Changes Needed to Protect Banking and Financial Services When Dealing with the Marijuana Industry

Posted on 08-03-2016

By: Moises Gali-Velazquez.

Medical marijuana is legal in 23 states and the District of Columbia.1 Moreover, four states have legalized marijuana’s recreational use and at least 18 more states are, or have been, considering legalization of medical marijuana.2 Puerto Rico, a U.S. territory, is in the process of legalizing medical marijuana.3

States Legalize Marijuana and the Medical Marijuana Industry is Established

The number of marijuana businesses operating in jurisdictions with legalized marijuana has been solidly increasing over the past few years; in 2014, the legal marijuana industry was regarded by one market research firm as the fastest growing industry in the United States.4 Yet, the manufacturing, distribution, dispensing, or possession of marijuana, even for medical purposes, is still illegal under federal law.5

Marijuana is classified as a Schedule I drug under federal law, alongside illicit drugs such as heroin and LSD.6 This classification means that, under federal law, marijuana is considered as having a high potential for abuse and no currently accepted medical use in treatment.7 This direct conflict between state and federal law regarding the use of marijuana for medical purposes, combined with federal banking restrictions, has created enormous problems for the legal medical marijuana industry.8

Navigating through the complex federal-state regulatory uncertainty surrounding medical marijuana are thousands of entrepreneurs seeking to establish themselves as legitimate and serious businesses in this emerging industry, the majority of which include growers, manufacturers, and dispensaries. These entrepreneurs not only encounter the typical barriers to entry experienced by startups,9 they also face legal and operational obstacles that are rooted in the conflict between state and federal policy towards marijuana. Some of these hurdles include tax disadvantages,10 limited liability protection for investors,11 lack of relief under federal bankruptcy law,12 and difficulties in retaining legal counsel.13 Still, one of the most basic and universally acknowledged obstacles facing marijuana entrepreneurs is lack of access to basic banking services.14

Overview of Federal Laws Pertaining to Marijuana

Federal Prohibition of Marijuana: The Controlled Substances Act

Federal legislation enacted prior to 1970 only burdened, but did not prohibit, the growth, possession, distribution, and use of marijuana in the United States. All of that changed in 1970 with the passage of the Comprehensive Drug Abuse Prevention and Control Act of 1970, of which Title II is known as the Controlled Substances Act, or CSA.15

The CSA encompasses a closed regulatory system making it unlawful to manufacture, distribute, dispense, or possess any controlled substance except in a manner authorized by the Act.16 The CSA categorizes all controlled substances into five schedules, with Schedule I being the most restrictive and Schedule V the least restrictive. The drugs are grouped together based on their accepted medical uses, the potential for abuse, and their psychological and physical effects on the body.17 Marijuana is classified as a Schedule I controlled substance, alongside illicit drugs such as heroin and LSD.18 This classification means that, under federal law, marijuana is considered to have a high potential for abuse, no currently accepted medical use, and no accepted safe use under medical supervision in treatment.19 Unlike the controlled substances in other schedules, Schedule I substances cannot be dispensed under a prescription.20

By classifying marijuana as a Schedule I controlled substance, the manufacture, distribution, dispensing, or possession of marijuana became a criminal offense, with the only exception being the use of marijuana as part of a Food and Drug Administration preapproved research study.21

Federal criminal law also penalizes activities beyond the direct manufacturing, distributing, dispensing, and possession of marijuana. For instance, whoever aids and abets in the manufacturing, distribution, or dispensing of marijuana is committing a federal crime.22 Also, federal law punishes the act of conspiring to manufacture, distribute, or dispense marijuana,23 as well as accessories after the fact.24

Federalism Battle and Indirect Control of Medical Marijuana Businesses through Banking Laws

The nation’s dual regulatory framework, in which a state may authorize a medical marijuana business to lawfully operate under its jurisdiction but cannot protect it from prosecution under federal criminal law, gives the federal government direct and indirect control over the establishment and development of medical marijuana businesses. Ironically, the federal government has not impeded the progress of state marijuana legalization and the growth of the medical marijuana industry through direct enforcement of the CSA in those states where medical marijuana is legal. Indirect federal regulations restricting access to basic banking services have proved a far greater challenge to medical marijuana businesses.

Currently, it is safe to conclude that medical marijuana laws that exempt prosecutions from state criminal law are not preempted by, and can co-exist with, the CSA.25 The same cannot be said about state laws that regulate and authorize the commercial cultivation and distribution of marijuana, which appear to raise more stark preemption concerns. It does not appear that any federal court has engaged in a substantial discussion of the preemption issues associated with these expansive state laws. However, at least one state court has ruled that the state’s medical marijuana identification card program was preempted by the CSA because the identification card program provisions contained in the state’s medical marijuana statute were in positive conflict with the CSA.26

Federalism Battle: Victory for the States?

Many have argued that although the CSA threatens harsh sanctions, the federal government does not have sufficient resources to impose them frequently enough to meaningfully impact its fight against the unlawful use and distribution of controlled substances.27 The federal law enforcement apparatus is small to begin with, and only a fraction of federal law enforcement agents work for the DEA, the principal agency enforcing the CSA.28 The federal government has historically relied on state law enforcement agencies to address marijuana activity through enforcement of state controlled substances acts.29

Based on the executive branch’s historical inability to effectively enforce the CSA due to limited resources, and its recent change in policy on enforcement of the CSA in states where marijuana has been legalized, “many are willing to declare that, at least for practical purposes, the marijuana federalism battle has been won by the states.”30 But medical marijuana businesses still face obstacles caused by the government’s indirect regulation of medical marijuana activities and the fact that marijuana remains illegal under federal law.

Some of the operational problems faced by medical marijuana businesses that are rooted in the direct conflict between state law and federal law include:

  • Tax disadvantages under the Internal Revenue Code, as sellers of Schedule I controlled substances are required to pay taxes on their gross revenue instead of their net income31
  • No limited liability protection for investors in businesses that violate federal law32
  • Lack of relief under federal bankruptcy law, with more than one federal bankruptcy court disallowing bankruptcy protection to marijuana businesses since they violate federal law33
  • Difficulties in retaining legal counsel, as ethical and criminal provisions discourage the provision of legal representation to clients in the marijuana industry34

Still, one of the most fundamental and universally acknowledged obstacles facing marijuana entrepreneurs is lack of access to basic banking services.35 The federal government exerts a strong indirect influence over medical marijuana businesses through the laws that regulate banks and other financial institutions.

Federal Banking Laws That Impact the Legal Marijuana Industry and Indirect Regulation by the Federal Government

Lack of Access to Bank Services

Legal marijuana businesses are having real difficulties in depositing their profits into traditional bank accounts. Banks are refusing to open new accounts for medical marijuana businesses, and several financial institutions that once opened accounts for marijuana businesses are closing them.36 Some medical marijuana businesses have formed holding companies with names that disguise the nature of their businesses in order to fool banks, and others are relying on their owners’ personal accounts to conduct banking.37 Nonetheless, banks ultimately close these accounts once they learn of their customer’s connections to a medical marijuana business.38 As a result, the lack of access to banking services is forcing medical marijuana businesses to store their massive cash profits in secret warehouses guarded by army veterans employed by private security companies, to compensate their employees in envelopes with cash, and to pay thousands of dollars in state taxes with bags of cash.39 Thus, many medical marijuana businesses must implement expensive and elaborate security measures to protect themselves from being targets of criminals who are aware of their cash intensive activities.40

The lack of access to banking services not only prevents medical marijuana businesses from depositing their profits into banks, it also means that these businesses cannot implement payment processing services in their stores, as the majority of such payment services need to be attached to the bank account of the medical marijuana business.41 Also, the official rules of payment processing companies such as Visa, MasterCard, and American Express prohibit the use of their debit and credit cards for marijuana purchases.42 Therefore, the majority of medical marijuana businesses have to operate on an all-cash basis. Moreover, the lack of access to traditional banking by medical marijuana businesses prevents them from obtaining commercial loans and other credit products traditionally offered by banks to fund capital and operational needs. Thus, some marijuana entrepreneurs have only been able to fulfill their capital needs by taking short-term high-interest loans provided by family members, friends, and private lenders.43 At a time when banks should be flocking to serve this emerging billion dollar industry, they are prevented from doing so by federal law.44

