Bankers in states where marijuana businesses are legal (under state, but not federal, law) have been confused for the past several years about the relative risks of banking what is undeniably a cash-rich sector of the economy. When Trump appointed Jeff Sessions as his Attorney General, we thought that was not a good sign for banks that are engaged, or are planning to engage, is providing services to such businesses. A few weeks ago, the White House Press Secretary threw another wet blanket of the marijuana campfire and Dorsey & Whitney's Joe Lynyak thinks that The Spice Boy's half-a$$ed-hearted warning to state-legal marijuana business owners (and, by implication, their "co-conspirators") bodes ill for bankers.
In a client alert Joe issued last week, he explicated.
As noted above, even though there have been some informal indications that the current non-enforcement approach adopted by the Obama Administration would continue, on Thursday, February 23rd, the White House Press Secretary stated that enforcement of federal drug laws aimed at limiting the proliferation of marijuana sales may occur.
Although the Press Secretary softened this warning by stating that medical marijuana businesses would not be targeted, the fact remains that the Trump Administration appears to be reconsidering the above-referenced guidance that has been relied upon by banks when electing to offer deposit and lending services to marijuana businesses.
Joe has some potentially disturbing observations for those banks that have been following FinCEN's guidance on banking marijuana business, advice based on the so-called "Cole Memo," by filing MJ-specific suspicious activity reports (SARs), a type of SAR that Joe and others (including the hose-heads who blog at this venue) affectionately refer to as "Cheech and Chong SARs."
[B]y having filed with FinCEN one of the three new SARs (which in virtually every case would be the Marijuana Limited SAR), a bank has made an admission of probable criminal conduct on its own part if the federal government elects to initiate criminal action against the filing bank and its management. Because prosecuting criminal drug laws against individuals and small businesses is time consuming and a drain of resources, using a bank’s own statement of liability in a statement made to the federal government under penalty of perjury might be a preferred strategy. Although a list of potential penalties might be available (e.g., asset forfeiture, civil and criminal penalties and RICO actions), it is certainly possible that the federal government might pressure banks to withdraw from providing banking services to marijuana businesses. A bank should also consider the possibility that fines and penalties, including criminal penalties, might be pursued not only against the bank, but also against officers, directors and employees of the bank. (Among other things, the availability of insurance coverage to pay for legal defense costs should be verified.)
That's right: by following the "guidance" of the DOJ and FinCEN, and dutifully filing Cheech and Chong SARS, banks may have teed up themselves, their officers, directors, and employees for easy-to-prove criminal charges that they violated a plethora of federal criminal laws. In response to claims that such action on the part of federal prosecutors would "unfair," I offer the immortal words of former Dancing With The Stars stoner, Tommy Chong: "Unfortunately, the American justice system is just riddled with lies and inconsistencies." I also deem insightful the lyrics of NaS: "Life's a bitch and then you die/That's why we get high."
After making the day of MJ bankers everywhere, Joe has a few other observations, which I'll quote at length, because (A) they're pithy and pertinent and (B) I'm lazy.
Second, banks wishing to continue providing banking services to marijuana businesses should revisit the current interpretative guidance and determine whether the bank’s on-going due diligence required by the guidance is commensurate with the degree of due diligence that the guidance mandates. Further, since the Administration may elect to distinguish between medical marijuana and recreational establishments, the degree of due diligence required for the two categories of marijuana businesses may be significantly disparate in nature.
Third, a bank may elect to review the banking services it provides to vendors of marijuana businesses, such as suppliers of fertilizer, irrigation, energy and similar products and services. A related issue arises in regard to banking a company that has an affiliated entity directly involved in marijuana, but the bank’s relationship is limited to non-marijuana affiliated operations. Similarly, if the vendor provides support services to both medical and recreational marijuana businesses, separating those functions may be difficult or impossible.2
Fourth, in light of what appears to be a changed enforcement posture on the part of the Trump Administration, the senior management of the bank and its board of directors should be fully briefed regarding the increased legal risk that may soon be presented.
Finally, a bank electing to continue banking marijuana businesses should consider retaining counsel with white-collar criminal experience, including AML expertise, in advance to assist should a DOJ inquiry occur. Among other things, the bank’s compliance with the current guidance should be organized, and counsel should be well-versed in the enforcement perspective and strategy employed by the DOJ when it considers bringing a criminal prosecution or investigation.
I've seen a number of service providers who tout their "solutions" to the MJ banking conundrum. Many of them claim that they've got the whole Gordian knot untied with their better-than-sex software, systems, or fairy dust. Good luck with all of that. Just make sure the color and design of your underwear go well with pinstripes and don't drop the soap in the shower of the federal prison camp you may have the privilege of gracing. Especially if the MJ-hostile Sessions follows Flynn into the wilderness for drinking too many White Russians during the campaign, and the Orange Lord appoints a really vicious MJ-hater to succeed him, like a Bridge-Too-Far Chris Christy. No matter how you try to camouflage the money trail, the fact remains that aiding and abetting the manufacture, sale, or distribution of marijuana remains an offense under federal criminal laws that can ruin your whole day. If you bank marijuana businesses (and even businesses that serve marijuana businesses), you are relying on the consistent tolerance and forbearance of the federal executive branch, and whatever other words you wish to use to describe the current crowd in charge of that branch, "tolerance" and "forbearance" are not two that immediately pop into my mind.