Pictured left to right: Tenzin GGT and Richard Pollak

This article analyzes the conflict between federal and state marijuana laws, and its impact on the inability of state-legal marijuana businesses to obtain traditional and fundamental types of banking services from federally insured banks. This article is divided into three parts: (i) an explanation of the conflict of state and federal marijuana laws; (ii) the effect of the conflicting laws on the decision of banking institutions to provide services to state-licensed marijuana businesses; and (iii) congressional and judicial attempts to resolve the conflict between state and federal marijuana laws.

This is the second article in a three-part installment about the banking dilemma for state-licensed marijuana businesses in the United States.

Part II. A Cash-Reliant Business with Limited Banking Access

It’s difficult to accurately ascertain how much money has been made from the sale of state-legal marijuana in the United States, but estimates vary from $9 billion to $23 billion in 2017 alone.[1] What’s clear is that the state-legal marijuana industry has been thriving over the last decade, with some analysts predicting that the industry will have a $77 billion impact on the economy by 2022.[2]

Colorado and California were the first two states to achieve over a billion dollars in sales revenue for recreational and medical marijuana.[3] In 2019, the state of California earned around $116 million in total tax revenue for the first quarter of 2019 from the state’s excise, cultivation, and sales tax on marijuana.[4]

The state-legal marijuana business can be extremely profitable, so much so, that for many such businesses the problem has become not knowing where to keep their profits. As a result of having little to no access to traditional banking services, the state-legal marijuana business continues to be reliant on primarily cash transactions. It’s not uncommon to hear stories of business owners having to drive around with hundreds of thousands of dollars in armored vehicles just to drop off their tax payment to the local IRS office.[5]

The banking problem has even become a harsh reality for professionals serving ancillary roles for state-licensed marijuana businesses. The Greenbridge Corporate Counsel, a law office in California, found out the hard way when their bank, Umpqua Bank, gave them two days to provide detailed information about a client that had a state license to sell marijuana.[6] When Greenbridge responded to their bank that they he could not reveal confidential information about their client, and certainly not within two days time, the bank responded by sending a letter stating that they had determined that maintaining a deposit account with Greenbridge was “no longer mutually beneficial” and would terminate the account in thirty days.[7]

Even when banking institutions are willing to offer state-legal marijuana businesses access to banking services, it’s often a relationship that the bank wants to keep secret in fear of the stigma it may convey to its customers and the public, and most importantly, the potential for prosecution by the federal government in violation of a plethora of federal laws.[8]

How the Conflict Affects the Banking Industry

The greatest challenge for the burgeoning cannabis industry is the inability of legal marijuana businesses to access banking institutions for even the very basic of banking services, like opening up a depository account, obtaining business loans or credit lines, access to electronic wiring services, and other online banking services. The decision for most banks in making their financial services available to state-legal marijuana businesses is largely a balancing test between the risks of facing federal prosecution versus the rewards of charging higher fees and obtaining access into the lucrative business of selling a highly profitable controlled substance. The fact that some banks that had once opened their doors to marijuana businesses and suddenly close them is indicative of the fact that the balancing test can turn in any direction at any given point.[9]

There are two major legal liabilities that banks expose themselves to when doing business with state-legal marijuana enterprises: (a) the loss of their status as a federally insured depository institution; and (b) civil forfeiture and seizure of assets under The Racketeer Influenced and Corruption Organizations Act of 1970(“RICO”) and the CSA. In addition, providing depository accounts to an enterprise that is cash heavy creates an administrative nightmare under the Bank Secrecy Act (the “BSA”) as banks are forced to make a determination of whether a cash deposit of greater than five thousand dollars requires the filing of a Suspicious Activity Report.

The Federal Deposit Insurance Corporation and the Federal Reserve System

The Federal Deposit Insurance Corporation (“FDIC”) is an independent governmental agency that provides deposit insurance for up to $250,000 per depositor to eligible banks and savings associations.[10] The most dangerous risk that a bank faces when conducting business with a state-licensed marijuana business is the possibility of losing its federal deposit insurance. Simply put, a bank will fail without membership to the FDIC.

