marijuana Related Businesses

In the past I've written in other venues I’ve written a good bit about banking marijuana related businesses (MRBs) – but that was in the past, well before the 2016 election in the US. Needless to say, a lot has changed. The focus of my writing then was centered around the 2013 Cole Memo and subsequent guidance from FinCEN in 2014, which laid out some guidelines that could keep financial institutions in reasonably good standing with the federal government with respect to MRBs. But “times they are a-changin.’”

First, a lay of the land – as of June 2017, 37 states and DC have some form of legalized marijuana (medical and/or recreational) and a handful more have ballot initiatives or legislative bills coming up. California, a global economy in itself, is about to become the largest market for recreational cannabis in the world, and Canada is coming along just as quickly. The differences between state law and US federal law are stark and create massive challenges for MRBs and financial institutions.

After the Cole memo, there seemed to be a pretty reasonable way forward – in short, institutions could follow state laws and regulations, and file SARs and CTRs regularly with FinCEN, and the DOJ would let things go (oversimplification I’ll address in another post). The change in administration has thrown all this in to doubt and there is little sign the new DOJ will be as permissive considering Attorney Jeff Sessions’ stance on marijuana (“Good people don’t smoke marijuana”). Yet most stakeholders seem to favor getting MRBs in to the banking system.

I’ve had the opportunity to speak with a range of people from MRBs to bankers to law enforcement officers and regulators. Most prefer getting MRBs’ funds in to the formal banking system. MRBs want to pay their taxes, they want their employees to be safe, they want bad actors excluded from the state-legal systems. Pushing state legal marijuana in to the shadows doesn’t make any sense – but that is where the current DOJ appears to be heading.

The SAFE Act that has been proposed in the US House. In short, this act would codify the very reasonable requirements from the Cole memo in to law, and give financial institutions, MRBs and law enforcement some level of clarity on how to manage this growing business segment. Under this act money flows from MRBs (which includes growers, processors, and retailers) will be clear to FinCEN and thus law enforcement. Entities involved in illegal trade will have a much tougher time, while state-law abiding entities will have an easier time paying their taxes.

It doesn’t matter if you personally agree with marijuana legalization – just like it doesn’t matter if you think tobacco or alcohol should be legal – it is happening across the country at the state level. At some point the federal government will need to deal with it. It will be mighty hard for the GOP to claim states’ rights except in this instance, and most DNC folks seem to be on board with legalization and regulation. States are no doubt looking to the tax revenue Colorado and Washington are bringing from marijuana sales and seeing an opportunity to both cut expenses and increase revenue. Of course, public safety includes things like driving under the influence and use by minors – but also includes the threat of violence associated with illicit trade.

People are safer, and law enforcement better informed when these activities are in the open, reported upon and state laws and regulations are followed. Financial institutions will inevitably be a key focal point in following the money and managing reporting. Some institutions will decide not to serve these businesses, and some will find a way to price according to the risk and operational costs commensurate with the business.

The point is, there needs to be more conversation between the banking industry and the federal government/regulators to clarify the go forward path for MRBs and for financial institutions to serve them. This challenge is not going away.