Anti-Money Laundering Compliance Update: FinCEN Guidance Regarding Banking Marijuana-Related Businesses Raises Many Questions, Answers Very Few

Mar 03, 2014   

As we reported last Monday, on February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued its guidance “BSA Expectations Regarding Marijuana-Related Businesses” in an effort to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions looking to provide services to marijuana-related businesses. As we further noted on Monday, despite the growing number of States that have legalized the use of marijuana in various forms and to various degrees, the federal government has continued its efforts to crack down on dispensaries. For instance, on June 29, 2011, U.S. Department of Justice Deputy Attorney General James M. Cole had issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances Act (“CSA”). In his memo, Cole reiterated Congress’s determination that marijuana is a dangerous drug and that its illegal distribution and sale is a serious crime.

As we previously explained, because the sale of marijuana remains prohibited under federal law, financial institutions are required to file with FinCEN suspicious activity reports (“SARs”) on activity involving a marijuana-related business (including in those states where medical and/or recreational marijuana is legal). In an effort to explain how a financial institution can provide services to marijuana-related businesses while maintaining its responsibilities under the BSA, FinCEN issued its February 14th guidance. In addition to making clear that prior to providing financial services to a marijuana-related business a financial institution must conduct a thorough customer due diligence, FinCEN has identified a series of red flags that would indicate to a financial services institution that a marijuana-related business may be engaged in activity that implicates one of the Cole Memo priorities or violates state law. The following is a list of the red flags identified by FinCEN:

  • A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law. Relevant indicia could include:
  • The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates.
  • The business receives substantially more revenue than its local competitors or than might be expected given the population demographics.
  • The business is depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for federal and state tax purposes.
  • The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law, as opposed to revenue derived from (i) the sale of other illicit drugs, (ii) the sale of marijuana not in compliance with state law, or (iii) other illegal activity.
  • The business makes cash deposits or withdrawals over a short period of time that are excessive relative to local competitors or the expected activity of the business.
  • Deposits apparently structured to avoid Currency Transaction Report (“CTR”) requirements.
  • Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals.
  • Deposits by third parties with no apparent connection to the accountholder.
  • Excessive commingling of funds with the personal account of the business’s owner(s) or manager(s), or with accounts of seemingly unrelated businesses. Individuals conducting transactions for the business appear to be acting on behalf of other, undisclosed parties of interest. Financial statements provided by the business to the financial institution are inconsistent with actual account activity. A surge in activity by third parties offering goods or services to marijuana-related businesses, such as equipment suppliers or shipping services. The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law. The business is unable to demonstrate the legitimate source of significant outside investments. A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.
  • Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.
  • The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws or regulations.
  • A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries.
  • The owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located.
  • A marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property.
  • A marijuana-related business’s proximity to a school is not compliant with state law.
  • A marijuana-related business purporting to be a “non-profit” is engaged in commercial activity inconsistent with that classification, or is making excessive payments to its manager(s) or employee(s).

FinCEN has made clear that these red flags indicate only possible signs of Cole Memo violations, and thus do not constitute an exhaustive list. Therefore, FinCEN has emphasized the importance of viewing any red flag(s) in the context of other indicators and facts, such as the financial institution’s knowledge about the underlying parties obtained through its customer due diligence.  Further, FinCEN explained that these red flags are based primarily upon schemes and typologies described in SARs or identified by its law enforcement and regulatory partners, and reserved the right to update them in future guidance.

A careful reading of these red flags makes clear that this new FinCEN guidance goes above and beyond the anti-money laundering programs banks are required to keep. Further, these red flags present more of a problem than a solution to financial institutions looking to provide services to marijuana-related businesses and to marijuana-related businesses looking to benefit from basic banking services. Asking a financial institution to dig deep into whether the business is receiving substantially more revenue than may be reasonably expected given the relevant limitations imposed by the state, what its competitors are making or what it reported on its income tax returns is essentially asking financial institutions to turn into a Big 4 auditor of medical marijuana dispensaries.

In effect, these red flags are totally impractical for banks looking to provide basic services to marijuana-related businesses because they raise more questions than they provide answers. A thorough reading of these red flags poses questions such as:

  • How can financial institutions practically implement measures to carry out this additional due diligence?
  • Will financial institutions need to hire new due diligence personnel with expertise in the state sanctioned marijuana industry?
  • Can financial institutions rely on the work of internal and external auditors?
  • What steps will professionals engaged to perform this due diligence have to follow?
  • Is there a practical and effective way to implement a set of internal controls to prevent, detect or monitor these red flags?

These are only a few of the countless questions that these new SAR requirements for marijuana-related businesses raise. Given all these questions, it comes as no surprise that FinCEN received such a lukewarm response from the Colorado Bankers Association and the American Bankers Association. As the American Bankers Association explained it “while we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks. As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.” We agree.

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments in the regulation of financial services and the marijuana industry. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, food & drug law, tax law and litigation, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution or marijuana-related business, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.