Written by Shereefat Balogun, Regulatory Compliance Counsel
Currently, about 20 states and the District of Columbia have legalized certain marijuana-related activity. For example, Alaska, Colorado, Oregon, Washington, and Washington D.C., have legalized recreational and medicinal marijuana for adults. Moreover, it is anticipated that more states will enact laws allowing for the legalization of marijuana. In light of these developments, it is important for credit unions that offer, or are thinking about offering, marijuana related business accounts to be reminded of their compliance obligations particularly under the Bank Secrecy Act (BSA). Warning, the regulators are not making it easy here.
As an initial matter, marijuana is still illegal under federal law. That said, in 2014, the Financial Crimes Enforcement Network’s (FinCEN) created strict guidelines for credit unions seeking to service marijuana-related businesses. The guidance set forth new due diligence requirements for opening an account for a marijuana-related business. As part of its member due diligence, a credit union deciding to provide financial services to these businesses is required to:
- Verify with the appropriate authorities whether the business is duly licensed and registered;
- Review the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- Request from state licensing and enforcement authorities available information about the business and related parties;
- Develop an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational members);
- Conduct ongoing monitoring of publicly available sources for adverse information relating to the business and related parties;
- Conduct ongoing monitoring for suspicious activity; and
- Update information obtained as part of member due diligence on a periodic basis commensurate with the risk.
See, FinCEN Guidance, 2014-G001.
Along with the above requirements, as part of its due diligence, a credit union is expected to consider whether a marijuana-related business implicates any of the eight priorities defined by the DOJ, in the infamous “Cole Memo”. The Cole Memo notes that the DOJ is committed to prosecuting any individual or entity that interferes with any of its eight delineated priorities including:
- Preventing proceeds from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
- Preventing state-authorized marijuana activity from being used as pretext for the trafficking of other illegal drugs or other illegal activity.
See, Department of Justice, Guidance Regarding Marijuana Enforcement.
The DOJ issued a supplemental memo the same day FinCEN issued its guidance. The memo reiterates the DOJ's 2013 position and generally reaffirms FinCEN's guidance. In short, credit unions are expected to monitor and ensure marijuana-related businesses do not violate the eight priorities set forth in the Cole Memo, as well as stay in compliance with the member due diligence requirements outlined by FinCEN.
If you thought that was it, there is more. SAR filing obligations remain! While some states allow businesses to sell marijuana, federal law still makes it a crime. Thus, credit unions must file a SAR on activity involving a marijuana-related business. Credit unions are advised to review the guidance relating to SAR reporting and filing requirements, as well as some of the red flags to look out for.
And there’s more- the CTR. Consistent with BSA/AML reporting requirements, credit unions are also required to file a CTR in connection with marijuana-related businesses. And importantly, a business engaged in marijuana- related activity is not eligible for a CTR exemption under 31 C.F.R. 1020.315(b)(6). See, FinCEN Guidance, 2014-G001.
And there’s more….. No, that’s it…for now.
On a final note, it is worth noting that while FinCEN seems to have given a pass to credit unions interested in banking marijuana-related businesses, so long as the above conditions are met; and while, NCUA has instructed its examiners to follow the guidance, other hurdles make servicing these businesses challenging and unclear. Aside from the additional regulatory requirements and associated costs to participate in this activity, credit unions thinking about exploring this opportunity cannot avoid the fact that marijuana is still technically illegal- federally speaking. The guidance doesn’t address the legal issue of whether a credit union is violating federal law in providing services to marijuana businesses. Moreover, credit unions that bank marijuana-related businesses may not have access to the Federal Reserve System, as illustrated in the case of Fourth Corner Credit Union in Colorado. The credit union sued the Kansas Federal Reserve Bank after it refused to open an account for the credit union. In dismissing the case earlier this year, the court held that it could not use its authority to require the Fed to facilitate a federal offense. The credit union filed a separate action against NCUA for not providing it with federal share insurance. Apparently, NCUA had concerns over the credit union’s ability to mitigate the risk of banking only marijuana businesses.
To learn more about marijuana-related businesses, the compliance risks, and what your credit union can do to mitigate those risks, come join us at NAFCU’s BSA Seminar in New Orleans from October 24 – 28. In addition to learning more about marijuana-related businesses, you can expect a full week of everything you’ve ever wanted to know about BSA. Check out the full agenda and sessions. We have limited seating – so register now!