Banking the Marijuana Business: Banker Beware

February 19, 2014 at 4:12 pm Leave a comment

Written by: Nicole Strong

On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Justice (“DOJ”) issued guidance seeking to clarify expectations and requirements for financial institutions that are looking to provide services to marijuana businesses (the “Guidance”). The Guidance allows financial institutions to provide services to marijuana businesses while still maintaining their obligations to “know their customer” and to report possible criminal activity.

Know Your Customer

Financial institutions must complete the following additional due diligence when assessing the risk of providing services to a marijuana business: (i) verifying with the state authorities whether the business is duly licensed and registered; (ii) reviewing the license application submitted by the marijuana business for obtaining a state license; (iii) requesting from state licensing and enforcement authorities available information about the marijuana business; (iv) developing an understanding of the normal and expected activity for the marijuana business; (v) ongoing monitoring of publicly available sources for adverse information about the marijuana business; (vi) ongoing monitoring for suspicious activity; and (vii) refreshing information obtained as part of customer due diligence. In addition, a financial institution should consider whether a marijuana business implicates one of the “Cole Memo priorities.” The Cole Memo was issued to all United States Attorneys to provide guidance to focus enforcement resources on persons or organizations whose conduct interferes with listed enforcement priorities. A copy of the Cole Memo including a listing of the Cole Memo priorities can be found here.

Reporting Criminal Activity

Because the sale of marijuana is still illegal under federal law, the obligation to file a suspicious activity report (“SAR”) is unaffected by any state law that legalizes marijuana-related activity. The Guidance was issued to assist financial institutions in determining how to file a SAR that best facilitates federal law enforcement’s access to pertinent information.

A financial institution providing services to a marijuana business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” SAR. A “Marijuana Limited” SAR is limited to the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the financial institution is filing the SAR solely because the subject is engaged in a marijuana business; (iv) the fact that no additional suspicious activity has been identified; and (v) the term “MARIJUANA LIMITED” in the narrative section. Any continuing activity report required under FinCEN’s existing guidance may contain the same limited content as the initial SAR.

If, in the course of conducting ongoing customer due diligence, the financial institution detects changes in activity that potentially implicate one of the Cole Memo priorities or violate state law, the financial institution should file a “Marijuana Priority” SAR. A “Marijuana Priority” SAR should include the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) details regarding the enforcement priorities the financial institution believes have been implicated; (iv) dates, amounts, and other relevant details of financial transactions involved in the suspicious activity; and (v) the term “MARIJUANA PRIORITY” in the narrative section.

If a financial institution determines it is necessary to terminate a relationship with a marijuana business in order to maintain an effective anti-money laundering program, the financial institution should file a SAR and note in the narrative section the basis for the termination, including the term “MARIJUANA TERMINATION.”

What This Means for You

The decision to open, close, or refuse any account or relationship lies with the bank. Before making the decision to provide services to any marijuana business, it is recommended that you familiarize yourself with the red flags described in the Guidance that indicate a marijuana business may be engaged in activity that implicates one of the Cole Memo priorities or violates state law. A copy of the Guidance can be found here. We look forward to hearing from you and answering any questions you may have with respect to this ever-expanding area of law, particularly as it relates to the varying laws of each state.

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