FinCEN ‘Unlocks the Door’ to Serving Marijuana-Related Businesses, Attorney Says
February 19, 2014
Feb. 19, 2014
By Hal Scoggins, Farleigh Wada Witt
FinCEN has finally unlocked the door for credit unions to serve marijuana-related businesses.
On Feb. 14, the federal Financial Crimes Enforcement Network (FinCEN) issued guidance FIN-2014-G001 to provide clarity and relief for credit unions serving marijuana-related businesses (MRBs), in the hope of enhancing the availability of financial services for MRBs. Washington’s Department of Financial Institutions issued a letter to state-chartered banks and credit unions on the same day, alerting them to the new FinCEN guidance.
The guidance certainly provides clarity, but it brings minimal relief. If anything, the guidance serves to emphasize the scope and burden of Bank Secrecy Act (BSA) requirements involved in serving MRBs.
State laws legalizing medicinal marijuana use (and in Washington and Colorado, recreational marijuana use) and legalizing marijuana distribution for permitted purposes have left credit unions in a bind. Growers and distributors quickly formed new businesses to meet the newly legalized demand, and like any new business, these organizations need financial services in order to successfully operate. However, financial institutions have been unable to provide those services, due to BSA compliance requirements and federal criminal concerns.
Growing and distributing marijuana for permitted purposes is no longer a crime under the law of 20 states (and the District of Columbia). However, it remains a federal crime. The U.S. Justice Department’s assurances that it will not pursue criminal charges against marijuana-related businesses permitted by state law did not address the BSA concerns faced by credit unions serving those businesses. Credit unions still must file Suspicious Activity Reports when they are aware that a member is depositing funds derived from illegal activity. In addition, the Justice Department’s non-enforcement stance provides no explicit protection for a credit union potentially aiding and abetting federal criminal activity.
FinCEN attempts to address the BSA issues by laying out its expectations in three key aspects of serving MRBs:
- Due diligence in account opening for MRBs;
- A special regime of SAR filing requirements for MRBs; and
- Continuing due diligence requirements in serving MRBs.
The guidance is aimed at harmonizing credit union BSA requirements with the enforcement priorities set out last August in a U.S. Department of Justice memorandum from Deputy Attorney General Andrew Cole to U.S. Attorneys.
Due Diligence in Account Opening
FinCEN listed five specific due-diligence points that credit unions must address before providing services to an MRB:
- Verifying with state authorities that the business is duly licensed and registered;
- Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- Requesting from state licensing and enforcement authorities available information about the business and related parties;
- Developing 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 customers); and
- Considering whether the MRB violates state law or implicates one of the priorities listed in the Cole Memo. The memo’s priorities include:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property.
Any credit union that provides service to MRBs must adopt procedures to complete these five requirements (including analysis of the Cole Memo factors) and document the results.
SARs for MRBs
FinCEN has attempted to alleviate the continuing SAR filing requirements that otherwise apply when a credit union member is engaged in ongoing activity that triggers SAR filing. Because the basic filing requirement resides in the BSA statutes, FinCEN has limited authority to deal with the issue. However, FinCEN found a way by creating three special types of SARs for MRBs.
Marijuana Limited SAR
If an MRB’s activity would not trigger any SAR filing requirements except for the fact that the MRB is dealing with marijuana, the credit union may file a Marijuana Limited SAR. This SAR is labeled a “Marijuana Limited” SAR in the narrative section and contains only:
- Identifying information for the subject parties;
- Addresses of the subject parties;
- The fact that the SAR is filed solely because the party is an MRB; and
- The fact that the credit union has not detected any additional suspicious activity.
Subsequent Marijuana Limited SARs must be filed every 120 days, with the same four elements of the original SAR and “details about the amount of deposits, withdrawals and transfers since the last SAR.” This presumably does not require actual daily transaction information, but it is unclear exactly what level of detail might be required.
Marijuana Priority SAR
If the credit union believes that the activity of an MRB implicates one of the Cole Memo priorities or violates state law, it must file a Marijuana Priority SAR. The Marijuana Priority SAR includes all information that any ordinary SAR would include, but also outlines which Cole Memo priorities the credit union believes are implicated and why. The Marijuana Priority SAR should be labeled as such in the narrative section.
Marijuana Termination SAR
If the credit union decides to stop serving an MRB, “in order to maintain an effective anti-money laundering program,” it must file a Marijuana Termination SAR (labeled as such in the narrative section) and note in the narrative section the reasons for termination of the business relationship.
Continuing Due-Diligence Requirements
In addition to initial account-opening due diligence, credit unions serving an MRB must engage in ongoing due diligence to determine whether additional action should be taken or whether a Marijuana Priority SAR must be filed. The due diligence must include:
- Ongoing monitoring of publicly available sources for adverse information about the business and related parties;
- Ongoing monitoring for suspicious activity; and
- Refreshing information obtained as part of customer due diligence on a periodic basis.
The guidance lists 11 “red flags” that could indicate that an MRB is engaged in activity that implicates a Cole Memo priority or violates state law. The credit union must be vigilant in reviewing account activity for the presence of such red flags, and must file a Marijuana Priority SAR if the red flag (or other factors) leads the credit union to believe that a Cole Memo priority is implicated or state law is violated. If the credit union decides not to file a Marijuana Priority SAR despite the presence of a red flag, the reasons for that decision should be documented.
Although the guidance itself does not mention this, the accompanying Justice Department memo warns that financial institutions operating in states that lack “a clear and robust regulatory scheme” for MRBs are more likely to “risk entanglement” with the eight priorities set forth in the Cole Memo. The Washington DFI letter to banks and credit unions also notes that the new guidance applies to MRBs that are in compliance with Washington’s regulatory scheme.
Thus, the starting point for considering service to MRBs in any state is an understanding of that state’s regulatory scheme and requirements, whether it is limited to medical marijuana or permits broader use.
Credit unions considering service to MRBs should carefully review the FinCEN guidance and the Cole Memo, along with the Memorandum to U.S. Attorneys issued on Feb. 14. The FinCEN guidance, the Feb. 14 memorandum and the Washington DFI letter can be accessed through the Washington DFI website at: http://www.dfi.wa.gov/banks/marijuana-guidance.htm. The original Cole Memo is available through a link provided in footnote 2 of the FinCEN guidance document.
FinCEN’s guidance is a welcome reality shift to recognize and serve MRBs. Less welcome and less realistic are the compliance burdens.
Hal Scoggins, an attorney with Farleigh Wada Witt, represents with credit unions in Washington, Oregon and across the country in credit union operations, compliance, and state and federal regulatory matters. He can be reached at 503.228.6044 or at firstname.lastname@example.org.
Questions? Contact Gary Stein: 503.350.2216, email@example.com.
Posted in Compliance.