Bank regulation and state-licensed cannabis sales

As promised, the Treasury Department and the Justice Department have issued new guidance designed to allow state-licensed cannabis enterprises access to the banking system.  That’s something the Administration had the legal power to do, and that will actually make a difference, but I’m not expecting any of the people pounding the “rescheduling” drum to notice that the distinction.  

Legislation would be better, of course.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

20 thoughts on “Bank regulation and state-licensed cannabis sales”

  1. Both Sullum and Angell had stories and tweets about the new FinCEN rules today. Seems like they noticed it just fine. Why you mad though?

  2. Yes, Sullum – utterly predictably – criticized the Administration, without suggesting what could or should have been done differently.

      1. Yes, and Congress would have refused to pass it. Instead they did what they could where they were with what they had.

        1. Quite possibly but we’ll never know because they didn’t try. The question nobody seems to be addressing is whether it was better overall to create a nebulous understanding along the lines of "the law will still be the law, it just won't be enforced, unless somebody decides that they want to enforce it in which case everybody goes to jail but we really hope that won't happen". That's just a crazy way to enforce the law. It's dishonest and it can only lead to big trouble down the road.

          I don’t understand the Obama administration’s reticence in deciding what it believes, sending the best legislation it can to the Congress and then trying hard to get it passed. This is just a silly dance that empowers the Congressional clown show even as it makes Obama seem weak and unprincipled.

          Nevertheless, while your point that Congress probably wouldn’t pass a safe harbor seems correct, it also seems to me that your concerns about the inability of such legislation to pass only intensify my uneasiness. Participating in an activity that is unquestionably illegal under federal law but is nonetheless permitted to operate openly by the Attorney General through a series of informal “directives” and wink-and-a-nod understandings seems very risky and inadvisable to those whose lives could easily be destroyed by a shift in the political winds. If you were hired as a consultant by a bank, could you seriously consider advising the bank to just take a chance?

          What kind of a regulatory environment can exist in Washington and Colorado absent a legislative safe harbor? Under this wink-and-a-nod arrangement whereby federal law enforcement is suspended until it isn’t, I don’t see how it’s going to be possible for the states to regulate marijuana activity in the way in which you and they have described. If a licensed marijuana trafficker manages to open up a bank account, who will be looking to see how that account is operating and how much discretion will that person have under these directives? Could a licensed marijuana trafficker openly make and spend millions without paying federal income taxes, filing a federal tax return or fearing the IRS? Can they hire lawyers and others to help them operate? Can they make campaign contributions with drug money? Can they file form 1099's or, perhaps more importantly, what happens when the banks and others file form 1099's and the IRS can't find a matching tax return?

          If we have an old-Chicago arrangement where everybody just agrees to look the other way, that's an environment that is ripe for corruption. Do these directives mean that if somebody with some kind of licensing arrangement with a state manages to open a bank account then literally anything goes? Wouldn't such a highly discretionary, ad hoc approach to enforcing laws that are actually still on the books simply become an open invitation to corruption and violence?

          1. I have no idea what has happened in the last five years that would lead you to conclude that legislation would be more likely to pass if Obama introduced it and pushed it.

          2. Perhaps I didn’t express myself clearly. I didn't say that passage of such legislation would be more likely. Only that it would be nice if Obama would be clear about his beliefs and act upon them by sending legislation to Congress that reflects those beliefs. I don’t claim that it would make passage of such legislation more likely but at least he could move beyond being some kind of living Rorschach test and he wouldn't constantly be negotiating with a center-right starting position if, in fact, he isn't a man of the center-right.

          3. Why is wanting a president who says what he means and means what he says and then sends legislation to Congress asking for what he wants somehow incompatible with “getting things done”?

          4. I see no reason to think that Obama can get anything passed by Congress.

            But I do think a lot of their stuff on marijuana is ineffective half-measures. They should, of course, reschedule the drug, if nothing else merely because the drug actually has legitimate medical uses and the current schedule is a lie.

