As of July 24, 2019, 33 states plus Washington, D.C. legalized medical marijuana, with 11 states allowing for recreational use. Because many of these marijuana-related businesses (MRBs) are required to operate solely with cash, each state has mandated its own set of rules and regulations (which vary tremendously and the sale and possession of marijuana products is still federally illegal, many financial institutions have decided not to bank these businesses because they are unwilling to accept the associated risks.
FinCEN guidance has attempted to reconcile the compliance expectations stemming from federal/state law conflicts with MRBs and has provided information for financial institutions to consider when determining whether to bank MRBs from a BSA/AML perspective. However, the guidance does not attempt to provide any safe harbor for any institutions or imply that this is a legal activity.
To Bank or Not to Bank
Not only must the financial institution consider the obvious risks associated with the implementation of robust enhanced due diligence programs, frequent high-risk monitoring, additional SAR filings, additional staff and training, and community impact, institutions must be aware that most states require MRBs to conduct business solely with cash. This activity opens a whole new world of potential money laundering.
Think about it. If these businesses have nowhere to bank in your community, they will need to do something with the cash. This has the potential to bring a whole new version of “bed banks” to the community. Where will the MRBs put their cash? Will this increase crime in their areas? Will new and inventive ways to launder money emerge?
This new cash activity certainly could bring additional exposure and risk in the banking industry. Current customers may suddenly be identified or flagged as potential suspects with abnormal cash deposit and withdrawal patterns compared to the expected. Demands for safe deposit boxes may increase. Cash purchases of monetary instruments may increase for these businesses to pay their bills. As MRBs may have nowhere to bank, the possibility of additional illegal activity just to support their ability to function is endless.
On the other hand, if a financial institution implements programs to bank these businesses, and accepts the associated risks, a new level of service fee income may open for them. It may reduce the exposure to the community itself by containing and reporting this activity. A financial institution could easily justify additional fees based on increased enhanced due diligence, state requirements and potential regulatory scrutiny. Most of the regulatory agencies have indicated that if they find your programs to be solid and comprehensive with strong state oversight, they will consider this during the examination process and any criticism will be from a BSA/AML (FinCEN guidance) perspective and not necessarily a federal level.
Small Business Administration Loans
Another potential conflict associated with banking MRBs relates to Small Business Administration (SBA) loans. If you are an SBA lender considering banking MRBs or associated businesses, this may be a problem. In April 2019, the SBA included (SOP) SO 10 5(K) in its Standard Operating Procedure. This policy states that if any business is engaged in federal or state illegal activity, they would be considered ineligible for SBA financial assistance which includes any business that derives revenues from MRBs or supports the end-use of marijuana. This would include, but not be limited to, sellers, distributers, contractors, landlords and product handlers.
Meanwhile, policy makers in Washington drag their feet as usual. The proposed Safe and Fair Enforcement Banking Act will effectively ban federal regulatory agencies from penalizing or otherwise punishing financial institutions that bank MRBs. However, this act is currently at a stand-still. The American Bankers Association and several state committees are pushing for Congress to rectify this situation.
In the meantime, To Bank or Not to Bank, that is the question.
Join our Temenos Compliance Advisory team on Thursday, September 26, 2019 for a free webinar on Recent Rules, Tips and Marijuana-Related Businesses, What You Need to Know about BSA.