Regulation of Banks in the United States: A Federalism Issue All Over Again

Dual Banking System

The United States banking industry operates under a dual banking system, in which banks form and function under a dual federal and state system of chartering, and of safety and soundness regulation.45

A bank may be chartered under federal law or state law. A bank can choose to be organized under a federal charter issued by the Office of the Comptroller of the Currency (OCC), thereby becoming a national bank.46 Likewise, a bank can choose to be organized under a state charter issued by the applicable banking regulator of that state. Common sense would move us to conclude that a bank may choose to obtain a federal national charter and fall under the regulatory authority of the OCC, subjecting itself to all federal laws, or obtain a state charter from the chartering state’s banking regulator and fall under its regulatory jurisdiction, only subjecting itself to the laws of the chartering state. Therefore, with respect the bank’s reluctance to serve medical marijuana businesses, “[i]f the dual banking system were truly dichotomous . . . the answer for marijuana banking would be clear: state-chartered institutions in states where marijuana is legal would be free to provide banking services to marijuana-related entities.”47 However, as a practical matter, it is virtually impossible for banks and other financial institutions48 to fall outside of the federal government’s radar and regulatory authority, even for statechartered entities.

Different federal financial regulators exercise control and oversight of banks through federal deposit insurance, regulation of bank holding companies, and payment systems regulation. All banks, even if organized under a state charter, have to strictly comply with federal statutes and regulations if they want to escape administrative sanctions, such as losing deposit insurance or having their charters revoked, being targeted for federal criminal prosecution, and being assessed hefty civil and criminal penalties. Since marijuana is still illegal under federal law, banks expose themselves to federal law enforcement if they establish commercial relationships with medical marijuana businesses and other marijuana-related entities.49 Compliance with the anti-money laundering statutes and the Bank Secrecy Act, which are enforced by the DOJ, the Financial Crimes and Enforcement Network (FinCEN), and other financial regulators, is driving banks to refuse banking services to marijuana businesses.

Bank Secrecy Act: Banks as Money Launderers and as Informants for the Federal Government

Money laundering, which is commonly known as the act of making illegal funds appear legitimate, is a federal crime, and the statutory provisions making money laundering a federal crime were added by the Money Laundering Control Act of 1986 (MLCA).50 In very general terms, the MLCA prohibits financial transactions involving criminal proceeds, including transactions designed to conceal or disguise the source, nature, location, ownership, or control of the proceeds, or to facilitate another crime.51

With respect to marijuana-related transactions, a bank may commit money laundering by conducting a banking transaction with a customer involving the proceeds of a known “specified unlawful activity” with the “intent to promote the carrying on of such specified unlawful activity” or while “knowing that the transaction is designed in whole or in part to conceal or disguise the nature, the location, the source, the ownership or the control of the proceeds of specified unlawful activity or to avoid a transaction reporting requirement under State or Federal law.”52 Some courts, adopting Black’s Law Dictionary definition of promote, have held that “intention to promote a specified unlawful activity” under the BSA includes the defendant’s contribution to the “growth, enlargement, or prosperity” of the unlawful activity.53

Because the cultivation, distribution, and use of marijuana are unlawful activities under federal law, it could be argued that when a bank provides banking services to a medical marijuana dispensary and such services allow the medical marijuana dispensary to grow its business, the bank is engaged in money laundering, for which the bank and its employees could be “sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.”54 A bank may also commit laundering if it “knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000,” exposing the bank to the imposition of fines or imprisonment for not more than 10 years or both.55 Hence, a bank that accepts a deposit from, or provides a loan to, a medical marijuana customer in a transaction that is in excess of $10,000, commits a federal crime, exposing the bank and its employees to hefty fines and/or prison time.

Anti-money laundering duties of banks and other types of financial institutions in the United States arise principally from the Bank Secrecy Act (BSA) of 1970 and related legislation.56 The BSA recruits banks in the fight against money laundering by requiring banks to assist the United States federal government in its enforcement efforts. Banks are required to monitor their customer’s transactions, file reports of cash transactions exceeding $10,000, and report certain suspicious activities that might indicate money laundering, tax evasion, or other criminal activities, such as financial transactions associated with illegal drug activity.57 These requirements affect not only banks, but other entities defined as financial institutions under the BSA.58 The BSA also includes two catch-all provisions defining a financial institution as “any business or agency which engages in any activity which the Secretary of the Treasury determines, by regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business described in the [BSA] is authorized to engage” and also “any other business designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters.”59

FinCEN, a bureau of the Department of the Treasury, has the authority to administer and enforce the BSA.60 FinCEN and other federal regulators have the authority to commence civil enforcement actions seeking money penalties against banks that are not in compliance with regulatory expectations. Furthermore, the DOJ may bring criminal actions against banks and responsible individuals for willful violations of the BSA, seeking criminal fines, imprisonment, or both.61

Consequently, the BSA applies to any bank in the United States,62 whether it was organized under federal law or under state law. In addition, credit unions and even foreign banks are deemed banks for BSA purposes and subject to the requirements and duties set forth therein. Under the BSA, banks must establish anti-money laundering programs that would include, at a minimum, the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs.63

Another obligation under the BSA is the establishment of customer identification procedures for verifying the identity of any person, including businesses, seeking to open an account to the extent reasonable and practicable.64 These procedures, commonly known as know your customer procedures, require banks to obtain enough information to understand the customer’s normal and expected account activity and business operations in order to discover and report unusual or suspicious activity.65 Banks are required to enhance due diligence procedures for customers that are considered higher-risk customers, which are customers that pose higher money laundering or terrorist financing risks.66

Once a relationship is established with a customer, the BSA then requires a bank to file several reports for different types of transactions that are of interest to the federal government. For example, banks must file currency transaction reports (CTRs) with FinCEN for any transaction that involves more than $10,000 in cash.67

Financial institutions must also file suspicious activity reports (SARs) with FinCEN for transactions involving at least $5,000 in funds or other assets if the bank knows, suspects, or has reason to suspect:

  • That the transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation
  • That the transaction is designed to evade any requirements of the BSA
  • That the transaction has no business or apparent lawful purpose, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction68

Since marijuana is still illegal under federal law, the BSA would thus require a bank to file a SAR with FinCEN each time the bank processes a transaction related to a customer that is engaged in a marijuana-related business. FinCEN recently confirmed the foregoing when it issued guidance for banks that desired to provide banking services to marijuana businesses.69 The FinCEN guidance, discussed below, was promulgated to alleviate the banking crisis of the marijuana industry by laying out FinCEN’s expectations of banks and their compliance with BSA requirements if they decided to service marijuana businesses. Such guidance, however, confirms that banks must file reports with the federal government for virtually all transactions for marijuana-related customers and that failure to comply with such guidance and the BSA will expose the bank to civil and criminal liability.

Based on the foregoing, the BSA not only exposes a bank to liability for money laundering and potential criminal prosecution for providing basic banking services to medical marijuana businesses, it also exposes a bank to civil penalties and criminal prosecution if it provides services to medical marijuana businesses and fails to comply with its obligation to be a watchdog for the federal government. It comes as no surprise that the majority of commercial banks in the United States are unwilling to provide services to medical marijuana businesses, with only a handful of banks willing to assume the risks associated with the legal marijuana industry. As of August 2014, only 105 of 13,188 banks, credit unions, and savings and loan associations in the United States reported having active commercial relationships with legal marijuana businesses.70

Federal Deposit Insurance and the Federal Reserve System

The stock market crash of 1929, together with a nationwide series of bank failures through the mid-1930s, resulted in the amendment of the Federal Reserve Act in June 1933, establishing the Federal Deposit Insurance Corporation (FDIC).71 The FDIC is an independent agency of the U.S. government that protects the funds depositors place in banks and savings associations. It also exercises certain supervisory and examination functions for state-chartered nonmember banks. The FDIC provides insurance to accountholders for up to $250,000.00 per depositor, per insured bank.72 Membership in the FDIC is truly a competitive necessity for a commercial bank and many believe that any bank that attempts to compete in the banking services market without the FDIC’s insurance would “doom itself to failure.”73Virtually all banks have federal deposit insurance, either because the law requires it or because it is a business necessity.74

In its role as federal deposit insurer, the FDIC is granted supervisory authority over insured banks.75 In practice, nonetheless, the FDIC cedes primary federal supervisory authority over national banks to the OCC and authority over state member banks to the Federal Reserve Board.76 Today, the FDIC serves as the primary federal prudential supervisor for state non-member banks and state savings associations. In that role, the FDIC is the primary safety and soundness examiner for state-chartered non-member banks.77 Thus, the FDIC conducts regular examinations to ensure that state-chartered banks comply with federal regulations and that they are not engaging in unsafe and unsound practices.78 Pursuant to the foregoing, a state-chartered bank becomes subject to federal regulation and to the jurisdiction of the FDIC when it is granted deposit insurance by the FDIC.