            But the big thing they should do is stop pretending the most important thing is to protect the states that still have prohibition. Prohibition is a failure. There's nothing wrong with undermining it.

            So, specifically, on the banking issue, they should have just said they will not prosecute any bank for doing business with a marijuana dealer. Period. No exceptions.

            Yes, that would mean that in some states where marijuana is illegal, dealers will get to use the banking system. So what? That's a state concern anyway.

            Why should the federal government spend one second helping states like Alabama enforce racist, failed drug laws?

          5. Really. Especially since it's easy as pie to look at a bag of cash tell that it's marijuana cash and not cocaine cash or human trafficking cash.

  3. With respect, I think you have it backwards. This guidance, while well-intentioned, isn't going to make a difference absent legislation. At least, if I were a general counsel of a bank, it wouldn't be sufficient to persuade me to accept cannabis business deposits. These sorts of memos are not legally binding in court and essentially amount to a guideline for prosecutorial discretion, which is not reliable. While they may hold true in the majority of cases, as dispensaries can tell you, all it takes is one US Attorney who doesn't care to observe the guidelines to bring federal charges and you run the risk of losing not only the assets but your charter. I wouldn't want to be the unlucky one in that case.

    Even assuming Holder can keep the federal attorneys leashed, the red tape associated with filing a SAR for every transaction (and keeping watch on every transaction using the Cole factors to determine the type of SAR) could be a significant barrier to entry for local credit unions and smaller banks who might otherwise be inclined to take the plunge and try to corner the market ahead of the larger institutions. Finally, there's the not-insignificant risk that a Republican will be elected in 2016 and negate this entire scheme, which you certainly don't want happening while you're holding the bag.

    The comments of Frank Keating in this WSJ article aren't encouraging. I'd love to be proven wrong, but I suspect the banks won't budge without a more concrete shield.

    1. An interesting question is what would happen if a bank tried to reduce its paperwork burden by placing a pot related business such as a group of related retail shops on the exempt list. Assuming all the other "know your customer" requirements are satisfied, if the bank knows the source of the money (narcotics trafficking) is legal under state law and non-prosecutable under the guidelines, can the pot shops be granted an exemption? The whole thing really has such an Alice in Wonderland feel to it because nobody is willing to take the culture war heat of proposing a legislative safe harbor.

      As an aside, it brings to mind the problem facing FNBC when we first tried to deposit forfeited currency. The bank was rightly suspicious that the two trash bags full of small bills and the briefcase of $100 bills being guarded by a group of shifty looking, heavily armed men was "drug money", which, of course, it was. They didn't want to deposit it even to an official state account. Ultimately, we compromised and they took the deposit and filed a CTR under my name listing the source of the cash deposit as "proceeds of narcotics trafficking".

  4. Lionel has it about right; the bankers are not happy with the guideline because it does nothing to protect them from prosecution if, for example, they somehow fail to make certain that the cannabis that their depositors sell is not used on federal land.

    Legislation is indeed not only better, but is necessary if the marijuana trade is to be kept out of the hands of cartels, which is already happening in the case of medical marijuana.

  5. Your inclinations to defend the placement of cannabis in schedule I is purely academic, and therefore perplexing. Surely you don’t believe it belongs there, do you? Then why all the puffery? This isn’t about you Mark, this is about common sense as it pertains to a plant.

    The conversation is swiftly moving towards delisting, not rescheduling anyways. What say you with regards to delisting cannabis, would you support? Why or why not?

    1. I'm not defending anything. The scheduling regime is incoherent and ought to be scrapped. Cannabis ought to be legal, but kept expensive and not subject to aggressive marketing. But none of that is within the power of the President. My objection isn't to any particular policy position, but to sleazy, sloppy journalism.

