BSA Expectations for Marijuana-Related Businesses

Currently, 23 states and the District of Columbia, including three Ninth District states, have legalized certain marijuana-related activity. Bankers have asked for additional guidance on how to comply with Bank Secrecy Act (BSA) obligations related to customers engaged in the legalized marijuana industry. In this article, we give direction on providing financial services to marijuana-related businesses consistent with BSA obligations. We do that by briefly explaining guidance issued by law enforcement and the Financial Crimes Enforcement Network (FinCEN), defining marijuana-related businesses, and outlining due diligence requirements. We conclude with some recommendations for banks considering offering services to marijuana-related businesses.

Guidance

The Controlled Substances Act (CSA)¹ makes it illegal under federal law to manufacture, distribute, or dispense marijuana. The U.S. Department of Justice (DOJ) issued a memorandum (Cole Memo)² in 2013 providing guidance to federal prosecutors concerning marijuana enforcement under the CSA in light of conflicting state laws. The Cole Memo directs federal attorneys and law enforcement to focus enforcement resources on persons or organizations whose conduct interferes with eight identified priorities (Cole Memo priorities). The priorities include preventing the distribution of marijuana to minors, preventing revenue from the sale of marijuana from going to criminal enterprises, and preventing the diversion of marijuana from states where it is legal to states where it is illegal.

On February 14, 2014, FinCEN released FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses³ (Guidance),providing direction on how financial service businesses can interact with marijuana-related businesses and comply with the Cole Memo. The Guidance allows banks to work with marijuana-related businesses that are operating in accordance with state laws and regulations. The Guidance also creates a three-tiered system for filing Suspicious Activity Reports (SARs) regarding marijuana-related businesses. Banks must use the following labels when filing SARs based on the bank’s reasonable belief as to whether the business implicates one of the Cole Memo priorities: MARIJUANA LIMITED (business does not implicate a Cole Memo priority), MARIJUANA PRIORITY (business does implicate a Cole Memo priority), or MARIJUANA TERMINATION (bank has terminated the relationship). Further, banks must report any activity suspected to be outside of state regulations.

Defining Marijuna-Related Businesses and Due Diligence

Marijuana-related businesses are divided into two categories; directly related and indirectly related. Directly related businesses include growers and providers/dispensaries. Indirectly related businesses provide goods or services to growers/providers (e.g., a commercial landlord that leases property to marijuana-related businesses or a business that sells supplies to a provider). Banks must file SARs on activity involving marijuana-related businesses in accordance with this Guidance and existing FinCEN suspicious activity reporting requirements and thresholds. Banks must use the labels outlined above when filing for directly related businesses, but the SAR narrative labels are not required for indirectly related businesses.

Customer due diligence is a critical aspect of making a decision to open, close, or refuse any particular account or relationship. Key elements of the due diligence process for marijuana-related businesses include verifying the business license and developing an understanding of the expected activity for the customer, including expected cash flow. For direct marijuana-related businesses, banks should also obtain the state license authorizing the entity as a grower/provider. Banks must monitor account behavior on an ongoing basis to identify red flags indicating that a marijuana-related business may be engaged in activity that implicates one of the Cole Memo priorities or violates state law. The Guidance identifies 11 scenarios that could raise a red flag, including operating the business as a front for money laundering, being unable to produce state licensing documentation, seeking to conceal involvement in a marijuana-related business, or publicly available sources reveal negative information about the business or related parties.

Recommendations

Banks that choose to offer financial services to marijuana-related businesses may want to consider the following steps to ensure compliance with expectations of the Guidance:

• Remember that the DOJ reserves the right to enforce federal laws, including federal laws relating to marijuana, regardless of state law and the Cole Memo.⁴
• Ensure that the BSA Risk Assessment and applicable policies are updated, congruent with inherent risk, and reflect established practices.
• Perform appropriate due diligence.
• Request all available business documents, including state licensing documentation.
• Establish expected account activity.
• Identify all related parties involved with the marijuana-related business consistent with Customer Identification Program requirements.
• Perform a site visit.
• Perform enhanced ongoing monitoring for suspicious activity.
• Obtain periodic financial statements and tax returns.
• Monitor accounts for credit/debit and check transactions in addition to cash transactions.
• Monitor publicly available sources for adverse information.
• Perform periodic site visits.
• At a minimum, file SARs as required by the Guidance.
• Consider maintaining separate accounts for the various operations of the marijuana-related business for ease of monitoring.
• Separate accounts could include payroll, ATM, expense, and tax payment accounts.

Banks should stay alert to changes in state laws regarding marijuana-related businesses. Banks may need to modify policies, procedures, and operations in light of such changes. Finally, all banks should be alert to the risk of inadvertently providing services to marijuana-related businesses. One way to avoid doing so is to question account names that include terms frequently associated with these businesses, such as “hydroponics.”

Endnotes

1 Controlled Substances Act, 21 U.S.C. § 801, et seq.

2 James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Enforcement (August 29, 2013).

3 Department of Justice and the Financial Crimes Enforcement Network division of the Treasury Department FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses.

4 James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes (February 14, 2014).