Lender Life


Buzz Kill

By Audrey Wright-Cipriano

For the first time ever, a clear majority of Americans favor the legalization of the medical and recreational use of marijuana. According to Gallup, which has been polling Americans on this issue since 1969, 58 percent of Americans now agree that the drug should be decriminalized. This trend isn’t likely to abate. Presently, 21 states and the District of Columbia allow legalized marijuana for medicinal or recreational purposes, and other states such as Maryland are taking baby steps to decriminalize possession of the drug.

As state laws relax and marijuana attempts to go mainstream, legally licensed “cannabis businesses”—which include everything from retailers, dispensaries and grow operations to specialty marketing shops and even ad agencies—are stepping up to serve an untapped market ripe with potential. These commercial startups would traditionally be an ideal commercial lending demographic for community banks, if not for federal regulatory uncertainty posing significant risks to serving these businesses.

Colorado, one of two states so far to legalize marijuana for recreational use, has struck a tax revenue bonanza with more than $7.3 million in tax income generated from legal marijuana sales in just the first quarter. As a whole, the national legal marijuana market is projected to rake in more than $2.6 billion this year, up from $1.5 billion a year ago, according to ArcView Group, a San Francisco investment network and market research firm that specializes in tracking legal cannabis trends.

FinCEN Bank Secrecy Act Expectations

In assessing the risk of providing services to marijuana-related businesses, the Financial Crimes Enforcement Network released guidance in February advising a financial institution to 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);
  • ongoing monitoring of publicly available sources for adverse information about the business and related parties;
  • ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and
  • refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

Find the guidance (FIN-2014-G001) on FinCEN’s website at www.fincen.gov.

No matter how you slice or dice—or roll it, as the case may be—that’s a lot of green. A lot of green that remains unbanked. In February, in response to recent state initiatives to legalize marijuana and a U.S. Department of Justice’s “Cole Memo” that concerns marijuana-related enforcement priorities, the Department of the Treasury Financial Crimes Enforcement Network (FinCEN) issued its own guidance to financial institutions that wanted to provide banking services to marijuana-related businesses.

The BSA Expectations Regarding Marijuana-Related Businesses memo clarifies financial institutions’ Bank Secrecy Act and anti-money laundering obligations should they choose to serve cannabis-based businesses as customers, whether providing loans, accounts or other financial services. However, the memo falls short of explicitly saying that, because marijuana remains illegal at the national level, financial institutions that do lend to such business will be protected from civil enforcement or federal prosecution.

“Community banks that seek to offer financial services to those involved in the marijuana trades should carefully review the guidance, assess their tolerance for risk and be mindful of the due diligence that is required when working with these customers,” says Lilly Thomas, ICBA’s vice president and regulatory counsel and an Bank Secrecy Act and anti-money laundering regulatory expert.

Thomas explains that the FinCEN memo warns financial institutions to “serve these customers at your own risk” and places a heavy burden on banks to scrutinize these customers for BSA compliance. “The due diligence process alone is arduous,” she says, “and Suspicious Activity Report filing obligations have not gone away under BSA/AML.”

“Community banks that seek to offer financial services to those involved in the marijuana trades should carefully review the [FinCEN] guidance, assess their tolerance for risk and be mindful of the due diligence that is required when working with these customers.”
—Lilly Thomas, ICBA Vice President and Regulatory Counsel

Thomas adds that despite federal U.S. Deputy Attorney General James Cole’s assurance that prosecuting properly regulated marijuana growers and sellers is not a high priority for the U.S. Justice Department as long as marijuana remains illegal under federal law, banks could still face substantial risk under the Controlled Substance Act, the USA PATRIOT Act, the Bank Secrecy Act, the Racketeer Influenced and Corrupt Organizations Act, or other federal statutes.

Erik Altieri, communications director for the National Organization for the Reform of Marijuana Laws (NORML), agrees that the FinCEN memo is not binding enough to protect banks from regulatory scrutiny. NORML, which advocates for those Americans who oppose marijuana prohibition, supports the Marijuana Business Access to Banking Act (H.R. 2652 ), which Altieri says would codify the FinCEN memo and give banks legal clearance to provide banking services to legitimate marijuana-related businesses.

The bill, which has 28 Democrat and three Republican co-sponsors, was assigned to a congressional committee in July 2013, and, according to the online bill tracking tool, GovTrack.us, has about a 1 percent chance of being enacted.

Audrey Wright-Cipriano (audrey.cipriano@icba.org) is ICBA’s director
of marketing and brand strategy.