      As to the topic of this post, note that it doesn't matter if 99% of the banks chicken out; as long as some bank is willing to do the business, the pot shops can stop keeping their money in mattresses.

      1. Except that all of their drug money is still subject to federal asset forfeiture, which will be made a "slam dunk" by putting it in a bank account in a bank that has complied with the new guidelines and therefore, among other things, required the pot shop/wholesaler/grower to provide documentation that they are getting their money by violating federal narcotics laws. If I was a pot shop owner, I'd think twice about taking that money out of my mattress—especially because everything I buy with drug money is also subject to forfeiture and running the money through a bank account makes tracing unbelievably easy.

        Basically, people in the marijuana business and everybody who provides them with goods and services are accepting a ride across the river on a crocodile's back based on nothing money than the croc's promise that he won't change his mind and decide to eat them once they are in the middle of the river and at the croc's mercy. It seems to me that the risk of politically ambitious culture warriors ignoring the guidelines is more of a risk than a bank should be expected to take with its charter or bankers and pot entrepreneurs with their freedom. Remember, it only takes one rogue cop, DEA agent or US attorney to bring the entire house of cards crashing down.

        What I don't understand is why the administration is willing to issue guidelines but won't send any "safe harbor" legislation to Congress. What is the political calculus that makes them think it's safe to issue guidelines but that sending legislation to Congress would expose the administration to an intolerable risk of "culture war" reprisals?

  6. I also agree with Lionel and, more importantly, I suspect that the lawyers advising the banks also will tend to agree with him and will advise their clients accordingly. It's important to remember that we are dealing with laws that impose extremely harsh penalties and have statutes of limitation that will extend well into the next administration.

    There is another reason why banks should be hesitant to rely on these informal assurances. Banks who act in reliance on these informal guidelines will unquestionably be putting their heads in the noose on the assumption that even if some politically ambitious or socially conservative should choose to whip the horse, the administration will intervene to save the bankers.

    Implicit in this is the related but obviously irrational assumption that an administration lacking the political spine to send safe harbor legislation to Congress will somehow muster the courage to derail a financial crimes prosecution brought by a US attorney in Seattle or someplace that can arguably assert jurisdiction. Seriously, if they won't take the heat for proposing the safe harbor legislation, why put your head in the noose in the first place?

    I would continue to advise banking clients (in the unlikely event that I acquire any) not to have drug traffickers as customers. Unless, of course, they're really big banks laundering immense amounts of money for violent drug cartels, in which case the Obama administration really will take the heat and fix their cases.

  7. My first reaction is the guidelines seem to put a lot of pressure on the banks to act as regulatory agents, i.e., to perform regulatory tasks that the federal and/or state governments should be doing, if anyone. The banks should be required to verify that the marijuana business is licensed, and to keep the usual records that banks keep for all businesses, which law enforcement could see if it has probable cause, but anything beyond that in the way of monitoring/investigation of possible illegal activities seems unduly burdensome and a kind of cost-shifting from the government to the banks.

    From the AP news article:

    Under the guidance, banks must review state license applications for marijuana customers, request information about the business, develop an understanding of the types of products to be sold and monitor publicly available sources for any negative information about the business.

    The guidance provided the banks with more than 20 "red flags" that may indicate a violation of state law. Among them: if a business receives substantially more revenue than its local competitors, deposits more cash than is in line with the amount of marijuana-related revenue it is reporting for federal and state tax purposes, or experiences a surge in activity by third parties offering goods or services such as equipment suppliers or shipping services.

    If a marijuana-related business is seen engaging in international or interstate activity, such as the receipt of cash deposits from locations outside the state, that's problematic, too.

    The banks need to file "suspicious activity reports" on their pot customers — designated either "marijuana limited," for those believed to be complying with the federal government's law-enforcement priorities, such as keeping pot away from children; "marijuana priority," for those the banks have questions about; or "marijuana termination," for those believed to be engaging in criminal activity.

Comments are closed.