As most readers of this blog are aware, marijuana is now legal in some form in half of the states, including Pennsylvania. Although legal in half of the states, marijuana related businesses remain subject to federal prosecution under the Controlled Substance Act (“CSA”) because it remains listed as a Schedule I drug. Until the DEA reclassifies marijuana, marijuana related businesses are subject to enforcement and prosecution under the CSA. The CSA specifically states that the federal law does not preempt state law on the same subject matter. How do marijuana related businesses and financial institutions resolve this conflict between state laws and federal law.
Initially, financial institutions wouldn’t go near marijuana related businesses. The risk of federal prosecution was too much for banks even if the marijuana related business was in compliance with state laws.
Through a series of three internal memos authored by former Deputy Attorney General, James Cole, the DOJ outlined its policy on enforcement of federal law and prosecution of marijuana related businesses and helped to alleviate the concerns of financial institutions.
The first memo dated June 29, 2011, clarified the DOJ’s position after an earlier Ogden Memo. The Ogden Memo focused the DOJ’s enforcement and prosecutorial efforts on illegal enterprises, gangs and cartels and viewed the prosecution of those individuals taking medical marijuana pursuant to an applicable state law as an inefficient use of federal resources. The First Cole Memo seemingly contradicted this when it stated that the Ogden Memo was never intended to shield such activities from enforcement action and prosecution, even when those actions comport with state law. The First Cole Memo reinforced that state laws were not a defense to enforcement of federal law when such enforcement was consistent with resources and focus of the individual judicial districts. The First Cole Memo was a major blow to marijuana related business as banks were unwilling to provide financing given the threat of federal prosecution and forfeiture under the CSA.
The Second Cole Memo dated August 29, 2013, helped to ease these concerns and fears when it listed eight (8) priorities of the DOJ’s for enforcement of the CSA on marijuana related activities.
The Second Cole Memo priorities are as follows:
– Preventing the distribution of marijuana to minors;
– Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
– Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
– Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
– Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
– Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
– Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
– Preventing marijuana possession or use on federal property.
The Second Cole Memo priorities provided some reassurance to marijuana related businesses that so long as they were in compliance with their respective state laws they were not likely to be the subject of federal action against them.
The Third Cole Memo, dated February 14, 2014, was issued concurrently with a memo from the Department of Treasury, Financial Crimes Enforcement Network (“FinCEN”) to provide guidance and clarification to marijuana related businesses and banks providing financing to those business. Essentially, the two memos were issued to guide banks and lending institutions financing marijuana related businesses with regards to the DOJ’s focus on financial crimes for which marijuana related conduct is a predicate. The memos stated that money laundering statutes, the unlicensed money remitter statute, and the Bank Secrecy Act remain in effect with respect marijuana related activities. However, the two memos provide guidance to banks on how they can provide services to marijuana related businesses and not run a foul of the DOJ and/or the Department of Treasury.
The FinCEN Memo, in particular, states that in assessing the risk of providing services to marijuana related businesses, a financial institution should perform customer due diligence that includes: (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.
The FinCEN Memo further states a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.
In effect the memos provided a blue print for marijuana related businesses to follow when they attempt to obtain financing from a bank.
1. Make sure your marijuana related business is licensed under state law and has procedures in place to ensure ongoing compliance with state and local laws regulations, and ordnances;
2. Have a proper understanding of all state and federal law including the Cole Memo priorities;
3. Screen all employees and any other parties related to the business to confirm they are properly licensed, if required, and to verify that they have no previous criminal records, especially drug related criminal records;
4. Provide a business plan or model which includes information such as: 1) the type of activity the business will engage in (grower /processor, dispensary, etc.); 2) product being manufactured, grown or sold; 3) proposed number employees; 4) proposed location of business; and 6) list of assets, liabilities, and possible investors;
5. Have procedures in place to properly document all of the activities of your marijuana related business; and
6. Have a monitoring and security system in place to prevent adverse public information and suspicious activity.
Generally, operate a marijuana related business like a normal business but keep in mind it is subject to unique legal requirements and rules which require your knowledge, understanding, and compliance.
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