Marijuana and Banking – The Basics

The federal laws that regulate banks and banking practices are numerous and complex.  Some are designed to prevent drug cartels, terrorists and other bad actors from using our banks to advance their criminal enterprises.  Those same laws are now impacting marijuana businesses in states which have legalized marijuana.  While many marijuana businesses are working to be law-abiding and responsible citizens under state law, what they do still violates the federal Controlled Substances Act.  That illegality under federal law means that many marijuana businesses in states that have legalized marijuana will not be able to get a bank.  And therein lies the rub.

So what exactly is the problem?

The friction arises primarily from the money laundering, bank fraud, and Bank Secrecy Act statutes.  These laws make it illegal for banks to knowingly allow bank customers whose money comes from unlawful activities (like marijuana cultivation and sale) to borrow money, make deposits, or otherwise use banking services.  So, businesses that are engaged in marijuana-related activity which is lawful in their states, as well as their employees, vendors, and customers, are often locked out of banking services.

No access to banking is a bad thing for businesses.

In those states which have legalized certain uses of marijuana, the businesses and state governments have raised major concerns based on the real risks that these cash-based businesses are targets for crime and are more difficult to regulate.  But most banks refused to accept marijuana money and take a risk that they will be accused of breaking the law.  The Financial Crimes Enforcement Network (FinCEN), a branch of the Federal Department of Treasury, tried to address the bank’s concerns in a February 14, 2014 guidance memo, by outlining steps a bank could take to reduce the likelihood that they would be pursued for assisting a state-legal marijuana business. 

But most banks say “better safe than sorry”.

By and large, the banks reacted to the FinCEN memo by refusing to allow banking activities by marijuana customers – they said that the guidance memo did not clearly establish the safe harbor that the bankers wanted to engage in marijuana banking.  Bankers are a risk-averse group, and most of them said “no” to serving marijuana businesses, even in states where marijuana business is lawful.  

Still, there’s hope. If only a little.

 Anecdotally it appears that a few banks are accepting marijuana customers.  But most are not.  Fourth Corner Credit Union in Colorado would really like to be a marijuana bank, and the State of Colorado supports that goal, but the Federal Reserve Bank in Kansas will not allow Fourth Corner membership.  Fourth Corner’s lawsuit against the Federal Reserve seeking to gain that membership, filed in US District Court in Colorado, was recently dismissed by the court.  The judge seemed sympathetic to the challenges faced by non-bankable marijuana customers and a bank that wanted to provide them services, but decided that this was a problem the US Congress needed to address.   

There are many people in marijuana businesses who spend large amounts of money to manage their cash (currency) because they can’t get a bank account.  They would be happy to spend some of that money paying fees to a bank to cover the bank’s increased compliance costs if they could establish a regular banking relationship.  

The banking issues surrounding marijuana legalization are going to continue to grow.  More and more states are heading in the legalization direction.  More and more states are expanding the scope of their legal marijuana activities (for example, here in Michigan we have legislation pending in the Senate that would increase from 72 to 1500 the number of medical marijuana plants a licensed grower could possess).  And more and more lawful commercial activity (read financial transactions) is resulting.  All this financial activity needs banking support, but most can’t get it.  

What about limited disclosure?

Some customers have resorted to selective disclosure in their conversations with the bank, in the hopes that they will get and hold an account.  However, those customers are adding to their risks by doing so.  The Federal money laundering statutes are very broadly written to criminalize attempts to disguise the true nature of financial transactions from a bank.  It is certainly possible that a failure to fully disclose the source of funds from a marijuana business could fall within those laws.  

Truth is: Access to banking benefits everyone.

Marijuana businesses in states which have legalized marijuana-related activities need banking services.  The states would like to see this as well.  Establishing a bank account will make marijuana businesses and employees safer from robberies, more transparent to regulators, and more likely to pay taxes on the economic activity in which they are engaged.  That judge in the Colorado case was absolutely correct — the banking issues arising out of legal marijuana need to be addressed and solved by the US Congress.