Hazy future: the impact of federal and state legal dissonance on marijuana businesses.

• Author: Winn, Rosalie

INTRODUCTION

Under the Controlled Substances Act of 1970 ("CSA"), (1) it is a federal crime to possess, cultivate, or distribute marijuana. Historically, states largely mirrored the CSA's criminal treatment of marijuana, with state laws making the possession, growth, and distribution of marijuana a state crime. (2) However, starting in 1996, many states began legalizing or decriminalizing the use of marijuana for medical purposes under state law. (3) In November 2012, voters in Colorado and Washington legalized the possession of marijuana for recreational purposes, citing marijuana enforcement costs and added tax revenue as rationales for the new policies. (4) Colorado and Washington have since developed regulatory frameworks for the production and sale of recreational marijuana. Most recently, ballot initiatives legalizing marijuana passed in Oregon, Alaska, and the District of Columbia. (5)

While state laws regulating marijuana have changed dramatically in the past few decades, change to the federal law through either legislation or executive action has been slow. (6) Instead, the Department of Justice ("DOJ") under President Obama has issued a series of memoranda encouraging United States Attorneys to exercise prosecutorial discretion to target specified federal marijuana enforcement priorities, including preventing the use of marijuana by minors, ensuring state-authorized marijuana sales do not intersect with other illegal activity, preventing driving under the influence of marijuana, and precluding marijuana use on public and federal land. These priorities represent a re-focus away from the broad prosecution of businesses operating in compliance with a state regulation. Despite these memoranda, the underlying conflict between federal and state criminality for marijuana will continue to have a significant impact on businesses conducting sales of recreational marijuana because transactions that are legal and regulated under state law remain illegal under federal law. These recreational marijuana businesses (7) face considerable uncertainty and risk as federal prosecutors retain full discretion to enforce the CSA and other anti-trafficking statutes against marijuana businesses and the financial institutions that work with the marijuana industry.

The discrepancy between federal and state marijuana law and the resulting uncertainty for marijuana businesses undermines the ability of states such as Colorado and Washington to develop a successful, regulated marijuana industry as intended through legalization. In comparison to the prosecutorial discretion approach utilized thus far by the Obama Administration, an administrative rescheduling of marijuana in the CSA by the President would align federal and state criminality, reduce the risks faced by marijuana businesses, and enable the development of successful, regulated marijuana industries in states that have passed legalization legislation.

Section I of this Note reviews federal authority to regulate marijuana, including the listing of marijuana as a Schedule I controlled substance under the CSA, the Supreme Court's holding that the federal government has authority under the Commerce Clause to enforce the CSA's prohibitions on in-state cultivation and distribution, and federalism concerns resulting from the discrepancies between state and federal marijuana laws. Section II provides an overview of evolving federal marijuana enforcement by the Obama Administration, beginning with the series of enforcement guidance memoranda issued by the Department of Justice and the Department of the Treasury, and continuing with a summary of recent federal prosecutions against medical marijuana operations. Section III introduces the new recreational marijuana regulatory frameworks developed in Washington and Colorado. Section IV examines the disconnection between federal and state law and its impact on businesses seeking to sell or distribute marijuana under state law--including continued risks of federal prosecution for recreational sales and difficulties in conducting financial transactions under federal anti-trafficking and money-laundering laws. Lastly, Section V considers alternatives for action at the federal level to reduce discrepancies between state and federal law, including an administrative rescheduling of marijuana under the CSA by the Attorney General.

1. FEDERAL AUTHORITY FOR CRIMINAL MARIJUANA SANCTIONS

   Pursuant to its authority under the Commerce Clause of the Constitution, Congress has made the cultivation, distribution, and possession of marijuana a federal crime. (8) Part A of this Section reviews the Controlled Substances Act, (9) which establishes federal criminal sanctions for possession, cultivation, distribution, and sale of listed drugs and related anti-money laundering statutes. Part B discusses Gonzales v. Raich, (10) which upheld the federal government's authority under the Commerce Clause to prosecute in-state cultivation and possession of marijuana. Lastly, Part C considers questions of federalism in the context of marijuana laws.