Under the broad language of the federal banking laws, an FDIC-insured bank can lose its deposit insurance coverage if it’s found to be in violation of any “applicable law,” or if a bank is convicted of any money laundering crime or any anti-money laundering provisions of the BSA.[11] Although there has been no reported case where a bank has actually lost its FDIC status as a result of doing business with a state-licensed marijuana business, the threat of exposure to such a risk will always be an important consideration for any federally insured bank.

Another important service that’s critical to a bank’s ability to issue modern-day financial transactions is access to the Automated Clearinghouse (ACH) payment system, which is a nationwide network through which depository institutions can send each other electronic credit and debit transfers (e.g. payroll deposits, tax refunds, wire transfers, etc.).[12] Banks must establish a master account with a regional Federal Reserve Bank in order to gain access to the ACH payment system. If banking institutions are found to be in violation of the BSA or any other applicable law, the Federal Reserve can exercise its authority to prevent access to the ACH payment system.

Anti-Money Laundering Requirements

Under the Money Laundering Control Act of 1986 (the “MLCA”), any financial transactions that involves criminal proceeds, including transactions that are designed to disguise or conceal the source, nature, location, ownership, or control of the proceeds, or to facilitate the carrying on of a specified unlawful activity can be subject to a fine of at least $500,000 and/or imprisonment of up to 20 years.[13] The “manufacture, importation, sale, or distribution of a controlled substance (as defined in the CSA)” is explicitly included in the definition of a ‘specified unlawful activity’.[14]

Furthermore, a bank can also be committing money laundering if it “knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000.”[15] Banks could be found in violation of the MLCA if they knowingly conducted a banking transaction for a federally unlicensed marijuana business and/or sought to conceal such a transaction.

Banking and financial institutions have very specific anti-money laundering obligations under the Bank Secrecy Act (the “BSA”) of 1970, which by and large, requires banks to monitor customer transactions and file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury whenever they conduct a transaction (i.e. deposit, withdrawal, transfer, exchange of currency, loan, etc.) that involves an aggregate of $5,000 or more and such monies were “derived from illegal activities.”[16] 

FinCEN and other federal regulators can commence civil enforcement actions against banks that fail to meet the compliance requirements of the BSA. In addition, the Department of Justice can seek criminal fines and/or imprisonment against banks/bank officials for violating the BSA.[17]

The compliance and reporting requirements of the BSA put banks in a very precarious situation when handling transactions for federally unlicensed marijuana businesses. Banks doing business with state-licensed marijuana businesses would be required to file a SAR with FinCEN every time they performed a transaction that involved $5,000 or more in cash, since as a matter of federal law, the sale of marijuana is illegal. Not only that, banks are also expected to conduct due diligence on their customers in order to determine whether or not customers pose a money laundering risk. On February 14, 2014, FinCEN issued a guidance memo to clarify their BSA expectations for financial and banking institutions seeking to provide services to state-licensed marijuana businesses (the “Cannabis Guidance”).[18]

The Cannabis Guidance was one of the few federal documents that addressed the conflict between federal and state marijuana laws, and was promulgated as a response to the Cole Memo, a memorandum written by Attorney General James Cole to the Department of Justice requesting that federal prosecutions of marijuana related crimes under the CSA be restricted to infractions that had one of eight specific effects (i.e. the “red flags”).[19] The Cannabis Guidance directed banking and financial institutions to file one of three SAR filings for marijuana-related businesses (“MRB”):       

1. A “Marijuana Limited” filing for a transaction with a MRB did not raise any of the eight red flags described in the Cole Memo or violate state law;
2. A “Marijuana Priority” filing for a transaction with a MRB that may be in violation of any of the eight red flags described in the Cole Memo or state law; and
3. A “Marijuana Termination” filing for whenever a relationship with a MRB is terminated in order to maintain an effective anti-money laundering compliance program. [20]

A typical SAR filing includes basic background information about the banking customer (e.g. name, date of birth, phone number, email), the amount of currency involved in the transaction, a characterization of the suspicious activity, and a narrative describing the transaction and its legal implications in specificity.[21] Between June 2018 and June 2019, FinCen received 87,249 SARs for MRBs from banks and credit unions.