The FDIC could impose significant civil penalties on banks and bank officials for BSA violations, and could issue cease and desist letters with respect to such violations or when the bank engages in unsafe and unsound practices.79 Ultimately and under certain circumstances, the FDIC could revoke a bank’s depository insurance, which would almost guarantee the bank’s failure and closing. Specifically, the FDIC is authorized to revoke a bank’s deposit insurance if it finds that:

  • A bank or the directors or trustees of a bank have engaged or are engaging in unsafe or unsound practices
  • A bank is in an unsafe or unsound condition to continue operations as an insured institution
  • A bank or the directors or trustees of the insured institution have violated any applicable law, regulation, order, or condition imposed in writing by the FDIC in connection with the approval of any application or other request by the bank or written agreement entered into between the bank and the FDIC80

Also, the FDIC may terminate a bank’s depository insurance if the bank has been criminally convicted for money laundering crimes or under the anti-money laundering provisions of the BSA.81

The Federal Reserve also plays a role in the regulation of certain state banks. State-chartered banks subject themselves to federal regulation, and to the jurisdiction of the Federal Reserve, when they voluntarily choose to become members of the Federal Reserve System, requiring compliance with all applicable laws and regulations. Such banks are also exposed to the imposition of civil penalties if they provide services to medical marijuana businesses.82

Also, the Federal Reserve System plays a central role in payment systems of the United States through its Automated Clearinghouse (ACH) payment system.83 Banks access the ACH payment system through the establishment of a master account with a regional Federal Reserve Bank.84 The ACH system is a nationwide network through which banks send each other batches of electronic credit and debit transfers.85 For example, typical ACH credit transfers include the direct deposit of payroll, social security benefits, and tax refunds.86 On the other hand, typical ACH debit transfers include the direct debiting of mortgages and utility bills.87 Therefore, without a master account with the Federal Reserve, “a depository institution is nothing more than a vault.”88 The Federal Reserve can exercise its regulatory power over medical marijuana businesses by imposing barriers to those banks or financial institutions that are serving the marijuana industry and desire to have access to the Federal Reserve’s payment system.

The above described regulatory framework demonstrates that, although the federal government has taken a non-enforcement approach with respect to criminal prosecutions of violations of the CSA by medical marijuana businesses, the federal government is still regulating, or at the very least burdening, the medical marijuana industry through its federal anti-money laundering and banking statutes.

Attempted Solutions to the Banking Problem of Medical Marijuana Businesses

Federal Guidance to Banks

FinCEN issued guidance clarifying BSA expectations for financial institutions seeking to provide services to marijuana-related businesses on February 14, 2014.89 Such guidance was issued in light of recent state initiatives to legalize marijuana-related activity and related guidance by the DOJ concerning marijuana-related enforcement priorities. According to FinCEN, the guidance clarifies how banks can provide services to marijuana businesses consistent with their BSA obligations, and it aligns the information provided by banks in BSA reports with federal and state law enforcement priorities.90 Therefore, FinCEN intended its guidance to increase the availability of financial services for marijuana businesses.91 As discussed below, the guidance did little to accomplish these goals.

The guidance creates a regulatory structure for banks that wish to serve marijuana-related customers, asking the banks to perform strict due diligence procedures before opening accounts for marijuana businesses, and to thereafter file a series of reports with FinCEN whenever a transaction occurs between the bank and the marijuana business. First, the guidance emphasizes that banks should evaluate the risks associated with offering a particular product or service to a marijuana business and that such evaluation should be made by thorough customer due diligence.92 In assessing the risk of providing services to marijuana businesses, a bank should 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 available information about the business and related parties from state licensing and enforcement authorities
  • 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 the guidance
  • Updating information obtained as part of customer due diligence on a periodic basis and commensurate with the risk93

As part of this risk assessment, a bank should then consider whether the prospective marijuana customer implicates one of the Cole Memo Priorities or violates state law.94 (Cole Memo Priorities permit the prosecution of banks for failure to report marijuana-related CSA violations and are described in further detail on page 61). Next, if the bank decides to provide banking services to a marijuana business, it is required to file SARs with FinCEN pursuant to the reporting framework described in the guidance. A bank is required to file a SAR if, consistent with FinCEN regulations, the bank “knows, suspects, or has reason to suspect” that any transaction conducted or attempted by, at, or through the bank: (i) involves funds derived from illegal activity or is an attempt to avoid liability by misrepresenting the source of such funds; (ii) is designed to evade BSA regulations; or (iii) “lacks a business or apparent lawful purpose.”95

The guidance provides that any bank that begins a relationship with a marijuana business must file a “Marijuana Limited Suspicious Activity Report” with FinCEN, even if the relationship does not implicate one of the Cole Memo Priorities.96 The Marijuana Limited SAR provides the government with identifying information of the subject and related parties, and with notice that the bank is filing the SAR solely because the subject is engaged in a marijuanarelated business and that no additional suspicious activity has been identified by the bank.97

After the initial Marijuana Limited SAR, FinCEN then requires banks to file continuing activity reports for the same activity initially reported on a Marijuana Limited SAR.98 These reports, in addition to the information contained in a Marijuana Limited SAR, contain the amounts of deposits, withdrawals, and transfers made by the account since the last SAR filing.99 A continuing activity report must be filed within 120 days of the initial Limited Marijuana SAR filing and continue under that same timeframe.100

A bank must conduct continuing due diligence and perform ongoing monitoring of its marijuana-related accounts in order to detect red flags.101 The guidance includes a non-exhaustive list of circumstances or actions constituting red flags, which includes, for example:

  • The customer’s use of a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity
  • The customer’s inability to produce satisfactory documentation or evidence to demonstrate that it is duly licensed by the state
  • Attempts by the customer to conceal or disguise its involvement in marijuana-related business activities by, for example, operating under a non-descriptive name
  • A customer’s commercial activity inconsistent with a non-profit classification, or making excessive payments to its manager(s) or employee(s)102

If, in the course of conducting customer due diligence, a bank reasonably believes that a customer is implicated with one of the Cole Memo Priorities or violates state law, the bank must file a “Marijuana Priority” SAR with FinCEN.103 A “Marijuana Priority” SAR must contain comprehensive detail including: (i) identifying information and addresses of the subject and related parties; (ii) details regarding the Cole Memo Priorities that the bank believes have been implicated; and (iii) the dates, amounts, and other relevant details of the transactions involved in the suspicious activity.104 Finally, a bank that wishes to terminate a relationship with a marijuana business in order to maintain an effective antimoney laundering compliance program should file a “Marijuana Termination” SAR.105

Based on the foregoing, if a bank wishes to provide services to a medical marijuana business, it must perform extensive due diligence and background checks into the proposed customer prior to entering into a banking relationship. Thereafter, the bank has to engage in thorough monitoring of such customer’s activities and continually file reports with FinCEN with information concerning the customer’s financial transactions. Failure to comply with any of the requirements of the FinCEN guidance constitutes a BSA violation. Hence, a mistake concerning its enhanced obligations for a bank serving medical marijuana businesses under the BSA could expose the bank to severe monetary penalties and potential criminal prosecution.

