Compliance Blog

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Folks have had quite a bit to say about the guidance FinCEN issued earlier this month (on Valentine’s Day no less), detailing Bank Secrecy Act (BSA) compliance expectations for financial institutions looking to bank marijuana-related businesses. There have been some real gems on this issue on the Bank Lawyer’s Blog, my favorite blog for a daily fix of dark humor and extreme sarcasm, here and here.

Nobody has anything nice to say about this guidance – don’t worry, neither do I – but I may feel slightly sympathetic towards FinCEN and the banking regulators on this issue. They are a convenient target for potshots (pun intended), but they are in a bit of a spot.  After all, it remains illegal under federal law to manufacture, distribute, or dispense marijuana, and no amount of guidance they issue can solve that problem.

Although FinCEN’s guidance purports to “enhance the availability of financial services” for marijuana-related businesses, the BSA compliance headache of maintaining these accounts is not a hassle I’d be willing to take on – not based on FinCEN’s guidance, and certainly not based on concurrent enforcement guidance issued by Deputy Attorney General James Cole.  I say this based on many years of working BSA in a credit union, and knowing just how much time and effort goes into running a BSA compliance program day-in and day-out.  (Shout out to my peeps at the credit union – you know who you are!)

In addition to the due diligence you would expect, like making sure the business is duly licensed, obtaining an understanding of the expected account activity, monitoring for suspicious activity, etc., due diligence also needs to include an assessment of whether the business implicates a “Cole Memo priority.”  Essentially, because enforcement resources are limited, these “priorities” are the current areas of focus for Department of Justice attorneys and law enforcement to consider “with respect to federal money laundering, unlicensed money transmitter, and BSA offenses predicated on marijuana-related violations of the Controlled Substances Act.”  They include:

• Preventing the distribution of marijuana to minors;
•  Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
• Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
• Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
• Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
• Preventing marijuana possession or use on federal property.

Absent some obvious clue, figuring out if a marijuana-related business implicates one of these priorities could require a lot of investigation, and the last time I checked, investigating criminal activity was a law enforcement function.  Haven’t we been told repeatedly that investigating alleged criminal activity reported on Suspicious Activity Reports (SARs) is the job of law enforcement, not the financial institution?

From FinCEN Guidance FIN-2012-G002:

“FinCEN continues to reiterate that institutions are not responsible for investigating the underlying suspected (or alleged) crime; investigations remain the responsibility of law enforcement. Institutions are responsible for reporting the information they know at the time they conclude that suspicious activity is present.”

Yeah, I thought so.

So what’s the real risk here? Well, enforcement priorities can change at the drop of a hat, and marijuana-related activities remain illegal at the federal level.  This excerpt from the February 14, 2014 Cole memo is warning enough for me:

“Additionally, financial 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 marijuana-related violations of the CSA. See, e.g., 31 U.S.C. § 5318(g). Notably for these purposes, prosecution under these offenses based on transactions involving marijuana proceeds does not require an underlying marijuana-related conviction under federal or state law.

[…]

Therefore, in determining whether to charge individuals or institutions with any of these offenses based on marijuana-related violations of the CSA, prosecutors should apply the eight enforcement priorities described in the August 29 guidance and reiterated above. ¹For example, if a financial institution or individual provides banking services to a marijuana-related business knowing that the business is diverting marijuana from a state where marijuana sales are regulated to ones where such sales are illegal under state law, or is being used by a criminal organization to conduct financial transactions for its criminal goals, such as the concealment of funds derived from other illegal activity or the use of marijuana proceeds to support other illegal activity, prosecution for violations of 18 U.S.C. §§ 1956, 1957, 1960 or the BSA might be appropriate. Similarly, if the financial institution or individual is willfully blind to such activity by, for example, failing to conduct appropriate due diligence of the customers’ activities, such prosecution might be appropriate. Conversely, if a financial institution or individual offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, prosecution for these offenses may not be appropriate.” (Footnote omitted) (My emphasis added).

I’ve only touched on the due diligence issue here, so definitely give FinCEN’s guidance a read in its entirety. Also note that the burden of filing BSA reports on marijuana-related businesses – Currency Transaction Reports (CTRs) and SARs – is not lessened at all, and is in fact increased.  Marijuana-related businesses are not eligible for exemption from CTR reporting requirements and there are three new SAR filings to deal with – “Marijuana Limited,” “Marijuana Priority,” and “Marijuana Termination.” What more can I say…fun times.

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On a lighter note, at least one enterprising kid is putting the pot munchies to good use – what better place to sell cookies than outside a medical marijuana dispensary?  All I have to say is …location, location, location!