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Marijuana Mania: What are the Risks for Banking Marijuana-Related Businesses?

During the first offering of RMA’s Risk Readiness Webinar Series, Stanley Jutkowitz, senior counsel, Seyfarth Shaw LLP, discussed the current state of the law regarding marijuana and hemp. He provided the latest on the most important legislative proposals regarding cannabis and how those proposals could eliminate or mitigate the risk of banking marijuana-related businesses.

To better understand the ramifications for banks, Jutkowitz outlined the current legal status of marijuana in the United States. In 1970, the Controlled Substance Abuse (CSA) Act placed marijuana on Schedule 1, the most severe and restrictive classification for its high potential for abuse, no accepted medical use in the U.S. (at the time), and lack of accepted safety even when used under supervision. Use, possession, manufacture, sale, and distribution of marijuana is still illegal under the CSA Act, whether it is medical marijuana or recreational (adult use) marijuana. Hemp is not illegal as of the 2018 Farm Bill. However, the Rohrabacher-Blumenauer Amendment of 2016 stated that the Department of Justice is prohibited from spending funds to interfere with the implementation of state medical marijuana laws.

Despite the CSA Act, medical marijuana is legal in 33 states plus the District of Columbia, Puerto Rico, and Guam. Recreational adult use marijuana is legal in 11 states plus the District of Columbia. Numerous states are currently taking steps to legalize both uses of marijuana.

It is important to note the interplay between the state and federal government. The Preemption Doctrine indicates that federal law supersedes state law in case of conflict between the two. Meanwhile, the Anti-Commandeering Doctrine states that the federal government cannot compel states to enforce federal law. The 2013 Cole Memorandum indicated that as long as businesses follow certain guidelines, state attorneys general should not enforce federal law in states that have legalized marijuana. Although U.S. Attorney General Jeff Sessions revoked the Cole Memorandum in 2018, there have been no prosecutions by any state attorneys general, however, the move did create greater uncertainty for the industry.

In 2014, FinCen issued guidelines to financial institutions to clarify how they can provide services to marijuana-related businesses (MRB) and still be compliant within Bank Secrecy Act obligations. The guidelines contain specific minimum standards for enhanced due diligence of MRBs. Banks must also file a suspicious activity report (SAR) for each transaction by its MRB.

Despite onerous federal restrictions on banking marijuana clients, as of March 2019, the U.S. Department of Treasury reported over 600 banks and credit unions were providing services to the marijuana industry. These are typically smaller community banks and credit unions serving local clients due to the easier manageability of monitoring a smaller number of customers and employees.

Proposed federal legislation may further modernize cannabis laws in the future. The recent passage in the House of the Secure and Fair Enforcement (SAFE) Banking Act provides a safe harbor for depository institutions to offer certain financial services to state legal cannabis-related business and service providers. The Act does not legalize marijuana nor does it provide safe harbor from the Department of Justice or relieve financial institutions from filing SARs.

The Strengthening the Tenth Amendment Through Entrusting States (STATES) Act would amend the CSA and extend protections to financial institutions. In general, it would allow the states to legislate and regulate in connection with marijuana.

The Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2019 was jointly introduced into the Senate and the House earlier this year and provides for comprehensive reform of federal marijuana laws. It is one of more than 15 bills that have been introduced in Congress.

If you missed the live webinar, you can purchase a recording here.

Join us for the next installment of the Risk Readiness Webinar Series on November 19, Climate Change Management.

Read the latest updates on marijuana legal news from Stanley Jutkowitz on his blog, The Blunt Truth, which is featured twice a month in RMA’s Industry Insider weekly newsletter. Subscribe here. You can also read his recent article in The RMA Journal, Banking Marijuana Related Business: Are We There Yet?