A February 13, 2014 DOJ memorandum addresses the DOJ’s position on the prosecution of financial institutions under certain financial crimes, such as those proscribed by the money laundering statutes, and the impact of state laws legalizing marijuana (hereinafter, the 2014 Cole Memorandum).106 The memorandum confirms that marijuana-related activities are deemed “specified unlawful activities” for purposes of the criminal anti-money laundering statutes and the BSA and, thus, can form the basis for criminal prosecution.107

Specifically, the 2014 Cole Memorandum provides that “[f]inancial transactions involving the proceeds generated by marijuanarelated conduct can form the basis for prosecution under the money laundering statutes . . . and the BSA.”108 It further states that “Sections 1956 and 1957 of [the anti-money laundering statutes] make it a criminal offense to engage in certain financial and monetary transactions with . . . proceeds from marijuana-related violations of the CSA.”109 Also, the memorandum provides that “[f]inancial institutions that conduct transactions with money generated by marijuana-related conduct could face criminal liability under the BSA for, among other things, failing to identify or report financial transactions that involved the proceeds of marijuanarelated violations of the CSA.”110

Emphasizing the DOJ’s commitment to use its limited investigative and prosecutorial resources to address the most significant marijuana-related cases effectively and consistently, the 2014 Cole Memorandum invites prosecutors to apply the eight Cole Memo Priorities in determining whether to charge financial institutions with marijuana-related offenses.111 The memorandum provides examples of activities that would entail prosecution of a bank including when “a financial institution or individual is willfully blind to [a customer’s activity involving one of the eight Cole Memo Priorities] by, for example, failing to conduct appropriate due diligence of the customers’ activities.”112 On the other hand, criminal prosecution of a bank “may not be appropriate” if the financial institution “offers services to a marijuana-related business whose activities do not implicate any of the eight [Cole Memo Priorities].”113 The 2014 Cole Memorandum provides that such guidance “rests on the expectation that states that have enacted laws authorizing marijuana-related conduct will implement clear, strong, and effective regulatory and enforcement systems in order to minimize the threat posed to federal enforcement priorities.”114 Therefore, banks choosing to provide services to marijuana businesses that are not compliant with such state and regulatory systems, or which operate in states lacking a clear and robust regulatory scheme, “are more likely to risk entanglement with conduct that implicates the eight [Cole Memo Priorities].”115 Finally, although the 2014 Cole Memorandum acknowledged that banks are allowed to provide services to marijuana businesses pursuant to the federal guidance issued by the DOJ and FinCEN, it does not shield the banks from federal prosecution if they run afoul of the guidelines and requirements set forth therein.116

In summary, federal agencies, recognizing the dilemma of the legal marijuana industry, have issued guidance and memoranda regarding their prioritization of marijuana-related criminal offenses, clarifying their expectations of financial institutions serving marijuana businesses. However, banks have not rushed to provide services to the legal marijuana industry following the issuance of the February 14, 2014 guidance and memorandum.117 For example, the American Bankers Association issued a statement responding to the guidance by stating that “[w]hile we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks. As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution.”118

The principal problem with the federal guidance is that it is not legally binding.119 Agency guidance can be changed overnight without any of the rigorous process that formal agency rulemaking would entail, thus not providing the necessary regulatory stability that banks would like to have if they decide to serve medical marijuana businesses.

Another problem is that the DOJ memoranda do not bind prosecutors. These memoranda give prosecutors discretion to prosecute a criminal case and merely recommend that a criminal case against medical marijuana users and businesses should not be pursued if the Cole Memo Priorities are not involved.

Additionally, marijuana remains illegal under federal law. Federal guidance does not change that compelling fact. Any bank providing services to a medical marijuana business could face criminal prosecution at any time. The same federal guidance that purports to allow banks to serve marijuana businesses also warns and reminds the banks that “[f]inancial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution.”120

Also, the 2014 Cole Memorandum provides that banks cannot rely on the guidance set forth therein as a legal defense to a violation of federal law. Specifically, it states that “[n]either the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA, the money laundering and unlicensed money transmitter statutes, or the BSA, including the obligation of financial institutions to conduct customer due diligence.”121 Therefore, even if banks are willing to rely on public statements about enforcement priorities, the DOJ’s assurance is not very strong.

Furthermore, the federal guidance seems to require the implementation of rigorous and costly compliance measures that many banks are not willing to undertake. A number of banks that have tried to observe the rigorous compliance requirements established in the FinCEN guidance have ultimately decided to close the bank accounts of their marijuana-related customers, citing the enormous costs of establishing the type of robust compliance protocol expected by the federal government.122

State-Chartered Marijuana Cooperatives and Other Attempted Solutions

The state of Colorado adopted legislation establishing a marijuana cooperative financial system.123 Membership in the cooperative is open to licensed marijuana businesses, industrial hemp businesses, and entities that provide goods or services to licensed marijuana businesses.124 Although Colorado marijuana financial cooperatives do not need to secure federal deposit insurance, the operation of the cooperative is still subject to the authority of federal banking regulators. The Colorado marijuana financial cooperative statute requires cooperatives to obtain approval from the Federal Reserve before opening their doors to marijuana-related customers.125 Many commentators believe that the Federal Reserve will never issue such approval.126 Even if Colorado authorities issue a charter to a marijuana financial cooperative, some believe that it is not clear that a cooperative could operate consistent with Colorado law.127 Under the Colorado marijuana financial cooperative statute, the cooperative must “comply with all applicable requirements of federal law, including . . . [t]he federal Bank Secrecy Act.”128 The statute also requires a marijuana financial cooperative to disclose to its members that “[f]ederal law does not authorize financial institutions, including marijuana financial services cooperatives, to accept proceeds from activity that is illegal under federal law, such as that from licensed marijuana businesses.”129 It is thus not a surprise that by September 2014, no one had applied to establish a Colorado marijuana financial cooperative.130

In November 2014, Colorado granted Fourth Corner Credit Union (Fourth Corner) a charter under the standard credit union statute rather than the marijuana financial cooperative statute. This credit union plans to primarily serve the marijuana industry.131 The credit union, however, has not been able to open its doors for business because it was not able to establish a master account with the Federal Reserve Bank. Fourth Corner applied in November 2014 for a master account with the Federal Reserve Bank of Kansas City, and while the Federal Reserve usually takes up to seven days to process a routine application, it took the Federal Reserve eight months to review Fourth Corner’s application and to notify Fourth Corner of its denial.132 On July 30, 2015, Fourth Corner filed a federal complaint against the Federal Reserve Bank of Kansas City demanding equal access to the Federal Reserve’s payment system.133 On January 5, 2016, however, the court dismissed the case and stated that “courts cannot use equitable powers to issue an order that would facilitate criminal activity.”134 Some commenters have already concluded that “it will be an uphill battle for the credit union to prove that the Fed does not have the power to turn down the institution.”

Technology is also playing a part in the industry’s attempt at providing a solution to the marijuana banking problem. Recently, a software company and a financial compliance firm teamed up to create a software solution designed to assist banks in complying with its due diligence and BSA obligations when serving a marijuana business.135 The venture created a software solution designed to track down marijuana inventory and purchase statistics. Specifically, a barcode and an RFID tag is assigned to a marijuana plant so it can be tracked while it grows, when it is trimmed, packaged as flower or made into a concentrate, placed on the shelf, and bought by a customer.136 The software also evaluates a bank’s BSA/anti-money laundering program and allows banks to monitor a client’s point-ofsale system for any discrepancies or suspicious activity. The banks can also monitor whether their clients’ bank deposits match up to their sales and to their total yield, ensuring that its marijuana customers are not trying to launder money.137 The software solution is still in a startup phase as of the date of this article, so it remains to be seen whether this will improve access to banking services.

Establishment of Unconventional Financial Institutions

In addition to the attempts to provide a solution to the marijuana banking crisis through the establishment of marijuana financial cooperatives and credit unions such as Fourth Corner Credit Union, no other attempt at establishing an alternative type of financial institution to solve the crisis has been documented so far. Nonetheless, it is very unlikely that the activities of a Colorado marijuana cooperative, a foreign bank, or any other state unconventional banking entity or system created in the future by a state or territory to provide banking services to the marijuana industry, will ever fall outside the federal government’s radar and its enforcement efforts.

