Risky Business: The Risk and Legal Issues in Providing Financial Services and Products to the Marijuana Industry

How can financial institutions navigate the current risk and legal landscape of the marijuana industry? Debevoise and Plimpton and RMA presented a seminar and webcast on July 26, 2018 that explored this complex topic and shed light on the legalities and ramifications for financial institutions.

Current Legal Landscape

Although 30 states plus the District of Columbia, Guam, and Puerto Rico have legalized marijuana in some form, the cultivation, possession, and distribution of marijuana is illegal under U.S. federal law, except for specially-exempt research purposes. Canada has become the first industrialized nation to legalize recreational use at the federal level. Its law legalizing marijuana possession, home growing, and recreational sales to adults will go into effect on October 17, 2018 and could create significant effects in the U.S. federal system.

Enforcement in the U.S. is currently a topic of debate. FinCen issued guidance in 2014 that paralleled extension of the Cole Memo applicable to financial institutions. (The Cole Memo de-prioritized the use of funds to enforce cannabis prohibition under the Controlled Substance and Abuse Act, shifting towards a more hands-off approach.) The FinCen guidance outlines the risk factors U.S. businesses should assess in determining whether to work with marijuana-related businesses. The guidance requires financial institutions to file SARs on activity involving marijuana-related businesses (even those licensed under state law). Although currently under review, this guidance remains in effect despite the rescission of the Cole Memo.

In January 2018, Attorney General Jeff Sessions rescinded two pieces of Obama-era DOJ guidance that largely shielded states with legal marijuana regimes—and financial services entities providing services to law-abiding domestic marijuana businesses—from federal scrutiny. It is unclear what effect, if any, Sessions’ guidance will have, as President Trump has signaled that he may break with his Attorney General on marijuana enforcement. Trump has recently indicated that he may likely support a bill sponsored by Senator Gardner (R-Colorado) and Senator Warren (D-Massachusetts) that would protect states with legal marijuana regimes from federal interference.

Implications for Financial Institutions

In light of the complex nature of U.S. federal and state law, providing financial products and services to the U.S. marijuana industry remains risky, even in states where marijuana is legalized for recreational use. Providing products and services to the Canadian marijuana industry is likely not a violation of U.S. law, so long as the entity in question conducts marijuana-related activity only in Canada and does so in compliance with Canadian law. However, institutions need to be vigilant that there are no U.S. touchpoints and that the activity is not directed to the U.S. in any way.

The panel recommended that financial institutions review its policies and procedures to ensure that existing controls effectively shield the organization from marijuana-related risk. Institutions should review different existing business lines and service offerings that may interact with entities in the marijuana industry with an eye to their varying levels of legal risk. And they should actively monitor developments in federal policy and industry standards to better evaluate and mitigate the risk of engaging with foreign marijuana-related businesses.

Financial institutions should also develop an adequate compliance framework that includes targeted policies for specific business lines and strict due diligence during client onboarding. “Know your customer” must continue throughout the client relationship with frequent transaction monitoring and periodic testing and evaluation.


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