Banking Problems for a Whole Industry
By of MillarLaw A Professional Corporation On Tuesday, January 17, 2017
By Ani Galyan
About half of the States have legalized marijuana for either or both medical and recreational use. Despite being legal under various state laws, businesses operating in the marijuana industry continue to encounter federal banking issues making it difficult to conduct daily operations.
Regardless of state laws, marijuana remains classified as a Schedule I substance under the Controlled Substance Act (CSA) . Accordingly, it is illegal to manufacture, distribute, or dispense marijuana. It is a criminal offense to engage in monetary transactions with the proceeds of specified unlawful activity, including proceeds from marijuana related activities in violation of the CSA. The announcement by the DEA on August 11, 2016, that it will not reschedule marijuana by reducing its from Schedule I to Schedule II further aggravates this situation.
Under the Bank Secrecy Act (BSA) , financial institutions are required to assist government agencies in detecting and preventing money laundering. Specifically, BSA requires the financial institutions to monitor and report cash transactions exceeding $10,000 and to file suspicious activity reports that may signify money laundering, tax evasion, or other criminal activities. The Financial Crimes Enforcement Network (FinCEN) issued guidance in February of 2014 regarding BSA Expectations for financial institutions that provide services to marijuana related businesses.
The FinCEN guidance clarified how financial institutions can provide services to marijuana related businesses consistent with BSA obligations, including filing reports that are highly useful in criminal investigations and proceedings. The FinCEN guidelines clarified that a decision to open, service, close or refuse any particular account relationship should be made by each financial institution based on factors specific to that institution, including due diligence and risk assessment. However, if the financial institution chooses to provide financial services to a marijuana-related business, then the financial institution is required to file suspicious activity reports (SAR) for the marijuana related business.
The FinCEN guidance set forth the requirements for filing a specific marijuana related SAR, including: “Marijuana Limited” SAR; “Marijuana Priority” SAR; “Marijuana Termination” SAR. In addition, the guidance reminded financial institutions regarding FinCEN regulations for submitting Currency Transaction Reports and Form 8300. Specifically, the guidance clarified that a business engaged in marijuana-related activity may not be treated as a non-listed business under the BSA regulations and therefore is not eligible for an exemption with respect to CTR obligations by the bank.
Financial transactions involving marijuana related business involve funds derived from illegal activity because federal law prohibits the distribution and sale of marijuana, regardless of classification under state law. For this reason, almost any financial transaction the business engages with the financial institutions will result in a reporting obligation. Thus, financial institutions are required to continuously monitor marijuana business accounts to determine when and if a BSA reporting obligation has arisen, which is likely every transaction. Many financial institutions simply turn away any business with links to the marijuana industry to avoid the additional risk, reporting, and due diligence requirements. For this reason, many marijuana related business either cannot open a bank account, or routinely have accounts terminated once the bank discovers the link to the industry. Thus, these businesses are left to operate in a cash only environment bringing about high levels of cash, increased risk of robbery, and inability to meet IRS and state tax payment requirements. Lack of cash controls within the businesses also lead to theft and underreporting of income for tax purposes. The rescheduling of Marijuana from Schedule 1 to Schedule II of the CSA may result in the ability of marijuana businesses to openly establish and maintain financial accounts and thereby improve tax compliance.