The legal landscape for marijuana-related businesses (MRBs) has seen significant change and challenges in recent years. Despite the legalization of marijuana for medical or recreational use in various states, it remains a controlled substance under the federal Controlled Substances Act (CSA). As a result, banks and certain payment companies have generally been hesitant or unwilling to provide financial services to MRBs due to risk management and regulatory compliance challenges, particularly with respect to anti-money laundering laws.
However, there are signs that the tide may possibly be starting to turn. In this alert, we explore the current federal financial regulatory landscape with respect to servicing MRBs and the regulatorily compliant opportunities that exist today. With a view to possible legislative developments around the corner, we discuss how banks and fintech companies can strategically position themselves for potential future changes, including the possible passage of the SAFE Act (now known as the “Secure and Fair Enforcement Regulation Banking Act” or the SAFER Banking Act). The proposed legislation intends to provide a safe harbor for financial institutions wishing to serve state-sanctioned MRBs.
Understanding the Current Legal Landscape
Due to the federal classification of marijuana as a Schedule I controlled substance, there is a broad prohibition under federal law to manufacture, distribute, or dispense marijuana. As a result, financial transactions involving an MRB would generally involve funds derived from illegal activity and implicate federal anti-money laundering laws.
Notwithstanding the federal ban, in 2014 the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying its Bank Secrecy Act (BSA) expectations for how financial institutions (defined by the BSA to include banks and money services businesses, or MSBs) actually may offer financial services to MRBs, consistent with their obligations under the BSA (FinCEN’s 2014 Guidance).
FinCEN’s 2014 Guidance referenced the Cole Memo, which was issued in 2013 by then Deputy Attorney General James M. Cole to all federal prosecutors. The Cole Memo provided updated guidance concerning marijuana-related enforcement under the CSA, directing federal prosecutors to focus their enforcement resources on eight priority areas (the Cole Memo Priorities), such as preventing the distribution of marijuana to minors, preventing revenue from marijuana sales from going to criminal enterprises, preventing the diversion of marijuana from states where it is legal under state law to other states, and preventing state-authorized marijuana activity from being used as a cover or pretext for illegal activity.
In its 2014 guidance, FinCEN advised financial institutions to reference these Cole Memo Priorities and to be vigilant for violations of state law in connection with their BSA compliance obligations—namely, conducting customer due diligence, assessing the risk of providing financial services to an MRB, and filing suspicious activity reports (SARs). Thus, the likelihood of a FinCEN enforcement action against a financial institution that is servicing MRBs would seem low, so long as the financial institution implements and maintains policies and procedures in line with FinCEN’s 2014 Guidance. In practice, this would involve 1) conducting risk-based customer due diligence, which includes assessing the risk of violating or facilitating the violation of state law and the Cole Memo Priorities, and 2) properly filing SARs in accordance with the “limited,” “priority,” and “termination” scheme set out in FinCEN’s 2014 Guidance, where the “priority” reporting category is keyed to potential violations of state law and the Cole Memo Priorities.
Importantly, the Cole Memo was rescinded in January 2018 by former U.S. Attorney General Jefferson Sessions. Even still, it would seem that FinCEN’s 2014 Guidance nevertheless remains in effect, notwithstanding the fact that it explicitly references the now-rescinded Cole Memo. That is because subsequent guidance issued by federal authorities—namely, a joint statement issued by the federal banking agencies and FinCEN in December 2019 and additional guidance with respect to BSA regulatory requirements for hemp-related business customers issued by FinCEN in June 2020—specifically reference FinCEN’s 2014 Guidance as though it were still in effect.
Preparing for Potential Future Changes
As we discussed in our prior alert, the Drug Enforcement Administration is currently considering rescheduling marijuana from a Schedule I to a Schedule III controlled substance, but any plans to completely deschedule (i.e., legalize) marijuana remain to be seen. Schedule III controlled substances are not subject to as broad a prohibition on their manufacture, distribution, or dispensation as Schedule I controlled substances.
On September 27, 2023, the Senate Committee on Banking, Housing, and Urban Affairs voted to advance the SAFER Banking Act to the full Senate for consideration. Generally, the SAFER Banking Act, as proposed, would provide a safe harbor for banks to provide financial services to “state-sanctioned marijuana businesses” or “service providers” by prohibiting federal banking regulators from, among other things, taking adverse action against banks for offering financial services to those businesses and recommending or incentivizing banks to refrain from offering financial services to those businesses.
The advancement of the SAFER Banking Act in the Senate marks the first time that Senate members have voted to advance a measure to create protections for financial institutions that provide services to MRBs. While this marks new progress, the actual enactment of the SAFER Banking Act into law is not guaranteed. The bill must still pass a full Senate vote, and a full House vote before it is sent to the President to become law.
Takeaways
The regulatory status quo presents a limited window of opportunity for banks, their fintech partners, and payment companies to serve MRBs, so long as they have effective risk management, due diligence (including with respect to state licensure), and monitoring policies and procedures. Looking ahead, the passage of the SAFER Act or similar legislation facilitating a framework for banks to service MRBs, where the activity is permitted under state law, would create more opportunities for banks and their fintech partners to support this space.
To prepare for potential future changes, banks, their fintech partners, and payment services companies that are either currently or considering providing services to MRBs would do well to take the following proactive steps:
- Implement and Maintain Policies and Procedures Consistent with Existing Guidance: Develop policies and procedures that are consistent with FinCEN’s 2014 Guidance, including:
- conducting risk-based customer due diligence, such as verifying that the MRB is duly licensed and registered with state authorities where required,
- developing an understanding of the normal and expected activity for the MRB,
- ongoing monitoring of publicly available sources for adverse information about the MRB and any related parties,
- ongoing monitoring for suspicious activity, and
- refreshing diligence information on a periodic basis and commensurate with the risk—as well as considering whether the MRB implicates a Cole Memo Priority or violates state law.
- Stay Informed: Keep abreast of federal and state laws and guidance regarding cannabis banking and the provision of financial services to MRBs. Regularly review updates from regulatory agencies to understand any evolving policies or opportunities. For example, in addition to the federal guidance discussed above, in 2022 President Biden directed the Secretary of Health and Human Services and the Attorney General “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.” In March 2023, Attorney General Merrick Garland advised during a congressional oversight hearing that the U.S. Department of Justice could potentially issue a policy document that “will be very close to what was done in the Cole Memorandum” related to marijuana enforcement.
The current state of banking services for MRBs presents significant challenges, but change may be on the horizon as the SAFER Banking Act makes its way through the Senate. As the marijuana industry and cannabis banking continues to evolve, adaptability and proactive measures will be key to navigating the ever-changing landscape of marijuana banking services.
For more information about cannabis banking or the financial regulatory landscape, please do not hesitate to contact Jess Cheng, Troy Jenkins, or another member of Wilson Sonsini’s payments practices for more information. If you have any questions regarding the law applicable to cannabis or cannabis-related products, please contact Olivia Cusimano.