In the United States, marijuana is illegal under federal law. But in nearly half of U.S. states, marijuana business is booming. Notwithstanding the federal ban, 23 states and the District of Columbia have legalized medical marijuana use. Colorado, Washington, Alaska, Oregon, and the District of Columbia also allow recreational marijuana use.
But new marijuana businesses face a common problem: They cannot get bank accounts. Instead, marijuana businesses operate on a cash-only basis.
Keeping marijuana businesses outside the banking system causes problems for both businesses and regulators. It is not good to have piles of cash lying around. Marijuana businesses expend significant resources to protect themselves from thieves.
The consequences of missteps are chilling: In one instance a California medical marijuana retailer was allegedly kidnapped and tortured by thieves looking for cash.1
At the same time, cash businesses have opportunities and incentives to underreport taxes or funnel earnings to illicit activities. Law enforcement must make sure the money flowing into marijuana businesses is properly taxed and is not diverted to criminal enterprises. Even tax authorities prefer to be paid by check, credit card, or electronic deposit, rather than with bags of cash smelling of marijuana.
So why don’t banks accept business from the state-legal marijuana industry? There are three related reasons.
First, regardless of state law, federal criminal law says marijuana is illegal. The Controlled Substances Act prohibits manufacturing, distributing, or dispensing marijuana.2 Banks that help the marijuana industry could be found guilty of “aiding and abetting” marijuana manufacturing or “conspiring” to dispense marijuana.3
It is also a crime to launder money – to engage in transactions knowing that the money came from marijuana.4 Even if the federal government does not prosecute banks directly, banks risk losing money as a result of criminal and civil forfeiture laws allowing federal officials to seize marijuana-related property, including bank accounts.5
The U.S. Department of Justice acknowledges that it does not have the resources to investigate and prosecute all marijuana-related crime. Instead, the Department of Justice issued guidance announcing several enforcement priorities, including preventing the distribution of marijuana to minors and preventing the diversion of marijuana from states where it is legal under state law to other states.
The Department of Justice, however, did not promise immunity for those whose marijuana businesses comply with the enforcement priorities. Instead it warned that nothing in the guidance “precludes investigation or prosecution, even in the absence of the [priority] factors listed.”6
Marijuana growers and retailers rely on the Department of Justice’s enforcement priority guidance. They openly operate grow facilities and dispensaries trusting that the federal authorities will not arrest them or confiscate their property. But banks are not so trusting. Banks have more to lose if the federal government changes its priorities.
Unlike so-called “ganjaprenuers,” existing banks have established businesses and significant income that is not tied to the marijuana industry. Banks also have less ability to protect themselves from prosecution. Marijuana business can adopt practices that reduce the risk they will run afoul of the federal enforcement priorities.
For example, a marijuana dispensary could check the identification of all marijuana buyers to avoid unintentionally selling marijuana to a minor. In contrast, a bank must largely rely on the dispensary’s word that minors are not allowed to buy marijuana. Thus, banks don’t offer marijuana banking because they worry they might be criminally punished.
Anti–money laundering compliance
Second, anti–money laundering laws impose a high compliance burden on banks. Some marijuana businesses, understanding that banks might be avoiding marijuana money, attempt to disguise the nature of their business. As one owner of medical marijuana dispensaries in Washington explains:
“Your savvy business owners know how to open a holding company, get a banking account through that holding company, and put their assets underneath that holding company . … The only way to really get banking is to not give the bank the entire story.”7
Banks, however, cannot take customers’ assertions at face value. Banks must know the identity of each account holder and must assess the risk posed by each account.8
For “higher-risk” accounts (like accounts belonging to “cash-intensive businesses”), banks must know the purpose of each account, the source of funds in the account, and the customer’s primary trade area.9
Knowing your customer is not enough. Banks must report suspicious transactions involving more than $5,000 to the Federal Financial Crimes Enforcement Network (FinCEN).10
FinCEN has explained that virtually every transaction involving marijuana money is suspicious. Furthermore, if marijuana transactions involve an enforcement priority, like the sale of marijuana to minors, FinCEN expects banks to include that information in the report.11
Filing these suspicious activity reports is time-consuming and costly.
Bank mistakes involving either inadequate “know your customer” due diligence or suspicious transaction reporting can lead to criminal charges and fines. Most banks are unwilling to undertake this compliance burden and the risk that comes with it. More than one financial institution has announced that it will accept marijuana money, only to reverse its position after discussing the compliance burden with federal regulators.
Finally, banks must answer to several federal regulators – regulators that do not seem excited about marijuana banking. For example, the Federal Deposit Insurance Corporation (FDIC) provides federal deposit insurance for bank accounts. Banks in the United States cannot operate without deposit insurance.