Although the fact of its issuance indicates that federal banking officials did not intend on hindering the development of state-licensed marijuana businesses, the Cannabis Guidance did nothing to actually alleviate the administrative burdens that banks were facings under the BSA. It in fact affirmed that banks were obligated to continue filing SARs and conduct the necessary due diligence that such filings required for every applicable transaction with a MRB.[22]

Forfeiture and Seizure of Assets under the RICO Act & the CSA

Under the CSA, any person that is convicted of a violation that is punishable by imprisonment for more than one year (i.e. sale of marijuana) must forfeit any property or proceeds obtained, directly or indirectly, as a result of such a violation.[23] Section 881 of the CSA specifically identifies “all moneys… furnished by any person in exchange for a controlled substance” to be subject to civil forfeiture. [24] The Racketeer Influenced and Corruption Organizations Act of 1970 also grants the federal government the right to seize any “interest in property or rights obtained from racketeering.”[25] The RICO Act explicitly defines ‘racketeering’ to include “the felonious manufacture, … buying, selling, or otherwise dealing in a controlled substance.”[26]

In 2018, Massachusetts residents sought declaratory and injunctive relief in the District Court of Massachusetts against the Massachusetts Department of Public Health, State Attorney General and other plaintiffs, alleging that the CSA preempted the state’s marijuana dispensary regulations and that the dispensaries were violating RICO laws.[27] The court did not discuss the merits of whether the CSA federally preempted Massachusetts’s law, and instead dismissed the CSA claim because the authority to enforce the CSA rests “only with the United States Attorney General and the Department of Justice.”[28]

Unlike the CSA, RICO allows a private right of action for any person “injured in his business or property by reason of a violation of § 1962” and such person can recover three times the damages he or she sustains.[29] Not only did the plaintiffs in Crimsonbring a RICO lawsuit against Healthy Pharms, the marijuana dispensary business setting shop in their neighborhood, but also against its bank (Century Bank). The court held that a plausible RICO conspiracy claim “generally involve allegations of a financial institution’s involvement with the RICO enterprise beyond providing ordinary banking services.” (emphasis added).[30] The plaintiffs had failed to allege “specific information about the nature of the banking relationship” between the parties to invoke a valid RICO claim against Century Bank.

In further support of its decision to dismiss plaintiff’s complaint, the court referenced the 2014 Marijuana Guidance by FinCen, in which the United States Treasury had implied that providing “ordinary banking services to marijuana-related businesses” did not violate the BSA.[31] Although the Marijuana Guidance makes no mention of RICO actions, the court incorporated its application to the BSA to a civil RICO claim.

In 2012, the District Court of Maryland determined that the seizure of $40,042.20 from a State Department Federal Credit Union account belonging to Thomas, Jr. was subject to forfeiture under the CSA because it “contain[ed] proceeds obtained from the distribution” of marijuana.[32] The court held that the government’s allegations had adequately shown a “substantial connection” between Thomas Jr.’s seized currency and his alleged drug trafficking activities, considering that the police had found over 12 pounds of marijuana, numerous banking documents, and “owe sheets”[33] in Thomas Jr.’s car.[34]  It also didn’t help Thomas, Jr.’s case that he had a reported income of less than $10,000 in the past few years, and no reported wages for 2011.[35]  

Thomas, Jr.’s case is one of many that prove how easy it can be for purveyors of marijuana in the illicit market to obtain access to ordinary banking services and make cash deposits with proceeds from the illegal (on both the federal and state level) sale of marijuana without triggering suspicion from bank employees as to the source of the cash deposits (i.e. filing of a suspicious activity report). In contrast, state-licensed marijuana enterprises have a much more difficult time endeavoring to open a business account with a federally insured bank. Banks across the United States have closed the accounts or rejected an application for an account of state-legal marijuana businesses upon learning about their core product.[36] Arguably, the current federal banking and forfeiture laws impose greater burdens on the state-legal marijuana businesses than for shrewd drug traffickers.

While the RICO and CSA forfeiture provisions are necessary to combat the illicit black market trade of controlled substances, the line between legal and illegal marijuana becomes hazy as a result of the conflict between state and federal marijuana laws. In theory, any amount of currency that is deposited into a bank from the state-licensed sale of marijuana can still be subject to federal seizure as a result of marijuana’s classification as a Schedule 1 drug. It would ultimately be left in the hands of the federal courts to determine whether to give preference to federal or state marijuana laws.