As previously discussed, the BSA regulates the activities of financial institutions and requires them to assist the federal government in its crusade against controlled substances.138 Recall that the statute contains two catch-all provisions indicating that a financial institution shall also mean “any business or agency which engages in any activity which the Secretary of the Treasury determines, by regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business described in the [BSA] is authorized to engage” and also “any other business designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters.”139 Such broad and inclusive language would subject virtually any type of unconventional financial institution to the anti-money laundering and BSA obligations. It would only take a determination from the Secretary of the Treasury that any particular entity constitutes a bank for BSA and anti-money laundering purposes. Many commentators, as well as the banking industry in general, firmly believe that the only solution to the marijuana banking problem is congressional action.

Measures to Resolve or Work around Barriers to Obtaining Banking Services

As discussed, even though the federal government has announced an apparent hands-off approach when it comes to prosecution of individuals or businesses that use or distribute medical marijuana in states where medical marijuana has been legalized, the federal government still exercises strong indirect regulation of marijuana businesses through the enforcement of its anti-laundering and banking statutes. Such indirect regulation is strong enough to have prevented the vast majority of banks and financial institutions in the United States from offering basic banking services to medical marijuana businesses.

Guidance issued by the DOJ and FinCEN has not been effective in providing a viable solution to the banking crisis faced by medical marijuana businesses. Many commentators agree that, unless Congress acts to remove these banking barriers, most financial institutions will not provide services to the marijuana industry.140 Even the FinCEN Director has admitted that the marijuana banking problem can only be addressed through congressional action.141

The most obvious approach for Congress, but unlikely at this point, would be the outright legalization of marijuana under federal law. Legalization could be accomplished by simply removing marijuana from the CSA. The consequence of outright legalization would be that marijuana and marijuana-related activities would no longer be considered unlawful under the anti-money laundering and BSA statutes, thus allowing banks to serve the medical marijuana industry without the fear of being criminally prosecuted and facing hefty civil penalties. Marijuana could also be rescheduled to a lower Schedule, which would allow the cultivation, distribution, and use of marijuana for medical purposes just as for other controlled substances with medical uses.

In a less polemic approach, Congress could amend the antimoney laundering and BSA statutes to provide an exemption from civil and criminal liability to those financial institutions serving state-sanctioned medical marijuana businesses operating in full compliance with their state’s marijuana statutes. The majority of banks admit that the principal obstacle preventing them from providing services to medical marijuana businesses is the fact that they could be exposed to criminal prosecution. Therefore, eliminating the risk of being prosecuted under the anti-laundering statutes and the BSA, and also those costly enhanced due diligence and monitoring requirements associated with the service of medical marijuana businesses, would allow the banks to treat a medical marijuana business as any other legitimate business in its portfolio of clients.

On December 16, 2014, President Obama signed into law the Consolidated and Further Continuing Appropriations Act, 2015.142 The Act contains an amendment providing that “[n]one of the funds made available in this Act to the Department of Justice may be used, with respect to the states [that have legalized medical marijuana], to prevent such states from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”143 It is yet unclear whether (or how) this language restricts federal marijuana prosecutions of private individuals. Nonetheless, a district court recently denied a motion to dismiss that argued that under the Consolidated and Further Continuing Appropriations Act, 2015, no rational basis exists for Congress’ regulation of intrastate marijuana cultivation or medicinal marijuana transactions.144 The court reasoned that the Supreme Court has held that a rational basis exists to regulate the intrastate manufacture and possession of marijuana and, thus, “[t]he appropriations rider does not negate the Supreme Court’s reasoning as to this issue.”145

Congress has been considering various legislation including measures aimed at making medical marijuana legal under federal law, measures that would protect anyone acting in compliance with state marijuana laws from federal prosecution, and even measures that would specifically protect financial institutions that provide banking services to marijuana businesses.146 In the Senate, a bipartisan trio of U.S. Senators introduced the Compassionate Access, Research Expansion and Respect States (CARERS) Act on March 10, 2015.147 An identical bipartisan companion bill was introduced in the House of Representatives on March 23, 2015.148 The bill seeks “to extend the principle of federalism to state drug policy, provide access to medical marijuana, and enable research into the medicinal properties of marijuana.”149 The bill, if passed, would reclassify marijuana under the CSA to Schedule II, thus conceding that marijuana has a recognized medical use. As a consequence, the CARERS Act would remove the threat of federal prosecution of medical marijuana patients in states that have enacted laws legalizing medical marijuana. It would also provide a safe harbor for banks and credit unions to offer services to medical marijuana businesses by prohibiting federal banking regulators from taking specific adverse actions against banks solely because the bank provides or has provided financial services to marijuana businesses.150 Although the CARERS Act directly addresses many of the impediments to marijuana banking, it is unlikely that the bill will be enacted at this point.151

In addition to the CARERS Act, Congress is presently considering the Marijuana Business Access to Banking Act of 2015.152 This bill contains the same safe harbor for banks and credit unions to offer services to medical marijuana businesses, by prohibiting federal banking regulators from taking specific adverse actions against banks solely because the bank provides financial services to marijuana businesses. It also provides that “a depository institution that provides financial services to a marijuana-related legitimate business, and the officers, directors, and employees of that depository institution may not be held liable pursuant to any Federal law or regulation . . . solely for providing such financial services pursuant to the law or regulation of such State or political subdivision.”153 This bill also addresses many of the impediments to marijuana banking, but as in the case of the CARERS Act, passage appears unlikely.154

Conclusion

The combination of an outdated CSA and pervasive federal banking regulations has interfered with state laws legalizing the medical use of marijuana. Businesses serving medical marijuana patients require access to the same basic banking services that a hospital, pharmacy, and other legitimate medical businesses enjoy. Access to banking and financial services is critical to fulfilling the purpose behind medical marijuana laws in providing care to those with qualifying diagnoses.

Legal marijuana businesses should be subject to equal financial scrutiny and accountability as other commercial activities. To do this, Congress must change federal law either by legalizing marijuana for medical purposes or exempting financial institutions from criminal, civil, and administrative liability when serving medical marijuana businesses.

Congress has been considering various measures, including making medical marijuana legal under federal law, the protection of anyone acting in compliance with state marijuana laws from federal prosecution, and even specifically protecting financial institutions that provide banking services to marijuana businesses. Without changes in federal law, states are powerless to protect the use, cultivation, and distribution of legal medical marijuana within their own borders.

Moises Gali-Velazquez is an attorney specializing in banking and financial transactions for health care clients in Puerto Rico. The author would like to thank Shawn Mathis, a professor at the Beazley Institute of Health Law and Policy, Loyola Law School Chicago, for her guidance and support.


Article courtesy of The Banking Law Journal, Volume 133, Nos. 2, 3, and 4.


Copyright © 2016. Matthew Bender & Company, Inc., a member of the RELX Group. All rights reserved. Materials reproduced from The Banking Law Journal with permission of Matthew Bender & Company, Inc. No part of this document may be copied, photocopied, reproduced, translated or reduced to any electronic medium or machine readable form, in whole or in part, without prior written consent of Matthew Bender & Company, Inc.