The FDIC warns that banks “need to assure themselves that they are not facilitating [their customers’] … illegal activity.”12 If a bank ignores FDIC warnings, the FDIC may revoke deposit insurance and force closure of the bank.
The Federal Reserve also wields significant control over banks because it provides four important payments services: (1) a centralized check collection system, (2) the Automated Clearinghouse (ACH) network for processing batched electronic small-dollar transactions, (3) the Fedwire system for larger electronic payments, and (4) coin and currency services. Normally, the Federal Reserve grants access to its services once other regulators have given a bank the green light to engage in banking.
However, the Federal Reserve might reasonably conclude that if it knowingly allows banks to use its payments services for marijuana transactions then the Federal Reserve (along with the banks) is aiding and abetting marijuana distribution and engaging in money laundering.
When federal regulators, including the FDIC and the Federal Reserve, are asked directly about marijuana banking, they avoid the question. Colorado Governor John W. Hickenlooper and Washington Governor Jay Inslee asked the FDIC, the Board of Governors of the Federal Reserve, the National Credit Union Administration, and the Office of the Comptroller of the Currency for guidance on marijuana banking. In response, the regulators sent a letter noting that banks should report suspicious transactions to FinCEN.
The letter provided no further guidance. Instead, the regulators explained that “further clarity from Congress” on the marijuana banking question “would provide greater legal certainty for banks.”
A credit union loophole?
One intrepid group is unwilling to wait for Congress to act. Organizers of the Fourth Corner Credit Union want to force federal regulators to make a decision. The organizers convinced Colorado to grant Fourth Corner a state credit union charter that would allow it to accept deposits and make loans. Fourth Corner clearly disclosed that its members/depositors will be marijuana-related businesses.
This disclosure is proving to be a stumbling block for federal regulators that must approve the new credit union.
Fourth Corner has sought government-provided share insurance (similar to deposit insurance) from the National Credit Union Administration. Fourth Corner has also sought access to the Federal Reserve’s payment services. Without share insurance and payment systems access, Fourth Corner cannot open. So far though, both federal regulators have been silent.
The path forward
Fourth Corner’s attempt to form the first marijuana-focused financial institution may prove to be the bellwether. If federal regulators grant it access to federal insurance and payment systems, it will be a federal stamp of regulatory approval for banking the marijuana industry. If Fourth Corner’s federal applications are rejected or languish in bureaucracy, then the marijuana industry will have to look to Congress for a solution to the banking problem.
Congress could open the door to marijuana banking by either decriminalizing marijuana or by removing criminal and civil penalties associated with marijuana banking. But even congressional action may not be enough. Federal financial regulators must set achievable due diligence expectations for banks offering services to the marijuana industry. If federal regulators require financial institutions to police marijuana businesses’ compliance with all federal and state law, banks will continue to avoid the marijuana industry.13
- 1 Alex Altman, Pot’s Money Problem, TIME, Jan. 27, 2014, at 32 (“[T]he kidnappers . . . burned [the victim] with a blowtorch, cut off his penis and doused him with bleach before dumping him along the side of a road. (He survived.)”).
- 21 U.S.C. §§ 802(6), 812, 841(a)(1) (2012).
- 18 U.S.C. §§ 2, 371 (2012).
- Id. §§ 1956-57.
- 21 U.S.C. §§ 853, 881(a)(6).
- Memorandum from James M. Cole, Deputy Atty Gen., to United States Atty’s, Guidance Regarding Marijuana Enforcement (Aug. 29, 2013).
- Jacob Sullum, Marijuana Money in the Mattress, REASON, July 2014, at 32-33.
- 31 U.S.C. § 5318(h), (l) (2012); 31 C.F.R. § 1020.220 (2014).
- FED. FIN. INST. EXAMINATION COUNCIL, BANK SECRECY ACT/ANTI-MONEY LAUNDERING EXAMINATION MANUAL 25, 65 (2010).
- 31 C.F.R. § 1020.320(a)(2).
- FIN. CRIMES ENFORCEMENT NETWORK, DEP’T OF THE TREASURY, FIN-2014-G001, BSA EXPECTATIONS REGARDING MARIJUANA-RELATED BUSINESSES (2014).
- FDIC, FINANCIAL INSTITUTIONS LETTER NO. 43-2013, FDIC SUPERVISORY APPROACH TO PAYMENT PROCESSING RELATIONSHIPS WITH MERCHANT CUSTOMERS THAT ENGAGE IN HIGHER-RISK ACTIVITIES 1 (2013).
- This article is based on longer article: Julie Andersen Hill, Banks, Marijuana, and Federalism, 65 CASE W. RES. L. REV. 597 (2015). That article may be downloaded free at: http://ssrn.com/abstract=2489089.