In related announcements by Deputy Attorney General James M. Cole, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), and the State of Washington Department of Financial Institutions, new guidance was issued that “should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” FIN-2014-G001, “BSA Expectations Regarding Marijuana-Related Businesses.” The announcements took place on Friday, February 14, a day after a snowstorm shuttered the Federal Government in Washington and immediately prior to the three-day President’s Day weekend. It was a perfect “Take Out the Trash Day.”
As President Barlet’s Deputy Chief of Staff, Josh Lyman, explained to his assistant, Donna Moss, “Any stories we have to give the press that we’re not wild about we give all in a lump on Friday.”
Has anything really changed or are financial institutions about to open themselves up further to a “know your customer” regime leaving them exposed for what they “should have known”?
What Hasn’t Changed: The Cole Memorandum & Federal Priorities
In issuing Friday’s Guidance to all U.S. Attorneys concerning marijuana enforcement, the Deputy Attorney General reiterated the enforcement priorities articulated in his August 29, 2013 Guidance:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property.
In the February 14 Guidance, the Justice Department expressly reserved its enforcement authority with great specificity:
The provisions of the money laundering statutes, the unlicensed money remitter statute, and the Bank Secrecy Act (BSA) remain in effect with respect to marijuana-related conduct. Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money transmitter statute (18 U.S.C. § 1960), and the BSA. Sections 1956 and 1957 of Title 18 make it a criminal offense to engage in certain financial and monetary transactions with the proceeds of a “specified unlawful activity,” including proceeds from marijuana-related violations of the CSA. Transactions by or through a money transmitting business involving funds “derived from” marijuana-related conduct can also serve as a predicate for prosecution under 18 U.S.C. § 1960. Additionally, financial institutions that conduct transactions with money generated by marijuana-related conduct could face criminal liability under the BSA for, among other things, failing to identify or report financial transactions that involved the proceeds of marijuana-related violations of the CSA. See, e.g., 31 U.S.C. § 5318(g). Notably for these purposes, prosecution under these offenses based on transactions involving marijuana proceeds does not require an underlying marijuana-related conviction under federal or state law.
Guidance at 2 (emphasis supplied). There was direct language on when U.S. Attorneys should consider enforcement:
For example, if a financial institution . . . provides banking services to a marijuana-related business knowing that the business is diverting marijuana . . . to . . . where such sales are illegal under state law, or is being used by a criminal organization to conduct financial transactions for its criminal goals . . . prosecution for violations of 18 U.S.C. §§ 1956, 1957, 1960 or the BSA might be appropriate. Similarly, if the financial institution or individual is willfully blind to such activity by, for example, failing to conduct appropriate due diligence of the customers’ activities, such prosecution might be appropriate. Conversely, if a financial institution or individual offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, prosecution for these offenses may not be appropriate.
Id. at 2-3 (emphasis supplied).
What’s a Bank To Do?
Financial institutions are understandably nervous about entanglements with Treasury or Justice. Just days before the Justice-FinCEN announcement, the CEO of the Colorado Bankers Association, Don Childears, expressed skepticism regarding the prospect for changes, writing “banks need the permanence of law versus changeable guidance.”
Banks already operate under Customer Identification Programs (CIP) under Bank Secrecy Act and Anti-Money Laundering (BSA/AML) rules. The February 14 FinCEN Guidance describes a further, multi-faceted process:
In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
FIN-2014-G001 at 2-3.
Many, including the U.S. Attorneys for the Eastern and Western Districts of Washington and Members of Congress, have addressed the dangers of large, cash-based business inviting crime. FinCEN’s Director, Jennifer Shasky Calvery, has stated that the agency “seeks to move from the shadows the historically covert financial operations of marijuana businesses.”
This appears to be a large experiment. Prosecutions for money laundering or the imposition of large civil penalties for banks that take on these risks are almost certain. The unknown reaction of the affected industries and the public make the politicians nervous. And when they are nervous about announcements, those announcements often end up on “Take Out the Trash Day.”
