When I started representing the cannabis business in 2010, the biggest epidemic in the industry since IRC 280E was the massive lack of cannabis banking. This inability to access deposit account-only financial institutions was staggering for businesses, leading to endless public safety hazards and organizational chaos. Almost 14 years later, the cannabis banking crisis has improved somewhat thanks to FinCEN’s 2014 guidance. But it’s not enough on either side of the aisle, and the Congressional Research Services (“CRS”) echoed that view in a recent “Legal sidebar,” describing the myriad obligations that financial institutions must face if they want to bankroll the cannabis business.
FinCEN’s guidance is a ‘good’ aid to cannabis banking
Because of the Bank Secrecy Act, anti-money laundering laws, and a host of other regulations governing the financial services industry, banking with cannabis violates federal law. However, after Colorado and Washington State legalized cannabis for adults 21 and older in 2012, in 2014 the Financial Crimes Enforcement Network (“FinCEN”) issued its own guidelines regarding cannabis banking companies. Of course, this was after the DOJ issued the “Cole Memo” (which no longer exists), and FinCEN’s guidance pays considerable attention to that memo.
FinCEN’s guidance does several things. First, they are the only way financial institutions can legitimately engage in cannabis banking, but they do no changing the laws governing the federal ban against cannabis banking. Second, these guidelines are really “know your customer” directives regarding steroids. Essentially, financial institutions must know (and report to the federal government) every material detail about the structure and transactions of their cannabis business customers. Third, FinCEN’s guidance shows that the Treasury Department thinks differently than the Justice Department about cannabis banking. When the Justice Department rescinded all cannabis-related enforcement guidance in 2018 (including the Cole memo), the Treasury Department left FinCEN’s guidance in place, which is a good thing. It’s no secret that banking makes the cannabis business more transparent and financially accountable to regulators. However, while cannabis businesses and financial institutions have a lifeline to do business together thanks to FinCEN’s guidance, financial institutions still face the heat of federal law.
Banks are in trouble with cannabis companies
Just because financial institutions follow FinCEN’s guidelines to the letter does not mean they are safe from federal criminal, civil, and administrative liability. In its legal sidebar, CRS highlights just a few of the obligations financial institutions still face if they bank on the cannabis industry:
- violations of the Controlled Substances Act for aiding, abetting and conspiring to operate a cannabis business, which may result in criminal prosecution;
- anti-money laundering laws;
- Civil, criminal and administrative forfeiture of assets used in or derived from cannabis crimes;
- the Bank Secrecy Act; and
- any number of other regulatory violations determined by federal banking regulators.
According to the legal sidebar, as of June 2023, FinCEN reported receiving nearly 350,000 “marijuana-related suspicious activity reports” (which must be filed under FinCEN guidelines) with 675 depository institutions. All of these financial institutions flirt with violations of federal law every day through their service to the cannabis industry.
The Cannabis Banking Fix
For years, Congress has tried to pass cannabis banking reform to no avail. Currently, the latest iteration of this reform, the SAFE(R) Banking Act, is making its way through the Senate (now to the Senate) at a glacial pace (albeit after a very favorable hearing in the Senate Banking Committee). The SAFE(R) Banking Act is truly what both cannabis businesses and financial institutions need to support a larger and safer scale of cannabis banking. If passed, the SAFE(R) Banking Act would finally create a federal cap on financial institutions banking the cannabis industry, so those institutions would no longer have to sweat over violations of the CSA, anti-money laundering laws, or the Act for bank secrecy (although this would enshrine and make law the strict know your customer standards imposed by FinCEN guidelines). Just as importantly, SAFE(R) Banking goes further than FinCEN’s guidance by clarifying that financial institutions can provide credit, debit, and credit services without consequence (currently, FinCEN’s guidance really only applies to deposits).
What should financial institutions do now?
First, if you are a financial institution that serves the cannabis business and you are not following FinCEN’s guidelines, that needs to change immediately. There is no other path to quasi-defense than these guidelines. Second, ensure that your cannabis ‘KYC’ protocols are in line with the guidelines and that you are performing adequate due diligence on your cannabis customers. Third, familiarize yourself with the state cannabis regulations your cannabis clients are subject to. I can’t tell you how many times I’ve dealt with banks and credit unions that haven’t kept up with changes in government regulations and inevitably and unknowingly bank illegal participants. Fourth, keep an eye on SAFE(R) Banking and, if it passes, prepare to revise your cannabis customer policies almost immediately if you want full protection under the new laws.