Cannabis-Related Issues

Email #9

THE STATE OF CANNABIS BANKING

Credit unions of all sizes across Montana continue to have questions on how to handle requests for accounts and loans for those involved in the cannabis industry. Compliance officers are also finding their credit union may have unintentionally opened accounts serving the industry or related businesses. This lesson is intended to dispel myths, lay out facts, and help you feel more comfortable with the current state of marijuana banking, even though it can — and probably will — change tomorrow!

Legality

Across the U.S., a majority of the states have approved legalizing either medical or recreational marijuana, or both, and the change in state laws continues at a rapid pace. In Montana, we have had medical marijuana for several years and (limited) recreational marijuana sales since January 2022. Even as the industry grows (and is accepted) in most states, marijuana/cannabis remains classified as a Schedule 1 substance under the Controlled Substances Act. That makes it illegal at the federal level, and no state law can override that. There was a federal agency recommendation made in August 2023 that could potentially impact that classification in the future.

SAFER Banking Act

Passing federal legislation like the SAFER Banking Act has been a priority for a few years now. It would provide a safe harbor to financial institutions serving cannabis businesses that are legal in their communities. It did pass out of the Senate Banking Committee this fall with bi-partisan support, including by Senators Tester and Daines, but has yet to be voted on by the full Senate.

Serving the industry

Marijuana is a booming business and new storefronts and related support businesses open daily in towns across our state. With their local nature, credit unions want to serve their members and communities, but see risk to their reputation if they choose to serve this industry. Most credit unions also don't have the staff or systems in place to monitor the accounts at the level expected by regulators and law enforcement.

There are additional safety and financial concerns for both dispensary employees and communities if the amount of cash in the cannabis industry is not allowed into the financial system and pushed into alleys. Employees may need to be paid in cash. Not only does that make them prime targets for theft, but they have little to no proof of income for gaining loans or filing taxes.

Marijuana-related businesses (MRBs) are cash intensive, so it is challenging to serve them. It requires a great deal of monitoring and reporting of the activity and, of course, the risk of possible seizure of funds if the federal government were to raid them. Since credit unions are often federally chartered and most are federally insured, their ability to serve an industry that is illegal at the federal level is further complicated.

Enforcement

During the Obama Administration, the federal government agreed to let states manage their programs without interference, as long as they were not violating federal law. The Trump Administration hinted at changes and more enforcement, but other than rescinding the Cole Memos (discussed below), they never imposed any further enforcement. The Biden Administration and current Congress continue to talk about changes or other support to states (like Montana) that have implemented legalization of medical and/or recreational marijuana. To date, nothing additional has been formalized and each federal election sets up the potential for shifts.

It is difficult to see where this goes, but having a good paper trail of the industry and their activity only benefits all of us in the fight against money laundering often found in cash-intensive businesses.

SAR FILING EXPECTATIONS

FinCEN issued guidance in 2014 on BSA Expectations Regarding Marijuana-Related Businesses. Even with changes in state law, the rescission of the Cole Memos, and the industry's growth, FinCEN's publication is still considered the primary guidance for the reports your credit union is expected to file.

The following three SAR filings may be necessary in various situations. Note these by naming them appropriately in the narrative section when you file one.

Marijuana Limited SAR

Filed if your credit union is providing financial services to a marijuana-related business that you reasonably believe, based on your member due diligence, does not implicate one of the Cole Memos priorities or violate state law. It would mainly identify the name and address of the subject and related parties.

Marijuana Priority SAR

Filed on a marijuana-related business that the credit union reasonably believes, based on its member due diligence, implicates one of the Cole Memos priorities or violates state law. The filing would identify the party, detail the Cole Memos priority or state law that is being violated, and provide details on transactions.

Marijuana Termination SAR

Filed when the credit union terminates an account or relationship with a marijuana-related business. Even if you do not serve the industry, you need to file this SAR if you discover accounts that are already open or accounts (perhaps MRB employee accounts) that are being used for dispensary or MRB activities.

Cole Memos Priorities

Early in 2018, then U.S. Attorney General Jeff Sessions rescinded the Cole Memos, which financial institutions and marijuana providers across the country had relied upon. As CNN Politics reported, he "rescinded a trio of memos from the Obama administration that had adopted a policy of non-interference with marijuana-friendly state laws."

According to the report, "the move essentially shifts federal policy from the hands-off approach adopted under the previous administration to unleashing federal prosecutors across the country to decide individually how to prioritize resources to crack down on pot possession, distribution, and cultivation of the drug in states where it is legal."

Until FinCEN, the Department of Justice, or another attorney general states otherwise, many jurisdictions still consider the Cole Memos a benchmark of expectations for SAR filing and enforcement. The priorities laid out in them include preventing the following:

Distribution of marijuana to minors;
Revenue from the sale of marijuana going to criminal enterprises, gangs, and cartels;
The diversion of marijuana from states where it is legal in some form under state law to other states;
State-authorized marijuana activity being used as a cover or pretext for the trafficking of illegal drugs or other illegal activity;
Violence and the use of firearms in the cultivation and distribution of marijuana;
Drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
The growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
Marijuana possession or use on federal property.

If your credit union becomes aware that any of the above are occurring through an account, your SAR filing should specifically reference the priorities your staff believe are being violated.

RECOGNIZING MRB ACTIVITY

You might be seeing activity to indicate a member is either operating or employed at a marijuana dispensary. And don’t forget all the businesses that are supporting the industry as it grows and becomes more complex. They may be an MRB too.

We have had several credit unions report finding dispensary activity, including payroll and payments to suppliers, being run through employee accounts. That makes sense given the difficulty the businesses are currently having in getting banked in traditional financial institutions. Your policy needs to address how to handle that scenario, and if you close the account, a termination SAR needs to be filed. (See the above blurb for guidance on that step.)

To get an idea of the regulatory expectations, it is worth reading the NCUA cease and desist order against Live Life FCU for marijuana-related activities. They not only ordered them to stop opening new MRB business accounts, but also to stop operating an MSB, file SARs, and hire a third party to assist with a retrospective review. As the first real public action against an MRB program, it can be informative in decision making on your own credit union's program decisions.

MRB Policy Decision

It is highly recommended that your credit union have a board-approved policy on whether or not you will serve marijuana-related or cannabis businesses.

When you do not serve MRBs, your policy should still detail how your credit union will respond if you are approached about accounts or loans and include the steps that will be taken if you find you already have accounts open that serve the industry or activity running through an existing account.

If you do choose to serve the industry, your policy should lay out the steps you will take for filing the necessary SARs and collecting and tracking needed information. In fact, you need a policy and an exit strategy to be compliant. This checklist is a good resource for items to consider in serving MRBs.

A possible third policy option is to allow management to make case-by-case decisions. While we do not have a sample policy for that scenario, some credit unions have been approached by businesses or individuals who support the growing industry with requests for accounts. Each decision should include thoughtful consideration of the regulatory expectations, including monitoring and reporting, but a policy of this nature can help with some of the gray areas that exist in defining service to the industry.

There are some great policy examples available in CU PolicyPro #2113 (Not Servicing Marijuana-Related Accounts), #2112 (Servicing Marijuana-Related Accounts), and #2111 (Hemp-Related Accounts) that can be adjusted to your needs. You may need to incorporate references to specific Montana features such as the Department of Revenue Cannabis Control Division and their helpful FAQ.

The Cannabis Control Division also maintains a list of counties (refer to the graphic below) who have approved recreational sales and/or the local tax option, along with a county-by-county map. The map is generally updated shorted after county elections are held each year.

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Donya Parrish, VP Risk Management | donya@mcun.coop | 406-459-3497