1. Stat. ann. § 17.37.030; ariz. rev. Stat. ann. § 36-2811; Cal. HealtH & Safety Code ann. § 11362.5; Colo. ConSt. art. Xviii, § 14; Conn. Gen. Stat. ann. § 21a-408a;  del. Code ann. tit. 16, § 4903a; d.C. Code § 7-1671.02; Haw. rev. Stat. § 329-125; 410 ill. Comp. Stat. ann. 130/25; me. rev. Stat. tit. 22, § 2423-a; md. HealtH-Gen. Code ann. § 13-3313; maSS. Gen. lawS ann. ch. 94c app., § 1-3; miCH. Comp. lawS ann. § 333.26424; minn. Stat. ann. § 152.32; mont. Code ann. § 50-46-319; nev. rev. Stat. ann. § 453a.200; n.H. rev. Stat. ann. § 126-X:2; n.J. Stat. ann. § 24:6i-6; n.m. Stat. ann. § 26-2B-4; n.y. puB. HealtH l. § 3362; or. rev. Stat. ann. § 475.319; r.i. Gen. lawS ann. § 21-28.6-4; vt. Stat. ann. tit. 18, § 4474B; waSH. rev. Code ann. § 69.51a.040. 2. alaSka Stat. ann. § 17.38.010; Colo. ConSt. art. XVIII, § 16; Oregon  Ballot Measure 91: Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act (2014); waSH. rev. Code ann. § 69.50.401 (3). Introduced bills that are still being considered as of this date include Alabama (SB 326), Iowa (SB 484), Missouri (HB 490, HB 800, SB 395), Nebraska (LB 643), North Carolina (H 78), Pennsylvania (SB 3, HB 193), South Carolina (H 3140), and Texas (HB 3785, SB 1839). 3. Puerto  Rico Executive Order No. OE-2015-010 (May 3, 2015) (ordering the Secretary of the Department of Health of Puerto  Rico to reclassify and authorize the use of the cannabis plant or some of its derivative  components for medical purposes), https://estado.pr.gov/apex/apex_util.get_blob?s=5329792254835&a=118&c=8707128265807757&p=15&k1=1441&k2=&ck=58F3E13F151E84AFA48D8EFE7897A742&rt=IR. 4. Will Yakowicz, Legal Marijuana Blooms into the Fastest-Growing Industry in America, inC. (Jan. 27, 2015), http://www.inc.com/will-yakowicz/legal-marijuana-is-fastest- growing-industry.html (citing a report  by ArcView Market Research,  finding that  the U.S. marijuana industry has a value of $2.7  billion—a 74% increase  from 2013—making it the fastest-growing industry in the country). 5. The Comprehensive Drug Abuse Prevention and Control Act of 1970,  21 U.S.C.§ 841(a)(1) (making it unlawful for any person  knowingly or intentionally “to manufacture, distribute,  or dispense,  or possess with intent  to manufacture, distribute,  or dispense,  a controlled  substance”); 21 U.S.C. § 802(6) (defining “controlled substance” as a drug or other  substance, or immediate precursor, included in Schedule  I, II, III, IV, or V of the Controlled  Substances Act); 21 U.S.C. § 812  (classifying marijuana, tetrahydrocannabinols, and cannabimimetic agents  as Schedule  I drugs). 6. 21 U.S.C. § 812 (classifying marijuana, heroin, and LSD as Schedule I drugs). 7. Id. 8. Robert A. Mikos, On the Limits of Supremacy: Medical Marijuana and the States’ Overlooked Power to Legalize Federal Crime, 62 vand. l. rev. 1421, 1438 (2009); see also J. Herbie DiFonzo & Ruth C. Stern, Divided We Stand: Medical Marijuana and Federalism, 27 HealtH  l. 17, 19 (June 2015)  (“Medical marijuana provides  the setting  for another high-stakes  battle between federal  and state  law”). 9. Brian Patrick Eha, High Hopes and Blunt Truths for the $2.3 Billion Legal Marijuana Market, entrepreneur  (Jan. 13, 2015), http://www.entrepreneur.com/ article/230772. 10. Section 280E of the Internal Revenue Code, I.R.C. § 280E, provides  that sellers of Schedule  I controlled  substances must pay taxes on their gross revenue instead  of their net income. See Benjamin M. Leff, Tax Planning for Marijuana Dealers, 90 iowa l. rev. 523, 525  (2014). 11. Luke Scheuer, The “Legal” Marijuana Industry’s Challenge for Business Entity Law, 6 wm. & mary BuS. l. rev. 511, 534  (2015). 12. In re Medpoint  Mgmt., 528  B.R. 178  (Bankr. D. Ariz. 2015); see also In re Arenas, 514  B.R. 887, 895  (Bankr. D. Colo. 2014) (The court dismissed a Chapter 7 case and denied  to convert  to a Chapter 13 case. The court stated that  it “cannot force the Debtors’ Trustee  to administer assets  under  circumstances where  the mere act of estate administration would require  him to commit federal crimes under the CSA. Nor can the Court confirm a reorganization plan that is funded from the fruits of federal crimes.”). 13. Sam Kamin & Eli Wald, Marijuana Lawyers: Outlaws or Crusaders?, 91 or. l. rev. 869, 899  (2013). 14. Julie Andersen Hill, Banks, Marijuana, and Federalism, 65 CaSe w. reS. l. rev. 597, 600  (2015). 15. See sources  cited in note  5. 16. 21 U.S.C. § 841(a)(1) (“[I]t shall be unlawful for any person  knowingly or intentionally . . . to manufacture, distribute, or dispense,  or possess with intent to manufacture, distribute, or dispense,  a controlled  substance.”); 21 U.S.C. § 844(a). 17. 21 U.S.C. § 812. 18. Id. (classifying marijuana, heroin, and LSD as Schedule   drugs). Tetrahydrocannabinol (THC), which is the major psychoactive ingredient of the marijuana plant, is also included in Schedule I of the CSA. Annaliese Smith, Marijuana As a Schedule I Substance: Political Ploy or Accepted Science?, 40 Santa Clara l. rev. 1137,  1140 (2000). 19. 21 U.S.C.S. § 812. 20. 21 U.S.C.S. § 829. 21. 21 U.S.C.S. §§ 823(f), 841(a)(1), 844(a); see also United States  v. Oakland Cannabis Buyers’ Cooperative, 532  U.S. 483  (2001); Gonzales v. Raich, 545  U.S. 1, 14 (2005). 22. 18 U.S.C.S. § 2 (“Whoever commits an offense  against the United States  or aids, abets, counsels, commands,  induces or procures its commission, is punishable  as a principal.”). 23. 18 U.S.C.S. § 371  (“If two or more persons conspire either  to commit any offense  against the United States  . . . and one or more of such persons do any act to effect  the object  of the conspiracy, each shall be fined under  this title or imprisoned  not more than five years, or both.”). 24. 18 U.S.C.A. § 3. 25. Robert A. Mikos, Preemption under the Controlled Substances Act, 15 J. HealtH Care l. & pol’y 5, 37 (2013). 26. Emerald Steel Fabricators,  Inc., v. Bureau of Labor and Industries, 348 Ore. 159 (2010). But see County of San Diego v. San Diego NORML, 165 Cal. App. 4th 798 (2008) (holding that the same identification  card program authorized under California’s medical marijuana statute was not preempted by the CSA). 27. Mikos, supra note  8, at 1,464.  28. Id. (stating that “[t]he federal government employs 105,000 law enforcement agents,  only about  4,400  of whom work for the DEA ... [t]he remainder work for dozens of departments—FBI, ICE, ATF, and so on—and spend only a fraction of their time handling drug crimes”). 29. Id. 30. Hill, supra note 14, at 599. See also Bradley E. Markano, Enabling State Deregulation of Marijuana through Executive Branch Nonenforcement, 90 NYU L. rev. 289 (Apr. 2015) (“In an apparent victory for federalism, the Obama Administration has set out a policy of deference to state  marijuana regulations, even when state  laws conflict with federal prohibition.”). 31. See sources  cited in note 10. 32. Scheuer, supra note 11. 33. See cases cited in note  12. 34. Kamin & Wald, supra note  13. 35. Yakowicz, supra note  4. 36. Jacob
Sullum, Marijuana Money Is  Still a Pot of Trouble for Banks, forBeS   (Sept.  18,  2014),  http://www.forbes.com/sites/jacobsullum/2014/09/18/local-banks-terrified-by-friendly-neighborhood-marijuana-merchants/; see also Dan Frosch & Robin Sidel, For Pot Shops, Finding a Bank Is Still a Pipe Dream, wall St. J. (Apr. 21, 2014),  http://www.wsj.com/articles/SB10001424052702304049904579
