By: David S. Mitchell, Jr. & Michael K. Goswami
Aside from a lack of supportive federal legislation to legalize medicinal or recreational marijuana sales, the appropriately-named “marijuana banking problem” is without a doubt the largest hindrance to the legal marijuana industry. The legal marijuana industry is projected to be a $50 billion industry nationally by the year 2026, and the financial sector is eager to take part in the market. However, the federal regulatory and enforcement regime makes many financial institutions understandably skittish to step up to help businesses in the marijuana sector with simple services taken for granted by virtually every other industry. For example, some financial institutions have refused to provide services to the industry altogether, making acquiring a bank account extremely difficult.
This article is intended to inform financial institutions of the legal framework governing the provision of services to businesses operating in the marijuana industry. It also examines data demonstrating that while the “marijuana banking problem” exists, banks are in fact providing banking and financial services to marijuana related businesses (“MRB”). Finally, the article provides considerations and guidance for financial institutions considering whether to participate in this marketplace.
Regulatory Framework for Conducting Business
within the Marijuana Industry
As a result of the passage of the Arkansas Medical Marijuana Amendment of 2016 (the “Amendment”), Arkansas financial institutions must determine whether the risk of federal prosecution or regulatory enforcement is worth the potential reward of being a front-runner for banking and payment needs of Arkansas MRBs. Likewise, Arkansas MRBs will have to face the issue of how to accept payments for product and make payments to employees and vendors. Standing between the supplier and demander in this non-functional financial services marketplace is the wall of tripartite federal prohibition, including the Controlled Substances Act (the “CSA”), the Banking Secrecy Act, and Anti-Money Laundering laws.
This federal prohibition creates a cash-only scenario whereby a MRB might experience a six-to-eight percent increase in costs and a slew of security concerns. Various solutions have been proposed to solve the problem, including using Bitcoin as a payment system or legislatively creating a state-owned bank to solely deal with MRBs. Furthermore, in-store payment systems like those offered by Jane™ continue to surface. Yet, the MRB banking problem will not be conclusively solved without action by Congress because providing banking and financial services to MRBs violates federal law no matter how the facts are tweaked.
Despite these complexities, the decision-making process for financial institutions falls back to the core of the financial industry model: basic risk-reward principles. Charging high monthly and per-transaction fees is common, but banking and lending institutions face fairly high risk by conducting business with MRBs. However, this risk can be significantly minimized by following the guidelines of the Cole Memorandum and the Financial Crimes Enforcement Network (“FinCEN”) guidance. The Cole Memorandum, issued in 2013 to guide federal prosecutors in enforcing the CSA as it relates to state-sanctioned MRBs, states that financial institutions must perform substantive due diligence to ensure that business conducted with MRBs does not facilitate eight high-priority enforcement areas. Pursuant to the Cole Memorandum, FinCEN released guidance in 2014 that reiterated the stance of the Cole Memorandum and gave financial institutions a methodology by which they might conduct business with MRBs regardless of the prohibition stemming from the CSA.
The FinCEN Guidance requires that a Suspicious Activity Report (“SAR”) be filed if a financial institution conducts business with a MRB. Presuming that a MRB is following Arkansas law regarding medicinal marijuana, a banking institution providing services to the MRB would file a “Marijuana Limited” SAR to comply with federal guidance and reduce the risk of prosecution or penalty. There are also “Marijuana Priority” SARs and “Marijuana Termination” SARs, which a bank must file if it believes a MRB is violating one of the eight high-priority Cole Memorandum areas of enforcement or if a financial institution has terminated a relationship with a MRB.
Data Shows that Financial Institutions
Do Participate in the marketplace
Despite the previously-described hurdles, financial institutions are choosing to participate in the marketplace. Based upon research conducted by Dynamic Securities Analytics, a research company based in Florida, thousands of Marijuana Limited SARs are filed every year. For example, between February 14, 2014 and July 31, 2015, there were 6,931 SARs filed by financial institutions conducting business with MRBs. In the entirety of the preceding year, there were 3,157 marijuana-related SARs filed. It is not difficult to see the correlation between the increase in marijuana-related SARs filed after the Cole Memorandum and FinCEN guidance provided financial institutions a framework for risk mitigation.
