United States: Legalized Marijuana Guidance Leaves Some Banks Dazed and Confused

Last Updated: February 22 2014
Article by Travis P. Nelson

Last week, the Financial Crimes Enforcement Network ("FinCEN") issued new guidance in response to several states passing legislation to legalize marijuana for medical purposes, and in some states, for recreational purposes as well. This has left many financial institutions scratching their heads as to how to comply with the Bank Secrecy Act ("BSA"), which requires institutions to conduct due diligence on their customers (Customer Identification Programs), and to report suspicious activity that may be indicative of criminal activity (Suspicious Activity Reports). According to a recent USA Today online posting, 20 states plus the District of Columbia have enacted laws that allow people to use medical marijuana with a doctor's recommendation. Two states – Colorado and Washington – have legalized marijuana for recreational use as well.

Two key aspects of BSA compliance are the customer identification program ("CIP") and suspicious activity reporting ("SAR"). All banks must have a written CIP, see, e.g., 12 C.F.R. § 21.21 (for national banks), and are required to implement a written CIP that is appropriate for the institutions' size and type of business, and that includes certain minimum requirements. The CIP is intended to enable an institution to form a reasonable belief that it knows the true identity of each customer. The CIP must include account opening procedures, and reasonable and practical risk-based procedures for verifying the identity of each customer. If an institution cannot verify the identity of its customer, or concludes that its customer is attempting to open an account at the institution in order to further criminal activity, then the institution should decline to open the account.

The second key aspect of BSA compliance is SAR reporting. Banks are required by federal regulations to file a SAR report on: (a) criminal violations involving insider abuse in any amount; (b) criminal violations aggregating $5,000 or more when the suspect can be identified; (c) criminal violations aggregating $25,000 or more regardless of a potential suspect; and (d) transactions conducted or attempted by, at, or through the bank (or an affiliate) and aggregating $5,000 or more, if the bank or affiliate knows, suspects, or has reason to suspect that the transaction: (i) may involve potential money laundering or other illegal activity (e.g., terrorism financing), (ii) is designed to evade the BSA or its implementing regulations, or (iii) has no business or apparent lawful purpose, or is not the type of transaction that the particular customer would normally be expected to engage in, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction. See, e.g., 12 C.F.R. § 21.11 (national banks).

Under federal law, narcotics and controlled substances are generally prosecuted under the Controlled Substances Act ("CSA"). 21 U.S.C. § 801 et seq. This provision makes it illegal to "manufacture, distribute or dispense, or possess with intent to manufacture, distribute or dispense, a controlled substance." 20 U.S.C. § 841(a)(1). Controlled substances include marijuana. 21 C.F.R. § 1308.11. Those engaged in a "continuing criminal enterprise" of drug-related activity can be subject to substantial fines and imprisonment. 21 U.S.C. § 848.

Despite the fact that the sale and distribution of marijuana is very clearly prohibited under federal law, with the passage of marijuana legalization legislation in several states, financial institutions are left with the question of how to treat marijuana businesses that are operating legally under state law, but in violation of federal criminal law. In order to address this potential confusion, FinCEN has issued BSA Expectations Regarding Marijuana-Related Businesses, FIN 2014-G001 (Feb. 14, 2014) (the "Guidance"). While acknowledging that the CSA "makes it illegal under federal law to manufacture, distribute, or dispense marijuana," and that Congress has made a "determination that marijuana is a dangerous drug," Guidance pg. 1, the Guidance provides a framework for institutions to adhere to their BSA responsibilities, while providing financial services to marijuana-related businesses. Rather than strict adherence to federal law, the Guidance advises institutions to take a risk- or policy-based approach to self-policing for customers engaged in marijuana-related activity.

The Guidance notes that "the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution." Guidance pg. 2. FinCEN offers certain factors that institutions should consider in evaluating the risk of providing financial services to marijuana-related businesses as part of the institution's due diligence review: "(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." Guidance pg. 2.

Institutions are also advised to consider whether its customers' marijuana business activities implicate any of the enforcement policies set forth by the Justice Department in a memorandum issued by Deputy Attorney General James Cole August 29, 2013 ("Cole Memorandum"). See http://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf. These policy objectives direct U.S. Attorneys to target higher-priority marijuana activity, such as distribution to minors, use of profits from sales of marijuana to fund gang activity, preventing the use of firearms or other violence in the growth of marijuana, preventing "drugged driving."

With respect to SAR filing, the Guidance creates a three-tiered marijuana-specific reporting approach – "Marijuana Limited," "Marijuana Priority," and "Marijuana Termination." Under a Marijuana Limited filing, where none of the Cole Memorandum's enforcement priorities is implicated, and the institution does not find any other criminal activity, institutions are expected to file a SAR, but use the term "Marijuana Limited" in the narrative section in Part V of the SAR form. Where an institution determines that a marijuana business is engaging in activities that do implicate one of the Cole Memorandum's enforcement priorities, the institution is expected to file a complete SAR, with a detailed narrative that uses the term "Marijuana Priority" in Part V. Where an institution "deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program," Guidance pg. 4, the institution is expected to file a standard SAR, with the term "Marijuana Termination" in the Part V narrative. In termination cases, where the financial institution becomes aware that the marijuana-related business seeks to move to a second financial institution, FinCEN urges the first institution to use Section 314(b) voluntary information-sharing (if it qualifies) to alert the second financial institution of potential illegal activity.

