Compliance Blog

Mar 06, 2017
Categories: BSA

The Feds Might be Coming for Mary Jane

Written by Pamela Yu, Special Counsel for Compliance and Research

Since moving my family from the DC metro area to Denver last summer, curious friends and family have often asked about the marijuana industry out here in the Mile High City. After eight months in beautiful Colorado, I can report that yes, we have a pot shop just up the street (actually, it's a pretty fancy "cannabis boutique") and yes, the marijuana industry in this state is booming and thriving. In 2015 alone, Colorado reportedly collected more than $135 million in taxes and license fees related to legal marijuana sales, with more than $35 million of those funds earmarked for public school construction projects.  But is the Mary Jane Gravy Train about to find a major roadblock in its path?

The Trump Administration is signaling that a major shift in federal marijuana enforcement policy may be just around the corner.  As we have blogged about in the past, credit unions providing, or interested in providing, financial services to marijuana-related businesses already face significant legal, compliance and operational challenges, and these difficulties are about to get worse.

By way of background, to date, more than half the country, 28 states in total, has legalized marijuana in some form at the state level.  Under the Controlled Substances Act (CSA), however, marijuana remains a schedule I controlled substance, which makes it illegal under federal law to manufacture, distribute, or dispense marijuana. See, 12 U.S.C. §812(b)(1).  In addition, criminal provisions of federal money laundering statutes, unlicensed money remitter statutes, and the Bank Secrecy Act (BSA) remain in effect with respect to marijuana-related activity.  For example, it is a federal criminal offense to engage in certain financial and monetary transactions with the proceeds of a specified unlawful activity, including marijuana-related funds. See, 18 U.S.C. § 1956 and 1957. It is also a federal criminal offense to transact funds derived from marijuana-related activity by or through a money transmitting business. See, 18 U.S.C. § 1960.  Financial institutions that conduct transactions with funds derived by marijuana-related activity may also be subject to criminal liability for failing to identify or report financial transactions involving marijuana proceeds.  See, 31 U.S.C. §5318(g).

As such, financial transactions involving proceeds from marijuana-related activity can still form the basis for federal criminal prosecution, despite growing legalization under state law.  Due to this conflict between federal and state law, credit unions and banks have been challenged in providing financial services to marijuana-related businesses.  Financial institutions have also faced uncertainty about how they can provide services to marijuana-related businesses consistent with their BSA compliance obligations.  As a result, legal marijuana-related businesses remain largely unbanked and typically operate as cash-based businesses, increasing the risk of robbery and other crimes.  Several members of Congress have called for legislative and/or regulatory action to enhance financial access for legal marijuana-related businesses. In response, under the Obama Administration, the Department of Justice (DOJ) issued "Cole" memos in 2013 and 2014 addressing marijuana enforcement, and the Financial Crimes Enforcement Network (FinCEN) in 2014 issued guidance on BSA expectations regarding marijuana-related businesses. Together, the DOJ memos and the FinCEN guidance created a path, albeit somewhat narrow, for credit unions to serve marijuana-related businesses consistent with their compliance obligations. 

However, recent comments from the White House and the attorney general are strongly hinting at a reversal from the previous administration's policy that the federal government would not direct its investigative and prosecutorial resources to states where marijuana is allowed under state law. 

In February, while drawing some distinction between medical and recreational marijuana, White House press secretary Sean Spicer indicated that "there is still a federal law that we need to abide by when it comes to recreational marijuana," and "I do believe you will see greater enforcement of it."

Meanwhile, during his Senate confirmation proceedings attorney general Jeff Sessions testified that, "I won't commit to never enforcing federal law," after previously stating, "good people don't smoke marijuana."

While still speculative at this point, a change in federal drug enforcement priorities could mean even greater uncertainty for credit unions already serving or looking to serve marijuana-related businesses. The DOJ memos and FinCEN guidance provided a framework for offering financial services to marijuana-related businesses but the fact remains that marijuana is still illegal under federal law.  At the end of the day, agency guidance and enforcement policies are not binding law.  The Trump Administration has full discretion and authority to overturn the DOJ memos and alter federal enforcement priorities with respect to marijuana-related activity.  If that happens, credit unions providing financial services to marijuana-related businesses are vulnerable to uncertain legal and compliance liabilities. 

Keep in mind that FinCEN's guidance relies on the enforcement posture articulated in the 2013 and 2014 DOJ memos:

FinCEN is issuing this guidance in light of recent state initiatives to legalize certain marijuana-related activity and related guidance by the U.S. Department of Justice (DOJ) concerning marijuana-related enforcement priorities. This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities.

Accordingly, if federal law enforcement priorities change or the DOJ memos are repealed or revised, credit unions can no longer rely on the FinCEN guidance for serving marijuana-businesses, heightening BSA compliance risks.  It is also unclear at this point how NCUA would respond to any change in federal drug enforcement policy.  While the agency instructed its examiners to follow the DOJ and FinCEN guidance, all bets are off if the current White House reverses course, and NCUA will almost certainly comply with any new directives from the Trump Administration with respect to federal enforcement of marijuana-related activities.

A lot remains uncertain, but if your credit union is serving or looking to serve marijuana-related businesses, be sure to watch this space for updates on any further developments.  Also, as always, feel free to reach out the NAFCU Compliance Team with any questions.