Many striking trends are evident from this data. First, there are a large number of depository institutions participating in the marijuana sector. Second, the number of institutions participating in the industry is increasing with rapidity. As of late 2015, FinCEN reported that 388 depository institutions have had banking relationship with MRBs. This is compared to late 2014, when the Director of FinCEN stated that “105 financial institutions [had ongoing] banking relationships with MRBs.” Although the data does not include statistics from 2016, all indicators suggest that the number of banks that have relationships with MRBs has continued to increase. Furthermore, data gathered by American Banker in 2017 highlighted that thirty-five percent of MRB survey participants had bank accounts with at least one of the four largest banks in the United States, despite public denials from each bank.
With more and more states legalizing marijuana in some form, the marijuana banking problem will reach critical mass sooner rather than later. Industry experts have even stated “it may be naïve to think that MRBs are excluded from the financial system simply because banks are generally reluctant to work with the marijuana industry.” As the data is now starting to prove this statement to be correct, there will be ample opportunity for Arkansas financial institutions to dive into the marijuana market. As a matter of fact, some Arkansas institutions may already have a head start.
Considerations and Guidance for Financial Institutions
Expanding into the Market
Arkansas depository institutions looking to venture into the medical marijuana industry should be aware of the breadth of considerations associated with such action. From a business standpoint, the first consideration is whether the increased income from MRBs is worth the potential penalties. After all, the assets of the financial institution are at risk once the institution begins conducting business with an MRB. If the increased income is worth the risks, a financial institution must focus on following the Cole Memorandum and FinCEN guidance to reduce risk associated with its new business line.
The institution needs to be able to conduct substantive due diligence on its MRB customers. To remain in compliance with SAR filing obligations, a financial institution must be able to recognize when a Cole Memorandum priority area might be violated by a MRB. This means that a financial institution likely needs to develop specialized practices for due diligence and devote more than a marginal amount of human capital to the venture. The enhanced due diligence burden will affect all financial institutions regardless of whether they actively engage business with dispensaries, cultivation centers, or transporters because the SAR filing requirements can also apply to banking customers ancillary to the industry, such as landlords renting property to MRBs.
To conduct business with MRBs, financial institutions must also likely modify standard forms and operating procedures. For example, secured lending becomes more difficult. A loan to a MRB secured by the assets of a MRB positions the lender to assume the full risk that the assets of the MRB might be seized, leaving the financial institution with an unsecured loan. Furthermore, a financial institution risks violating state law of marijuana possession if it chooses to utilize the inventory of a dispensary or cultivation center as security. For this reason, creative arrangements may be required, such as a requirement that in the event of default, a MRB will be required to sell its inventory at the highest possible price to other dispensaries or cultivation centers that have state authority to take possession.
Finally, financial institutions must consider the reputational impact of conducting business with MRBs. If it becomes widely known that a financial institution conducts business with MRBs, it may subject the financial instruction to higher scrutiny upon regulatory exam. Furthermore, it might affect the institution’s perception with its client base. As with most areas of business, careful planning can mitigate the potential negative perception that might be associated with conducting business with MRBs. A financial institution might consider requiring non-disclosure agreements with its potential MRB customers. Furthermore, for both business and legal reasons, a financial institution should have an exit strategy prepared that will address any possible changes in client base or federal policy.
The inconsistent treatment of marijuana under state and federal law creates a plethora of challenges for financial institutions interested in conducting business with MRBs. While the risks of providing banking and financial services to MRBs can be mitigated by following the Cole Memorandum and FinCen guidance, no complete safeguard currently exists. Nevertheless, despite this uncertainty, a large number of banks across the country have made the decision to conduct business with MRBs. Arkansas banks and financial institutions that are now facing this decision should consult experienced legal counsel to help guide them through the complex issues presented by the intersection of state and federal law.
 See Jennifer Kaplan, Cannabis Industry Expected to be Worth $50 Billion by 2026, Bloomberg available at https://www.bloomberg.com/news/articles/2016-09-12/cannabis-industry-to-expand-to-50-billion-by-2026-analysts-say.
 The U.S. Controlled Substance Act lists marijuana as a Schedule I controlled substance, meaning the manufacture, distribution or dispensing of marijuana is illegal under federal law. See 21 U.S.C. §§ 802(6), 812(c)(c)(10), and 841(a).
