Should We Block That Marijuana Transaction?
Earlier this year, I blogged about some of the legal and compliance uncertainties and operational challenges facing credit unions that are providing, or interested in providing, financial services to marijuana-related businesses that are legal under state law but remain illegal under the federal Controlled Substances Act (CSA). I've also blogged about one credit union's efforts to become the first cannabis credit union and the difficulties in banking these unbankable businesses.
Not much has changed in 2017 with respect to resolving the conflict of laws impacting marijuana banking. But in April West Virginia became the 29th state to legalize medical marijuana and the November elections saw gains for legalized marijuana advocates. In the meantime, the attorney general continues to see marijuana as a "life-wrecking" substance that is "only slightly less awful" than heroin. In short, the debate over state-sanctioned pot is ongoing and the law in this area is far from settled.
Meanwhile credit unions are increasingly being forced to contend with the cannabis conundrum, whether they have chosen to take on marijuana-business accounts or not. Recently, some of our members have contacted NAFCU's Compliance Team for assistance with how to handle marijuana-related transactions. Namely, should a credit union affirmatively block marijuana-related transactions?
Liability Under Federal Law
Marijuana remains a schedule I controlled substance under the CSA, which makes it illegal under federal law. See, 12 U.S.C. §812(b)(1). Thus, federal criminal statutes may be implicated when handling marijuana-related funds. 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). In light of these liability concerns, some credit unions are wondering if they have an obligation or affirmative duty to prevent marijuana-related payments or transactions of funds associated with marijuana-related activity.
Blocking Merchant Codes
Ultimately it is a risk-based decision for the credit union, but keep in mind that credit unions are under no legal obligation to supervise their members' behavior nor to enforce federal drug laws. There is no federal regulatory requirement to affirmatively prevent member transactions to state-sanctioned marijuana-related businesses. Yet, the liability risk remains. So what should a credit union do?
Some credit unions have considered taking such action as blocking marijuana-related transactions based on merchant codes. There is some precedent for this: the Unlawful Internet Gambling Enforcement Act (UIGEA), for example, prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law (restricted transactions). See, 31 U.S.C. §§ 5361-5367. Under the UIGEA, Treasury and the Federal Reserve Board promulgated regulations requiring certain participants in payment systems that could be used for unlawful Internet gambling to have policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit the processing of restricted transactions. See, Unlawful Internet Gambling Enforcement Act of 2006 Overview.
However, blocking marijuana-related transactions would be an administrative burden and there are ways to circumvent code-blocking. For example, critics have suggested that the UIGEA has had debatable success in effectively blocking illegal gambling transactions. One reason that code-blocking has not worked well, according to some reports, is because of a circumvention technique called "factoring." In factoring, a merchant engaged in illegal gambling submits its card transactions through another merchant's terminal using that merchant's identification number and merchant category code and then pays the other merchant a percentage of the submitted transactions. While this violates card associations' rules, this type of circumvention illustrates the difficulty in trying to police member behavior. It is also worth bearing in mind that restrictions on internet gambling transactions are specifically governed by federal law, the UIGEA. There is no similar statute requiring marijuana-related transactions to be blocked by financial institutions.
Also, there is the risk of over-blocking. Some merchants may sell both legal and (federally) illegal products; the marijuana merchant for example could sell marijuana as well as tobacco products, e-cigarettes, magazines, T-shirts, hats, etc. So, a customer could shop at a marijuana merchant but only purchase legal products and still be blocked.
Reputation Risk
Another consideration is reputation risk. Although illegal on the federal level, marijuana is legal at the state level in 29 states. More and more states are legalizing cannabis, both medically and recreationally, and there is majority and growing public support for legalized marijuana. Particularly with respect to medical marijuana where members with legitimate medical conditions may rely on medical marijuana to treat or alleviate serious illnesses including cancer and epilepsy, there could be risks to the credit union's reputation if members become upset that their transactions for medical marijuana are blocked by the credit union, particular if there is no regulatory obligation to do so.
On the other hand, there might be reputation risk to allowing marijuana-related transactions or in not taking some affirmative action to prevent payments to marijuana-related businesses. For example, a credit union with a field of membership that includes law enforcement agencies could suffer reputational harm in allowing marijuana-related transactions despite continued federal prohibitions against marijuana.
BSA Compliance
If the credit union determines to allow marijuana-related transactions, reporting requirements under the Bank Secrecy Act and anti-money laundering (BSA/AML) rules certainly come into play. If a transaction appears to be associated with marijuana, FinCEN guidance issued in 2014 is instructive. See, FIN-2014-G001. The FinCEN guidance "clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations." See, FIN-2014-G001, p.2. For example, the credit union may need to file a marijuana-related suspicious activity report (SAR) for member transactions that involve marijuana-related funds.
The FinCEN guidance discusses three specific marijuana-related SARs: (1) marijuana limited; (2) marijuana priority; and (3) marijuana termination. BSA obligations are heightened for transactions involving marijuana, even if the transaction is related to a marijuana-related business that is legal under state law. For instance, all transactions with a marijuana-related business require a SAR, simply by virtue of the fact that the subject is engaged in a marijuana-related business.
FinCEN's discussion of the "marijuana limited" SAR filing states:
A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a Marijuana Limited SAR. The content of this SAR should be limited to the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified. Financial institutions should use the term "MARIJUANA LIMITED" in the narrative section.
See, FIN-2014-G001, pp.3-4. Thus, at a minimum, a "marijuana limited" SAR should be filed for all transactions involving a marijuana-related business or marijuana-related funds.
In the end, this is a complex and still uncertain issue and a lot remains unclear about how credit unions should address state-sanctioned marijuana activities.