United States: Even Legal Marijuana Businesses Pose Serious Money Laundering Risks For Banks and Investors

Last Updated: November 10 2016
Article by Jodi L. Avergun and Douglas H. Fischer

Most Read Contributor in United States, August 2018

Marijuana might be legal in some places, but as IRS audits increasingly show, just doing business with the legal marijuana industry brings significant compliance challenges, especially for the financial services world.

Although investment in the state-legal marijuana industry has been growing at rapid pace, the IRS' recent audits of over thirty marijuana businesses in Colorado should concern everyone connected to the marijuana industry, including banks that serve the industry and investors. The industry-wide investigation, perhaps prompted by frequent reports of multi-billion dollar revenues in legalized marijuana, demonstrates that, despite popular support for legalization, there remains a significant risk of federal enforcement actions under anti-money laundering ("AML") laws. Indeed, the number of businesses subjected to audits, and those audits' detailed focus on marijuana-related activities suggest a specific law enforcement interest in the industry. Accordingly, marijuana businesses, and their investors and banks, should seize this opportunity to assess and mitigate their risks under AML laws.

Participants in the marijuana industry have always been cognizant of the obvious risk of federal law enforcement action for violations of the Controlled Substances Act, which prohibits the manufacture and distribution of marijuana regardless of state laws. However, more sophisticated industry participants and their advisors know that the greater risk comes from the enforcement of AML laws against marijuana businesses, ancillary businesses, and financial institutions is arguably a greater risk.

The risk arises from a simple reality: currently, every business in the industry, including every bank and investor, is violating AML laws. Generally speaking, AML laws prevent people and businesses from knowingly receiving or participating in transactions with money that is known to be derived from certain federally illegal activities, such as the sale of marijuana. So every time a business that sells marijuana pays another party or deposits funds in a bank, the recipient of funds has knowingly engaged in a financial transaction with the proceeds of illegal activity. Knowingly transacting business with the proceeds of marijuana manufacture or distribution can result in a fine of $250,000 or twice the value of the transaction, as well as a prison sentence of up to ten years.

Beyond the risk of engaging in money laundering, marijuana businesses, investors, and banks also may be subject to enforcement actions under AML laws for deficiencies in their compliance programs. For example, all businesses must report the receipt of cash payments greater than $10,000 on a Form 8300 and any interests in foreign accounts with a value over $10,000. And under the Bank Secrecy Act ("BSA"), financial institutions, such as banks and money transmitters, are required to have systems and controls to prevent money laundering, including monitoring their clients' activity for potential money laundering.

Even though knowingly transacting with funds derived from the sale of marijuana is illegal, many banks serve the industry, and high-profile investors continue to fund various marijuana businesses. These banks' and investors' participation has been facilitated by the U.S. Department of Justice's ("DOJ") policies concerning state-legal marijuana businesses. On August 29, 2013, the DOJ issued the Cole Memorandum, which provided that the DOJ would refrain from using its resources to prosecute state-legal marijuana businesses if those businesses did not violate eight stated enforcement priorities, such as preventing the distribution of marijuana to minors and preventing the diversion of marijuana to states where it is not legal. The following year, DOJ's Guidance Regarding Marijuana Related Financial Crimes (the "DOJ Guidance") laid out a policy that prosecutors should not use their resources to bring money laundering charges against statelaw compliant businesses that do not violate DOJ's enforcement priorities. Simultaneously, the Treasury Department's Financial Crimes Enforcement Network's ("FinCEN") issued guidance entitled "BSA Expectations Regarding Marijuana- Related Businesses" (the "FinCEN Guidance"). The FinCEN Guidance described FinCEN's and expectations for financial institutions that transact with marijuana businesses, including obligations related to suspicious activity monitoring and reporting.

IRS audits highlight enforcement risks

Media reports indicate that the IRS' audits of marijuana business are related to those businesses' Form 8300 filings (or their failure to make such filings). However, a closer look at the audit forms reveals a more comprehensive and substantive IRS inquiry. The IRS is asking direct questions about marijuana businesses' compliance with state marijuana laws, including questions about inventory tracking, growing methods, and customers. While it is impossible to say for certain why the IRS is asking questions related to compliance with state law, one frightening prospect is that the government is trying to identify businesses who may not be fully compliant with state laws and federal enforcement priorities. Moreover, the IRS is asking questions related to the training of employees and businesses' systems and controls related to AML laws. For example, the IRS is asking about records generated by businesses' point-of-sale systems, businesses' bank accounts, and how employees are trained with respect to AML laws. These questions can reveal whether and how businesses may have violated AML laws, and are the types of questions that are often at the heart of money laundering cases (not just ones against marijuana businesses).

To date, marijuana businesses, banks, and investors have benefitted from the hands-off policy articulated in the DOJ Guidance and Cole Memorandum. But if the IRS audits expose that certain businesses are not compliant with state law or the DOJ's enforcement priorities, then those businesses— and their banks and investors—may find themselves subject to prosecution because they are outside of the policy set forth in the Guidance. Specifically, if an IRS audit determines that a marijuana business' compliance is not sufficient to follow within the policies articulated in DOJ's Guidance and Cole Memorandum, the government will question whether a bank serving that business also should have known of that businesses' non-compliance. The government's scrutiny could then turn to a bank's AML compliance program, opening up the bank to potential enforcement actions under the BSA, like the one taken against Millennium Bank in Illinois. Banks and investors can take steps to mitigate their AML risks now, before marijuana businesses they work with are audited. Banks should focus on their diligence of MRB customers, ensuring it meets or exceeds the expectations set forth in FinCEN's guidance. Specifically, banks must be able to ensure their clients' marijuana sales are legal under state law, that clients' revenues are in line with expectations, that there are no suspicious movements of client funds, and that the client's beneficial ownership is understood. Banks should also look at marijuana businesses' policies and procedures for state-law compliance to see if they are sufficiently robust. Further, banks should have in place procedures for when and how they will file each of the marijuana-related suspicious activity reports described in the FinCEN Guidance. Lastly, if banks find that their MRB clients are non-compliant, they must either come up with a plan to quickly bring that client into compliance with state law and federal guidance, or they must terminate that relationship.

Many investors are not required to have AML compliance programs under the BSA, and therefore also are not the intended targets of the FinCEN Guidance. Nonetheless, investors would be wise to incorporate aspects of the FinCEN Guidance into their due diligence on investments in marijuana businesses. Doing so will ensure investors can detect non-compliance by marijuana businesses in which they have invested. Additionally, investors can negotiate investment terms that mitigate risk. For example, investors can negotiate audit rights sufficient to determine a marijuana business' compliance with state law. They can also reach deal terms that allow rescission of an investment if the marijuana business is in material non-compliance with state law or federal enforcement priorities.

While compliance measures must reflect the unique nature of the marijuana industry, AML enforcement actions against banks and investors involved in the marijuana will, in some respects, look similar to AML enforcement actions in other contexts. Therefore, banks and investors should also seek advice from professionals who are experienced not just with the marijuana industry, but also with AML laws and government enforcement.

While the full import of the IRS' audits of marijuana businesses remains uncertain, it is indisputable that banks and investors who participate in the marijuana industry face serious risks under AML laws. As long as marijuana remains federally illegal, banks and investors that wish to participate in the industry will need to tolerate a certain degree of risk. However, the magnitude of that risk can be significantly reduced through smart compliance programs that account for the nature of the marijuana industry, as well as continually evolving federal policies.

Previously published in Compliance Week – October 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

In association with
Related Topics
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