Despite state legalization actions, marijuana money continues to bedevil banks

This Jan. 1, 2018 photo shows marijuana on display at Harborside marijuana dispensary in Oakland, Calif. A group of Democratic state lawmakers are proposing major tax cuts for the marijuana industry to jump-start's California's sluggish legal marketplace. The bill Assemblyman Rob Bonta of Oakland and others introduced Monday, Jan. 28, 2019 would for the next three years eliminate the state's $148 per pound cultivation tax and reduce the state's 15 percent excise tax on retail sales to 11 percent.

ALBANY — The risk of criminal liability and civil penalties are real for New York banks now that Gov. Andrew Cuomo’s proposed budget seeks to legalize, regulate and tax the cultivation and sale of marijuana.

Also real for these banks is the possibility of banking $1.7 billion in estimated sales forecasted for an industry beset by a lack of legitimate banking options that experts and advocates say restricts growth, increases costs and attracts crime to businesses forced to transact only in cash.

Federal law still makes the possession, sale or growth of the cannabis plant or its dried flowers — know colloquially as marijuana — illegal, classifying it as a Schedule I controlled substance, the strictest designation.

Those laws, despite the Empire State’s efforts, stand between New York banks and these new accounts but recent events in Washington might finally get the ball rolling on changes to those laws.

Last week, the U.S. House of Representatives financial services subcommittee took up consideration of the SAFE (Secure and Fair Enforcement) Banking Act, sponsored by U.S. Senator Jeff Merkley, D-Oregon, which if passed would shield businesses from the alphabet soup of federal regulators (the FDIC, FinCEN, NCUA, the OCC and the Federal Reserve) for whom the Schedule I drug trade is a major target.

Without shielding laws like the SAFE Banking Act, legal experts agree that any bank official who opens an account for, or extends credit to, marijuana businesses is complicit in money laundering and could be criminally liable under the CSA (Controlled Substances Act), BSA (Bank Secrecy Act) and MLCA (Money Laundering Control Act).  No matter how legal Cuomo makes marijuana in New York, federal law enforcement agencies can still go after the banks’ marijuana businesses.

Until a year ago, a directive given by former U.S. Attorney General James Cole, known as the “Cole Memo,” gave marijuana businesses and their bankers some peace of mind.

Federal law enforcement leaders, through the Cole Memo, were advised to stand down on reefer regulation as long as states have strong enforcement of their own that didn’t conflict with federal guidelines (in short: keep it away from kids and don’t let it cross state lines).

On January 4, 2018 then-Attorney General Jeff Sessions cancelled that directive a mere fours days after California legalized recreational marijuana.

In this uncertain and risky regulatory climate, banks are wary to stick their necks out and that includes credit unions, said RJ Tamburri, Communications Director for the New York Credit Union Association.

“Even with state-level and federal guidance from regulators, it’s still a very burdensome process to serve marijuana companies and marijuana-related businesses,” he said, “at the end of the day, it remains a Schedule I drug illegal under federal law.”

Tamburri said that he would not encourage or discourage credit unions to serve cannabis customers, given the high compliance costs that come with serving the industry.

“On top of the already strict and onerous procedures financial institutions that serve the cannabis industry have to abide by, regulators will almost certainly more closely scrutinize an institution that is serving the marijuana industry,” he said.

The few banks that do engage in the marijuana businesses rely on the closest thing an official document that exists — the FinCEN guidelines, where the FinCen Financial Crime Enforcement Network operates under the auspices of the U.S. Treasury Department.

Under FinCEN, banks must perform additional and significant customer due diligence before providing services to marijuana-related businesses. In some cases, that means boots-on-the-ground inspections to make sure the bank’s cannabis-selling customers are legitimate and regulation-complaint.

The most bemoaned of FinCEN guidelines is the SARs (Suspicious Activity Reports), which banks must submit every time they transact business with a marijuana customer. But even after doing all this, legal experts say, banks are technically still in violation of federal criminal statutes.

Proponents of immunizing banks from federal prosecution frequently cite the burdensome SAR requirement and the risk of crime associated with cash-based business as justification for the SAFE Banking Act.

On Wednesday, these arguments took center stage before the house financial services subcommittee.

“We have the power in this committee to prevent murders and armed robberies, and we must use it, we must use it now,” said co-sponsor Rep. Denny Heck, D-Wash.

Other supporters testified to the risk of robberies and other burdens of conducting business without bank accounts, such as paying millions of dollars in taxes, in cash.

Sundie Seefried, CEO/President of Partner Colorado Credit Union located in Denver, Colorado, wrote the proverbial playbook on how banks can service the marijuana businesses successfully. In her book, “Navigating Safe Harbor: Cannabis Banking in a Time of Uncertainty, Seefried highlights public safety concerns raised by a glut of cash on the street was key to garnering support of skeptical bank officers and directors. The most universal of her advice? Get the cash off the street and into banks, Seefried says.

Julie Hill, Professor of Law at the University of Alabama School of Law, has written extensively on banks and marijuana and in 2015, said  “other cash-intensive businesses find ways to successfully manage their robbery risk, typically through a combination of security measures and insurance.”

“Unless somehow constrained, a cash-intensive marijuana industry would eventually do the same,” Hill wrote. “While this would probably be less efficient for the marijuana industry than just contracting with banks, it may suggest that in the long-term, public safety concerns are not paramount.”

With respect to New York, Hill acknowledges that the FinCEN safe harbor affords banks some protection, but said there is still a “good amount of risk” that is hard to mitigate, especially for smaller banks and credit unions, which can’t afford the high compliance costs. Technological solutions merely mask whether a marijuana business is really doing what it tells the bank it’s doing, according to Hill.

Oswego County banks were reluctant to opine on the current controversy surrounding the prospect of legal marijuana businesses, and the bank accounts and financing those businesses will need. A Pathfinder Bank representative offered, “no comment,” and other financial institutions, including Oswego County Federal Credit Union, did not respond to multiple inquiries.

The work in Washington D.C. being done on behalf of bankers advocating for the SAFE Banking Act is not without its critics.

Rep. Blaine Luetkemeyer, R-Mo., the ranking Republican on the financial services subcommittee, said the committee was “discussing the merits of allowing federally illegal businesses to access banking services.”

“As far as I know, the House Financial Services Committee does not have jurisdiction over descheduling a drug,” Leutkemeyer said.

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