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Marijuana Banking Just Got More Complicated

Well, we can't say we didn't see this coming...we blogged back in March, 2017 on what the change in administration might mean for marijuana banking, and the federal government announced a change in its policy towards marijuana enforcement late last week.

U.S. Attorney General Jeff Sessions changes DOJ's position on marijuana.

In a move long forecasted by many legal and policy observers, last Thursday the attorney general issued a memorandum to rescind Obama-era guidance on federal enforcement of marijuana. Released just days after California became the latest (and largest) state to begin sales of recreational marijuana, the memo directs "all U.S. Attorneys to use previously established prosecutorial principles," in marijuana enforcement, thus eliminating the already-limited guidance that provided some measure of direction in navigating the conflict between federal illegality and state legality of marijuana. This policy shift will significantly heighten risks for credit unions serving state-authorized marijuana-related businesses or operating in states with legalized cannabis.

Sessions' memo rescinds a 2013 directive, written by then-Deputy Attorney General James M. Cole, which instructed federal prosecutors to focus its marijuana enforcement efforts on eight priorities, including keeping marijuana out of the hands of minors and black market criminals and cartels.  It also rolls back a 2014 Cole memo that directed U.S. Attorneys to apply the same eight enforcement priorities in prosecuting financial crimes based on transactions involving marijuana proceeds.  The so-called Cole memo guidance had cleared up some of the uncertainty about how federal prosecutors would address the conflict of laws as states began allowing sales of marijuana for medical and recreational use. 

Today, 29 states and the District of Columbia (DC) permit medical marijuana and, of those, eight states and DC also allow adult-use recreational marijuana. A recent Gallup poll shows that public support for the legalization of marijuana is at an all-time high, with 64 percent of Americans favoring legalization, including for the first time a majority of Republicans (51 percent now support legalizing marijuana).  Nevertheless, marijuana remains a schedule 1 substance under the federal Controlled Substances Act. Thus, a litany of federal criminal statutes may be implicated for credit unions handling marijuana-related funds.

So what does this mean for credit unions?  In short, providing financial services in states where marijuana is legal under state law just got a lot more complicated. 

Marijuana Banking

At this point, is unclear whether the rescission of the Cole memo guidance will mean a federal crackdown on state-sanctioned marijuana.  The roll-back of formal guidance with respect to marijuana enforcement has created a policy void (note that the memo eliminates prior directives but does not replace them with new guidance) but it is too soon to tell if enforcement will significantly increase.  In effect, the Sessions memo empowers the country's 93 U.S. Attorneys to exercise prosecutorial discretion in their respective jurisdictions. We don't know how prosecutors will use this discretion as some jurisdictions may take a more aggressive enforcement posture while others may not, but the door is now open for federal officials to carry out enforcement against marijuana activities in states that have legalized cannabis.  This creates significant legal uncertainty for credit unions that have been serving marijuana-related businesses under the auspices of the Cole memo guidance. 

There are some existing barriers to marijuana enforcement that remain in place.  For example, the Rohrabacher-Blumenauer (also known as Rohrabacher-Farr) appropriations bill provision that has been in place since December 2014 prohibits the Department of Justice (DOJ) from using federal funds to prevent states "from implementing their own state laws that authorize the use, distribution, possession or cultivation of medical marijuana."  However, the provision must be renewed each fiscal year in order to remain in effect and its protections apply only to medical marijuana, leaving particularly vulnerable those credit unions operating in recreational states.

 BSA Compliance

 In 2014, as a supplement to the Cole memo on marijuana-related financial crimes, the Financial Crimes Enforcement Network (FinCEN) issued guidance to clarify "how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations." See, FIN-2014-G001.   Despite limited protections, together the Cole memos and FinCEN guidance created a framework for credit unions to serve marijuana-related businesses consistent with their legal and compliance obligations. 

However, as we previously cautioned, FinCEN's guidance depends heavily on the enforcement posture articulated in the Cole memos. Now that those memos have been reversed, credit unions can no longer rely on the FinCEN guidance for serving marijuana-businesses, significantly heightening BSA compliance risks. To add fuel to the fire, some credit unions may now be questioning whether their compliance with FinCEN's 2014 instruction to file either a "Marijuana Limited," a "Marijuana Priority," or a "Marijuana Termination" suspicious activity report (SAR) for each transaction involving marijuana-related funds has created a damning paper trail for federal prosecutors.  FinCEN and the DOJ have yet to offer any assurance that SARs issued under FIN-2014-G001 will not be used to prosecute financial crimes, even against those who relied on the guidance in good faith.  While it is perhaps unlikely that marijuana SARs will be used as evidence for the widespread prosecution of financial institutions, it is not outside the realm of possibility that federal authorities could make an example out of a bank or credit union to send the message that federal marijuana enforcement priorities have changed. Regardless, the increased liability and compliance risk will certainly have a chilling effect on the ability for credit unions to provide services to marijuana-related businesses. It is likely FinCEN will release additional guidance or information soon in light of these changes.

Momentum for Change

On a more optimistic note, Thursday's rescission may create momentum for congressional action on marijuana.  Marijuana banking advocates on the Hill have been challenged in mobilizing change.  The uncertainties created by Sessions' action could actually galvanize support in Congress to find a legislative solution to the conflict between federal and state drug laws. With support for marijuana protections in both parties the attorney general's tougher stance on marijuana could ironically become the impetus for a statutory solution for marijuana banking.

About the Author

Pamela Yu, Special Counsel for Compliance and Research, NAFCU

 Pamela Yu, Special Counsel for Compliance and ResearchPamela Yu was named special counsel for compliance and research in September 2016. In this role, Yu works with NAFCU's compliance and research departments to help credit unions with a variety of compliance and operational issues.

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