   1. The Controlled Substances Act and Money Laundering Statutes

      The Controlled Substances Act of 1970 makes it a federal crime to "manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance." (11) The CSA establishes five schedules of controlled substances, with placement or removal of a drug on a schedule based on potential for abuse, scientific evidence, patterns and scope of abuse, risks to the public health, dependence liability, and whether the substance is a precursor to an already-controlled substance. (12) Schedule I is the most restrictive schedule in the CSA, as substances listed under Schedule I must have "a high potential for abuse," "no currently accepted medical use in treatment in the United States," and there must be "a lack of accepted safety for use of the drug or other substance under medical supervision." (13)

      While marijuana has been listed as a Schedule I Controlled Substance since the passage of the CSA, (14) the Attorney General has the authority under the CSA to "transfer between ... schedules" or "remove any drug ... from the schedules" after a formal rulemaking and a scientific and medical evaluation and recommendation from the Secretary of Health and Human Services. (15) Despite this authority, the Drug Enforcement Administration ("DEA"), the responsible agency within the Justice Department, has consistently refused to consider moving marijuana to a different schedule or delisting marijuana from the CSA. (16)

      Because marijuana is a controlled substance, banks and other financial institutions working with marijuana producers or suppliers may be charged as co- conspirators under the CSA. (17) In addition to potential prosecution under the CSA, banks may also be investigated and prosecuted under federal money-laundering statutes, and may be held liable under the Bank Secrecy Act for failing to report relationships with marijuana businesses. (18) Title 18 of the United States Code makes money laundering a criminal offense, (19) and sections 1956 and 1957 provide that any defendant conducting or attempting to conduct a financial transaction with knowledge that the property involved in the transaction represents the proceeds of an unlawful activity, which includes violations of the CSA, may be subject to criminal penalties. (20) The federal Bank Secrecy Act, (21) as amended by the PATRIOT Act, imposes a legal obligation on financial institutions to know their customers' businesses and sources of money, and requires the implementation of anti-money laundering programs and the reporting of transactions that appear to be illicit. (22) A "willful" failure by banks to establish or maintain anti-money laundering programs exposes the banks to criminal sanctions. (23) Due to this potential liability under the CSA and federal money laundering and banking statutes, banks have been reluctant to deal with the marijuana industry. (24)

   2. Gonzales v. Raich: Commerce Clause Authority for Federal Prosecutions of Marijuana under the CSA

      In 1996, California voters passed Proposition 215 to enable access to marijuana for "seriously ill" residents. (25) As codified into California law, the Compassionate Use Act of 1996 exempted patients from criminal prosecution for possession or cultivation of medical marijuana under the recommendation of a physician. (26) In 2002, local law enforcement and the federal Drug Enforcement Administration raided the home of an ill woman who, pursuant to the direction of her physician, was cultivating marijuana for personal use. (27) Although local law enforcement concluded the woman's actions were legal under California law, the federal agents seized and destroyed her marijuana plants. (28) In Gonzales v. Raich, respondent Angel Raich, along with other California medical marijuana users, sought injunctive and declaratory relief against the Attorney General of the United States and the head of the DEA to prohibit the enforcement of the CSA against users in compliance with California state law. (29) The plaintiffs claimed that the CSA's prohibition on marijuana as applied to intrastate use unconstitutionally exceeded Congress's authority under the Commerce Clause, and thus impinged upon California's sovereign ability to govern itself. (30)

      The Supreme Court upheld the federal government's authority under the Commerce Clause to take enforcement actions against intrastate uses of marijuana. (31) The majority opinion, written by Justice Stevens, rejected attempts to distinguish intrastate personal use of marijuana for medical purposes in accordance with state law from drug trafficking. (32) Because the CSA was enacted pursuant to Congress's Commerce Clause authority, the only question the majority considered was whether Congress's policy judgment to include all activities related to marijuana cultivation and use in...