 The U.S. Bank Secrecy Act makes it illegal for a party to conduct a financial transaction if the party knows that there are funds involved from an unlawful activity and if the party is promoting the illegal activity. See 18 U.S.C. § 1956(a)(1).
 Deposits over $10,000 related to marijuana place a bank at risk of violating 18 U.S.C. § 1957, which is part of the federal anti-money laundering regime.
 See Will Yakowicz, The Company to Call When You’ve Got Millions of Dollars in Cash and Marijuana, Inc.Com, http://www.inc.com/will-yakowicz/blue-line-protection-secures-cannabis-cash-and-now-bank-accounts.html.
 Currently, U.S. Representative Thomas Garrett (R-VA) filed H.R. 1227 in the United States House of Representatives to remove marijuana from the Controlled Substances Act. It has been referred to the House Subcommittee on Crime, Terrorism, Homeland Security, and Investigations. The text of the bill may be accessed at https://www.congress.gov/115/bills/hr1227/BILLS-115hr1227ih.pdf. Furthermore, U.S. Senator Elizabeth Warren recently called upon FinCEN to release further guidance to financial institutions. See Sen. Elizabeth Warren Wants to Pull Pot Shops Out of Banking Limbo, Associated Press, available at http://www.latimes.com/business/la-fi-warren-pot-banking-20170102-story.html.
 See Cumming & Hochstein, Pot, Bitcoin Companies Pay Steep Fees for Bank Access, Am. Banker available at https://www.americanbanker.com/news/pot-bitcoin-companies-pay-steep-fees-for-bank-access. Monthly account fees of $3,000 and varying per-transaction fees up to $50 are common. See id.
 James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Enforcement (August 29, 2013), available at http://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf. [Hereinafter referred to as the “Cole Memorandum”].
 See “BSA Expectations Regarding Marijuana-Related Businesses,” Dept. of Treasury Financial Crimes Enforcement Network (February 14, 2014). [Hereinafter referred to as the “FinCEN Guidance”].
 The eight high-priority enforcement criteria listed in the Cole Memorandum are: (1) preventing the distribution of marijuana to minors; (2) preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels; (3) preventing the diversion of marijuana from states where it is legal under state law in some form to other states; (4) preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; (5) preventing violence and the use of firearms in the cultivation and distribution of marijuana; (6) preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use; (7) preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and (8) preventing marijuana possession or use on federal property. See Cole Memorandum, supra note 9.
 See FinCEN Guidance, supra note 10.
 See FinCEN Guidance, supra note 10.
 See Alison Jimenez & Steve Kemmerling, New Marijuana Banking SAR Data Has International Implications, Data Security Analytics available at http://securitiesanalytics.com/bank_marijuana_sar_fincen.
 See Jimenez & Kemmerling, supra note 14.
 See Jimenez & Kemmerling, supra note 14.
 It is important to note that this data is recent only as of late 2015. Assuredly, the numbers of marijuana-related SARs have increased substantially. However, the Financial Crimes Enforcement Network has yet to release its 2016 Technical Bulletin with such information.
 See Remarks of Jennifer Shasky Calvery, Director of FinCEN, at 2014 Mid-Atlantic Anti-Money Laundering Conference, available at https://www.fincen.gov/sites/default/files/shared/20140812.pdf.
 See Kevin Wack, Big Banks Worked With Pot Industry, Despite Denials, Records Show, Am. Banker available at https://www.americanbanker.com/news/big-banks-worked-with-pot-industry-despite-denials-records-show.
 See Jimenez & Kemmerling, supra note 14.
 As of late 2015, the data report by Data Security Analytics showed SARs regarding MRBs have been filed in 48 of 50 states. See Jimenez & Kemmerling, supra note 14. Since that data was released, one of the two holdover states, Hawaii, has legalized medical marijuana. Thus, it is almost certain that SARs for MRBs have been filed by financial institutions in Hawaii.
 See Cumming & Hochstein, supra note 8 (figures related to potential income for financial institutions).
 The country’s largest banks publicly deny operating in the marijuana sector, although experts interpret data points to the contrary. See Wack, supra note 19.