The Guidance also provides red flags for institutions to distinguish priority SARs, and notes that currency transaction reporting requirements apply to marijuana businesses just as they would in any other context.

Despite the above attempts to provide direction and clarity for financial institutions in states where the sale of marijuana has been legalized, some in the banking industry remain unconvinced. According to a recent Wall Street Journal report, some of the nation's largest banks have existing policies not to provide banking services to marijuana businesses. See "Banks to be Allowed to do Business With Marijuana Dispensaries," Andrew Grossman, Wall Street Journal (Feb. 14, 2014). Frank Keating, president of the American Bankers Association, has said that the Guidance "doesn't alter the underlying challenge for banks," and that: "As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions." Id. Sen. Charles Grassley of Iowa, the ranking Republican on the Senate Judiciary Committee, has called the Cole Memorandum "encouraging an improper use of prosecutorial discretion." Id.

The American Bankers Association has expressed further skepticism that mere guidance will give financial institutions the level of comfort required to open themselves up to marijuana businesses. According to the Association, "Because marijuana is illegal under federal statute, guidance alone isn't enough. There's a great deal of guidance that banks would want to see in terms of banking with these types of businesses but guidance alone doesn't change the fundamental prohibition. In order for banks to be comfortable banking marijuana businesses, the federal statute must be changed by Congress. It's also important to recognize that while guidance for marijuana businesses might help, guidance also can be changed overnight. Similarly, even though regulatory modifications would be less subject to change, regulations cannot overturn federal statute – only Congress can change the law. The only way to eliminate the risk of criminal prosecution for banks is if Congress changes federal statute."

One possible legislative remedy is currently pending in Congress – the Marijuana Businesses Access to Banking Act of 2013 (H.R. 2652) – sponsored by Rep. Perlmutter (CO – 7). This bill would do the following, among other things: (a) prohibit a federal banking regulator from terminating an institution's deposit insurance, or prohibiting, penalizing, or otherwise discouraging an institution, based on the institution's services to marijuana-related legitimate businesses; (b) prohibit a federal banking regulator from recommending, motivating, or encouraging a financial institution not to offer services to an operator of a marijuana-related legitimate businesses; (c) prohibit a federal banking regulator from taking any action on a loan to an owner or operator of a marijuana-related legitimate business or real estate related to such business; (d) grant immunity from federal prosecution or investigation to an institution providing services to marijuana-related legitimate businesses; and (e) prohibit the Treasury Department from requiring reporting (e.g., SARs) solely because the transaction involves a marijuana-related legitimate business. These provisions are designed to prevent federal regulators from interfering with marijuana-related legitimate businesses merely because they are in that industry. However, the bill would not prevent regulators from taking action based on such businesses' involvement in other criminal activity. Moreover, the bill would not prevent financial institutions from determining on their own that involvement with such businesses is too risky. The bill has 27 co sponsors, but has not made it out of committee.

In considering whether to provide financial services to marijuana-related businesses in states where it has been legalized, institutions must consider not only the policies and guidance outlined above, but also the substantial reputational risk management that involvement with such businesses carries. While there are strong opinions underlying the marijuana legalization debate, both sides would likely agree that providing banking services to such businesses carries heightened compliance and reputational risk. Moreover, while the Cole Memorandum and the FinCEN Guidance have attempted to provide direction for institutions in how to deal with marijuana-related businesses in a manner that comports with safety and soundness, and complies with the BSA, it also puts institutions in the potentially awkward and uncertain position of having to apply federal law enforcement policies and priorities to their customers' activities. Rather than the clarity provided by a policy that absolutely prohibits involvement with customers engaged in illegal drug activities, the FinCEN Guidance places on institutions the burden of having to make subjective judgment calls about the nature and risk of its customers' activities in a decidedly hazy area. While this sort of risk assessment function is nothing new to financial institutions, when such is being applied against the backdrop of clear anti-drug statutes – and a public that is increasingly scrutinizing financial institutions' activities and third-party relationships – many institutions may find any prospect of serving this new market simply go up in smoke.

Travis P. Nelson is a member of the Financial Industry Group, resident in the firm's Princeton and Washington, D.C. offices. Mr. Nelson is a former Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department; a former Congressional staffer; and a frequent lecturer on financial services examination and enforcement issues. Mr. Nelson is a co-leader of the firm's Financial Institutions Enforcement and Investigations Task Force, and regularly advises banks and money transmitters on compliance with BSA/AML issues.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions