Do You Feel Lucky, Banker? the Shaky Prospects for Financial Transactions With Marijuana-related Businesses

• Publication year: 2018
• Author: Bradley Scheick

Do You Feel Lucky, Banker? The Shaky Prospects for Financial Transactions with Marijuana-Related Businesses1

Bradley Scheick

Brad Scheick is a senior counsel in Miller Starr Regalia's Walnut Creek office. He represents financial institutions, property owners, developers, and retail and office tenants in a broad range of real estate and related business transactions. Brad is Miller Starr Regalia's Financial Services Practice Group Leader.

This article (a) provides an overview of the primary federal laws and regulations governing financial institutions, and the potential penalties thereunder, that have prevented the banking industry from becoming more engaged with the state-legal marijuana industry, (b) describes various federal actions that have been taken to address these concerns and to increase banking access for state-legal marijuana-related businesses, and (c) discusses the implications of these federal actions for marijuana-related businesses and those businesses that service them.

I. INTRODUCTION

Federal law prohibits the manufacture, possession, or use of marijuana for any purpose, including medical purposes.² This prohibition notwithstanding, as of January of 2018, 29 states plus the District of Columbia have legalized marijuana for medical purposes, six states have legalized marijuana for recreational use, and Maine and Massachusetts have approved legalization measures that have not yet taken effect.³ Because of this conflict between federal law and the growing state-level legalization movement, financial institutions, the majority of which are governed by federal law or, in the case of state-chartered banks and credit unions, are reliant upon systems and services overseen and administered by federal agencies, are wary of potential federal enforcement actions and, as a result, state-legal marijuana-related businesses are largely denied access to the banking system. This means that marijuana-related businesses are generally unable to open checking accounts, accept credit and debit cards, use electronic payroll services or remote bill pay, or access the automated clearing house ("ACH") electronic payment system. It also means that these businesses, and in some cases businesses that serve or support them, such as property owners who lease space to dispensaries or cultivators, have difficulty obtaining bank loans and lines of credit, forcing them to rely on high interest, short-term hard money loans to meet financing needs.

II. TREATMENT OF MARIJUANA UNDER THE CONTROLLED SUBSTANCES ACT

The Controlled Substances Act (the "CSA") lists marijuana as a Schedule I drug—a category of drugs deemed most hazardous by the federal government and of no practical use. As such, the manufacture, distribution, possession, and use of marijuana is strictly prohibited under federal law for all purposes.⁴ Further, it is unlawful under the CSA for any person to knowingly aid in the commission of any such activities or to open, lease, rent, use, maintain, manage, or control any place for the purpose of conducting such activities.⁵ This includes any parties that lease space to others for the distribution or production of marijuana.

Penalties for the violation of the CSA can include fines and imprisonment, both for parties directly involved in the manufacture, distribution, or use of a controlled substance and for parties found to have aided or conspired with such directly involved parties.⁶ Additionally, any real or personal property used in the commission of a violation of the CSA is subject to federal asset forfeiture. Therefore, any party that violates the CSA, including parties such as landlords that support or aid marijuana related businesses but are not directly involved in marijuana manufacture, distribution, or use, can have their property seized by the federal government. Because of this, loans made by financial institutions to marijuana-related businesses or to other parties that support or aid marijuana-related businesses can at any time be rendered unsecured as a result of the seizure of the borrower's assets and, as a result, real property owners engaged in a marijuana-related business, or who lease their property to a third party marijuana-related business, find very few banks willing to loan against that property.

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III. OTHER FEDERAL BARRIERS TO BANKING ACCESS FOR MARIJUANA-RELATED BUSINESSES

Federal anti-money laundering laws make it illegal for financial institutions to handle funds generated from illegal activities, including violations of federal drug laws. They impose various obligations and limitations on financial institutions to ensure that the banking system is not used to facilitate violations of the CSA. Specifically, under the Money Laundering Control Act of 1986, it is a criminal offense for any person or entity to conduct or attempt to conduct a financial transaction where that party knows that the funds involved represent the proceeds of some form of unlawful activity, and such party is conducting the transaction with the intent of promoting a "specific unlawful activity." For example, an activity in violation of the CSA, or for the purpose of avoiding state or federal currency transaction reporting requirements.⁷ For purposes of this prohibition, the term "financial transaction" is broadly defined as:

(A) a transaction which in any way or degree affects interstate or foreign commerce (i) involving the movement of funds by wire or other means or (ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real property, vehicle, vessel, or aircraft, or (B) a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree.⁸

Further, the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Report Act of 1970 (commonly referred to as the Bank Secrecy Act)⁹ (the "BSA") requires financial institutions to file certain reports with respect to currency transactions and their customer relationships in order to identify potential criminal activity and to provide paper trails to support criminal, tax, and regulatory investigations. Under the BSA and its applicable regulations, financial institutions are required to file a Currency Transaction Report ("CTR") with respect to each currency transaction involving more than $10,000. Financial institutions are also required to monitor suspicious activity on the part of their clients and to file suspicious activity reports (referred to as "SARs") of any suspicious activities. SARs must be filed in connection with transactions aggregating more than $5,000 and which the institution knows or has reason to suspect, (i) involve funds derived from an illegal activity or constitute an attempt to disguise funds derived from an illegal activity, (ii) are intended to evade the reporting or other requirements of the BSA, or (iii) lack a business or apparent lawful purpose.¹⁰

Persons or institutions found to...