515911975177756; Keri Geiger, Jesse  Hamilton & Elizabeth Dexheimer,  Does Anybody Want $3 Billion in Cash from Pot Sales? Big Banks Say No, Thanks, BloomBerG  (May 12, 2015), http://www.bloomberg. com/news/articles/2015-05-12/banks-just-say-no-to-weed-as-treasury-pushes-the-business. 37. Mark S. Lally, What’s in Store for Delaware’s First Medical Cannabis Dispensary? 33 del. law. 20, 21 (Spring
2015). 38. Id. 39. Serge F. Kovaleski, Banks Say No to Marijuana Money, Legal or Not, N.Y. timeS (Jan 11, 2014), http://www.nytimes.com/2014/01/12/us/banks-say-no-to-marijuana-money-legal-or-not.html.
40. Grant Hatchimonji, Up in Smoke: How Marijuana Shops in Colorado Are Protecting Themselves from Losses, CSO online (May 6, 2014), http://www.csoonline.com/article/2151700/physical-security/up-in- smoke-how-marijuana-shops-in-colorado-are-protecting-themselves-from-losses.html. 41. During the  settlement stage  of a payment  processing transaction, funds  are debited  from the  customer’s  bank account and are ultimately deposited into the bank account of the merchant medical marijuana business. Therefore, medical marijuana businesses need to have a bank account in order to receive the profits of their processed sales. See maSterCard, wHat we do, https://www.mastercard.us/en-us/about-mastercard/what-we-do/payment-processing.html (last visited May 3, 2016). 42. Nonetheless, some reports have surfaced  regarding the fact that Visa and MasterCard have quietly decided  not to enforce their rules and allow certain marijuana retailers to use their payment  processing services for their customer purchasers as long as their merchant acquirers  (banks) decide such transactions are legal. Other  companies,  such as American Express, have taken a tougher stance  and are not processing transactions for marijuana-related businesses. See Robin Sidel, Card Conundrum Develops in Colorado over Marijuana Sales, wall St. J. (Jan. 6, 2014),  http://www.wsj.com/articles/SB10001424052702304887104579304
970273466300; David Migoya, Recreational Pot: Processors of Credit, Debit Cards Relax Rules, denver poSt  (Jan. 8, 2014), http://www.denverpost.com/marijuana/ci_24866119/recreational-pot-processors- credit-debit-cards-relax-rules. 43. Abigail Tracy, The Long, Strange Challenge Facing Marijuana Entrepreneurs, INC. (Feb. 11, 2014), http://www.inc.com/abigail-tracy/the-obstacles-facing-potrepreneurs.html. 44. Hill, supra note  14, at 600  (“When the marijuana industry asks federal and state  financial institutions why they will not provide banking services, the institutions point to federal law”); see also ameriCan BankerS aSSoCiation, frequently aSked queStionS: mariJuana and BankinG (Feb. 2014), http://www.aba.com/Tools/Comm-Tools/Documents/ABAMarijuanaAndBankingFAQFeb2014.pdf. 45. Kenneth E. Scott, The Dual Banking System: A Model of Competition in Regulation, 30 Stan. l. rev. 1 (1977) (“the ‘dual system’ of both  national and state  banks and national and state  agencies  regulating  banking is an object of almost universal veneration”); see also Jonathan R. Macy & Henry N. Butler, The Myth of Competition in the Dual Banking System, 73 Cornell  l. rev. 677  (1988) (“The American banking system  operates under a dual state  and federal system  of chartering  and safety and soundness regulation.”). 46. The OCC charters national banks under the authority  of the National Bank Act of 1864,  12 U.S.C. 1 et seq. 47. Hill, supra note  14. 48. This article does not delve into the particularities  of the regulatory  frameworks  related  to other  financial institutions such as credit unions and savings and loans associations. Credit unions, however,  also operate under a dual regulatory system and can generally choose a federal charter  from the National Credit Union Administration (NCUA) or a state  charter  from a state  credit union regulator.  See 12 U.S.C. §§ 1753, 1752(6). 49. American Bankers Association,  supra note  48 (“Financial institutions face significant risk for violating federal law if they offer banking services to marijuana-related businesses.”). 50. Pub. L. No. 99-570; 18 U.S.C. §§ 1956 and 1957.  51. Regalado Cuellar v. U.S., 553  U.S. 550, 550  (2008); 18 U.S.C.A. § 1956.  52. 18 U.S.C.A. §§ 1956 (a)(1)(A)(i) and 1956(B). 53. U.S. v. Arthur, 432  Fed. Appx. 414, 421  (5th Cir. 2011) (unpublished); U.S. v. Awan, 607  F.3d 306, 314  (2d Cir. 2010); U.S. v. Valuck, 286  F.3d 221, 226  (5th Cir. 2002). 54. 18 U.S.C.A. § 1956 (a)(1). We may concede that a bank would be promoting the growth  of a medical marijuana dispensary  when  it provides  a loan for the working capital of the dispensary  or to expand  its operations, or simply by allowing the dispensary  to deposit  funds with the bank and providing legitimate  evidence  of the  profitability of the  bank to potential  investors.  55. 18 U.S.C.A. § 1957.144. 56. Currency  and Foreign Transactions Reporting  Act (popularly known as the Bank Secrecy Act), Pub. L. No. 91-508, 84 Stat. 1114 (1970), codified as amended in 12 U.S.C. §§ 1829(b), 1951–1959; 31 U.S.C. §§ 5311–5330. The USA PATRIOT Act amended and strengthened the requirements under the BSA. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act, Pub. L. No. 107-56, 115 Stat. 272 (2001). 57. Id. See also FinCEN, Mandate From Congress, Financial Crimes Enforcement Network, http://www.fincen.gov/statutes_regs/bsa (summary of Bank Secrecy Act provisions) (last visited May 3, 2016). 58. 31 U.S.C. § 5312. 59. 31 U.S.C. §§ 5312(Y) and 5312(Z). 60. The general  civil penalty  provision of the  BSA is 31  U.S.C. § 5321 and its corresponding regulation,  31  C.F.R. § 1010.820. 61. The general  criminal penalty provision of the BSA is 31 U.S.C. § 5322 and its corresponding regulation, 31 C.F.R. § 1010.840. 62. Specifically, the term “bank” is defined to include each agent, agency, branch, or office within the United States  of any person  doing business  in one or more of the following capacities: (1) a commercial bank or trust  company organized under the laws of any state  or of the United States; (2) a private bank; (3) a savings and loan association  or a building and loan association organized  under the laws of any state  or of the United States; (4) an insured institution  as defined  in Section 401  of the National Housing Act; (5) a savings bank, industrial bank, or other thrift institution;  (6) a credit union organized under the law of any state  or of the United States; (7) any other organization  (except a money services business) chartered under  state  banking law and subject  to state  bank supervisory  authority;  (8) a bank organized  under  foreign law; and (9) any national  banking association or corporation under  the  provisions of Section 25(a) of the Act of Dec. 23, 1913,  as added  by the Act of Dec. 24, 1919,  ch. 18, 41 Stat. 378, as amended (12 U.S.C. 611–32).151. 63. 31 U.S.C.A. § 5318(h)(1). 64. 31 U.S.C.A. § 5318(l); 31 C.F.R. § 1020.220). 65. Federal Financial Institutions Examination Council, Bank Secrecy Act/Anti-Money Laundering Examination Manual 56–58 (2014), https://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2014_v2.pdf. 66. Id. 67. 31 U.S.C. § 5313(a); 31 C.F.R. § 1010.311. 68. 31 C .F.R. § 1020.320. 69. Fin. Crimes Enforcement Network, Dep’t Of The Treasury, Fin-2014-G001, Bsa Expectations Regarding Marijuana-Related Businesses (2014), http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2014-G001.pdf. 70. Jennifer  Mann, Chart of the Week: The Challenging Banking Climate for Marijuana Businesses, mariJuana  BuS. daily (Jan. 12, 2015),  http://mjbizdaily.com/chart-of-the- week-snapshot-of-the-challenging-banking-situation-facing-marijuana-businesses/; see also Danielle Douglas, Banks Are Slowly Welcoming Legal Marijuana Dealers, waSH. poSt  (Aug. 12, 2014), http://www. washingtonpost.com/business/economy/banks-are-slowly-welcoming-legal-marijuana-dealers/2014/08/12/01c17960-225b-11e4-8593-da634b334390_story.html. 71. Act of June  16, 1933,  ch. 89, § 8, 48 Stat. 168, as amended. This provision, originally codified at 12 U.S.C. § 264, was subsequently withdrawn  from the Federal Reserve Act and made over into the separate Federal Deposit Insurance Act, 12 U.S.C. ch. 16, in 1950.  See Act of September 21, 1950,  ch. 967, § 1, 64 Stat. 873. 72. Federal Deposit Insurance, Understanding Deposit Insurance, https://fdic.gov/deposit/deposits/ (last visited May 3, 2016). 73. Macy & Butler, supra note  49, at 699. 74. Patricia A. McCoy, Banking Law Manual: Federal Regulation of Financial Holding Companies, Banks and Thrifts § 3.03 (Matthew Bender, Second Ed.). 75. Id. See also Hill, supra note  14, at 618  (“With the benefit  of federal insurance  comes the burden  of federal regulation.  In order to retain the federal insurance,  financial institutions must comply with FDIC . . .restrictions.”). 76. McCoy, supra note  78, at § 3.03. 77. Id. 78. 12 U.S.C. §§ 1820(b), 1784;  12 C.F.R. § 741.1. 79. 12 U.S.C. §§ 1818(b), 1818(i). 80. 12 U.S.C. § 1818(A). 81. 12 U.S.C. § 1818.  82. 12 U.S.C. §§ 324, 330; 31 C.F.R. § 1010.810. 83. Federal Reserve Bank Of San Francisco, What Is the Fed: Payment Systems, http://www.frbsf.org/education/teacher-resources/what-is-the-fed/payment-services (last visited May 3, 2016 (last visited  May  3,  2016).  84. Federal Reserve Bank Services, Master Account  https://www.frbservices. org/servicesetup/account/master_account.html  (last visited  May 3,  2016).  85. Board Of Governors of the Federal Reserve System, Automated Clearinghouse Services,  http://www.federalreserve.gov/ paymentsystems/fedach_about.htm (last visited May 3, 2016). 86. Id. 87. Id. 88. Chris Morran, Pot-Centric Colorado Credit Union Sues Federal Reserve Bank for Denying Account, ConSumeriSt  (July 31, 2015), http://consumerist.com/2015/07/31/pot-centric-colorado-credit-union-sues-federal-reserve-bank-for-denying-account/. 89. Fin. Crimes Enforcement Network, supra note  73. 90. Id. at 1. 91. Id. 92. Id. at 2. 93. Id. at 2–3. 94. Id. at 3. 95. Id. 96. Id. 97. Id. at 4. 98. Id. 99. Id. 100. Frequently Asked Questions Regarding 3 FinCEN Suspicious Activity Report (Question #16), http://www.fincen.gov/whatsnew/html/sar_faqs.html (last visited May 3, 2016). 90. Id. at 1. 91. Id. 92. Id. at 2. 93. Id. at 2–3. 94. Id. at 3. 95. Id. 96. Id. 97. Id. at 4. 98. Id. 99. Id. 100. Frequently Asked Questions Regarding 3 FinCEN Suspicious Activity Report (Question #16),  http://www.fincen.gov/whatsnew/html/sar_faqs.html (last visited May 3, 2016). 101. Fin. Crimes Enforcement Network, supra note 73, at 4. 102. Id. at 5–7. 103. Id. at 4. 104. Id. 105. Id. at 4–5. 106. Memorandum from James M. Cole, Deputy Att’y Gen., to U.S. Att’ys, Guidance Regarding Marijuana Enforcement (Feb. 14, 2014), http://www.justice.gov/sites/default/files/usao-wdwa/legacy/2014/02/14/DAG%20Memo%20-%20Guidance%20Regarding%20Marijuana%20Related%20Financial%20Crimes%202%2014%2014%20(2).pdf. 107. Id. at 2. 108. Id. 109. Id. 110. Id. ernight.”). 118. American Bankers Association, Aba Statement on FinCEN Guidance (Feb. 14, 2014), http://www.aba.com/Press/Pages/021414FinCenGuidance.aspx. 119. American Bankers Association,supra note 48, credit-union-for-cannabis.html. 120. Memorandum, supra note 106, at 2. 121. Id. at 3. 122. American Bankers Association, supra note 48 (“the expectations set forth in the guidance are extensive and require financial institutions to adopt procedures to closely scrutinize all activities of a marijuana business”); see also Tony C. Dreibus, Mad Scramble in Nevada after Bank Retreats from Cannabis Industry, Marijuana Bus. Daily (May 19, 2015) (citing the decision of various banks to close accounts due to high costs of compliance with government requirements), https://mjbizdaily.com/mad-scramble-nevada-bank-retreats-cannabis-industry/. 123. Marijuana Financial Services Cooperatives Act, Colo. Rev. Stat. Ann. §§ 11-33-10 to 11-33-128. 124. Colo. Rev. Stat. Ann. § 11-33-106. 125. Before the commencement of operations, the incorporators of the co-op must provide written evidence of approval by the Federal Reserve System Board of Governors for access by the co-op to the Federal Reserve System. Colo. Rev. Stat. Ann. § 11-33-104. 126. Hill, supra note 14, at 639 (“Is the Federal Reserve likely to grant cannabis credit co-ops access to any of the Fed’s payment services? Most commentators say no, although few offer a precise legal basis for their conclusion”). 127. Id. 128. Colo. Rev. Stat. Ann. § 11-33-126(1)(a); Hill, supra note 14, at 642. 129. Colo. Rev. Stat. Ann. § 11-33-106(4)(a)(I); Hill, supra note 14, at 642. 130. David Migoya, Promise for Pot-Banking Co-Op SeesLittle Progress Since It Was Law, Denver Post (Sept. 14, 2014) (“’We get questions from interested parties, but no one has applied,’ said Chris Myklebust, Colorado’s commissioner of its division of financial services”), http://www.denverpost.com/marijuana/ci_26525249/promise-pot-banking-co-op-sees-little-progress. 131. Jenny B. Davis, Meet a Lawyer Trying to Guide the All-Cash Cannabis Industry into the Federal Banking System, ABA J. (July 1, 2015), http://www.abajournal.com/magazine/article/lawyer_dad_works_to_guide_all_cash_cannabis_industry_into_the_federal. 132. Nathaniel Popper, Banking for Pot Industry Hits a Roadblock, N.Y. Times (July 30, 2015), http://www.nytimes.com/2015/07/31/business/dealbook/federal-reserve-denies-credit-union-for-cannabis.html. 133. Id. 134. Fourth Corner Credit Union v. Fed. Reserve Bank of Kansas City, 15-CV-01633-RBJ (D.Colo. Jan. 5, 2016). Fourth Corner Credit Union filed an appeal to the U.S. Court of Appeals for the Tenth Circuit, Case No. 16-1016, and it is pending resolution as of this date. 135. Will Yakowicz, New Software Could Help Marijuana Businesses Get Access to Banks, Inc. (July 21, 2015), http://www.inc.com/will-yakowicz/kind-financialcannabis-banking.html. 136. Id. 137. Id. 138. Id. 139. 31 U.S.C.A. §§ 5312(Y) and (Z). 140. Hill, supra note 14, at 644. 141. Id. (citing FinCEN Director Jennifer Shasky Calvery when she conceded that marijuana banking is “a unique and complex issue” and “only legislative change can fully and completely address it”). 142. Pub. L. No. 113-235. 143. Id. 144. U.S. v. Silkeutsabay, 13-CR-0140-TOR-1 (E.D. Wash. May 18, 2015). 145. Id. 146. CARERS Act of 2015 (S. 683; H.R. 1538, 114th Congress (2015–2016)); Respect State Marijuana Laws Act (H.R. 1940, 114th Congress (2015–2016)); Marijuana Businesses Access To Banking Act Of 2013 (H.R. 2652) was reintroduced as Marijuana Business Access To Banking Act Of 2015 (H.R. 2076, 114th Congress (2015–2016)). 147. CARERS Act Of 2015 (S. 683, 114th Congress (2015–2016)). 148. CARERS Act Of 2015 (H.R. 1538, 114th Congress (2015–2016)). 149. Id. 150. Id. 151. According to Govtrack, a website that tracks the progress of bills in Congress, the prognosis for the CARERS Act is that it has a 1% chance of being enacted. H.R. 1538: CARERS ACT OF 2015, GOVTRACK.US, https://www.govtrack.us/congress/bills/114/hr1538 (last visited May 3, 2016). 152. H.R. 2076, 114th Congress (2015–2016). 153. Id. 154. According to Govtrack, the prognosis for the Act is that it has a 0% chance of being enacted. H.R. 2076: Marijuana Businesses Access To Banking Act Of 2015, Govtrack.us, https://www.govtrack.us/congress/bills/114/hr2076 (last visited May 3, 2016).