Washington Bankers Association



Banking and the Marijuana IndustryWhile Washington voters may have given the green light to the marijuana industry, the sale and use of marijuana remains illegal at the federal level. In late June 2011, the U.S. Department of Justice issued a memo reiterating the consequences of those individuals caught cultivating, selling or distributing marijuana. The memo also went on to include other parties who “knowingly facilitate such activities” as targets of prosecution. The exact language as stated in the DOJ memo reads:“Persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law. Consistent with resource constraints and the discretion you may exercise in your district, such persons are subject to federal enforcement action, including potential prosecution. State laws or local ordinances are not a defense to civil or criminal enforcement of federal law with respect to such conduct, including enforcement of the CSA. Those who engage in transactions involving the proceeds of such activity may also be in violation of federal laundering statutes and other federal financial laws.”Across the country, a few banks had been providing banking services to medical marijuana businesses prior to directives from federal banking regulators (Federal Reserve System, Federal Deposit Insurance Corporation, Comptroller of the Currency) which followed with the DOJ letter. Since that action by bank regulators, we are not aware of any bank continuing to provide services to marijuana businesses knowingly. There are two elements to the issue. One is being involved in an illegal act per federal law (explained above); the other is money laundering. Those laws preclude handling deposits of an illegal activity and require filing Suspicious Activity Reports (SARs) for any transaction that may violate federal law. Money Laundering – The process of taking the proceeds of criminal activity and making them appear legal. Money laundering laws are federal and therefore not impacted by Washington’s decision to legalize marijuana. Any banking transaction (a checking account, credit/debit cards, wires…) involving money from the (federally illegal) marijuana industry fits this definition of money laundering. All banks, even state-charted banks, are required to comply with federal money-laundering laws. Financial institutions that bank the marijuana industry not only are facilitating money laundering by the marijuana customer, but the financial institution actually is laundering money itself and subject to all applicable criminal and civil penalties .Alternative Institution – Financial institutions in Washington are not permitted by federal regulators to provide banking services to marijuana dispensaries. Even state-charted banks have a federal regulator and are bound to comply with federal law. This has led some legislators and some in the marijuana industry to propose the idea of a state-owned bank (or credit union) devoted exclusively to the industry. This concept brings up a whole new set of issues, including:Still precluded: Any financial institution owned by the state or a specific group still is subject to federal law regardless of ownership, and results in the same prohibitions. The only potential exception to this is a state-owned bank that has no connection with the payment system, which is federally regulated. That means checks from it could not be deposited in other financial institutions, credit/debit cards couldn’t be issued, funds couldn’t be wired to/from other financial institutions… In short, it could not operate as we understand banks today. It could only accept deposits (in cash) and pay them back out to depositors (only in cash) at only its own location(s). Its deposits would not be FDIC insured. This arrangement presents security issues and the possibility of federal seizure of aggregated funds. Even if the “bank” operated in this manner, its activities could still be interpreted as those of a “financial institution” engaged in interstate commerce under federal law. Either way, it would also face the below issues.Washington Constitution: Article VIII, Section 5 of the Washington State Constitution reads, “The credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation.” And Article XII, Section 9 reads, “The state shall not in any manner loan its credit, nor shall it subscribe to, or be interested in the stock of any company, association or corporation.” This could be read to preclude state ownership of a bank.Capital: The minimum it takes to start a small bank is $20 million – taxpayer money that is in great demand given recent budget deficits, and that would be put at risk by starting up a severely limited financial institution.FDIC: Operation without FDIC insurance we believe is playing loose and reckless with taxpayer funds. For a bank to be chartered without FDIC insurance, it requires numerous changes in law. If such an institution should fail, any depositors’ funds in the institution could be lost and perhaps those of the investor State of Washington; there are no protections for the customers. FDIC insurance is required for any institution connected to the payments system. FDIC will not grant insurance to an institution involved in an activity that is still illegal at the federal level, regardless of whether that business is legal on a state level. Federal Seizure: Any funds on deposit would continue to be subject to federal seizure just as they are now; the distinct difference would be the ease of seizure by aggregating the funds of numerous marijuana-related businesses. Payment System: Without proper (FDIC or NCUA) insurance, a financial institution does not have access to the payment system. Without access to the payment system, an institution cannot issue checks or credit/debit cards, wire funds, or conduct electronic transactions.Regulation: Who would set the rules and regulations? If the state does, it will end up with a case of the fox watching its wholly owned hen house. With the state as both owner and regulator of the bank, its policies could change with each election.Lending to the marijuana industry – All financial institutions are currently prohibited from lending to the marijuana industry. Financial institutions cannot lend against inventory or receivables because the collateral is illegal at a federal level. The challenge even extends to real estate loans. The collateral (building and/or land the marijuana business operates from) is subject to federal seizure. As a result, the loan is not effectively secured. Banking regulators will not permit loans to illegal businesses with or without collateral. Even if federal authorities issued guidance that they would use discretion in prosecuting any financial institution serving marijuana-related businesses that are legal under state law, banks would be required to do extensive due diligence to ensure their potential customers’ compliance with all state laws and regulations.For a loan customer that owns and leases out space to other businesses (a landlord), a bank may not count rent from any illegal business (e.g. a business that deals in illegal firearms) as income to repay the loan.? With that rental income disqualified, the landlord has greater difficulty qualifying for a loan. Additionally a lender normally takes an assignment of rents as collateral for the loan.? Regulators do not permit the bank to take such an assignment which then makes it more challenging for the landlord to qualify for a loan on the property. In the eyes of regulators, the entire property is subject to federal seizure and as such it is questionable if the property can be used as collateral at all. Change Federal Controlled Substances Act – The only way we know to deal with this issue is for the federal government to amend the Controlled Substances Act to create an exception (e.g., per state law and for limited amounts). That may address legal issues for other aspects of marijuana use, but it may not be sufficient for the banking aspect. For financial institutions to handle such transactions, further amendments may be needed to the USA Patriot Act, Bank Secrecy Act and other federal statutes. A number of Washington Bankers Association members may be interested in providing banking services to this stream of commerce. That said, they will not risk their ability to operate until the federal government completely clears the way to legally offer marijuana banking services.Recent Developments – The US Department of Justice recently announced that it will not interfere with state laws allowing the medical or recreational use of marijuana. They have further indicated that Justice will be working with federal banking regulators to explore how banking services might be offered to this new industry. At the State level; Governor Inslee, the Department of Financial Institutions, and Attorney General Ferguson have also been active in urging a federal solution. The Washington Bankers Association is encouraged by these developments. That said, we continue to believe that any federal solution will have to provide a high degree of certainty that banks will be able to service the cannabis industry in a way that does not threaten their ongoing operations.If you have any further questions regarding this matter, please feel free to contact Denny Eliason at 206-650-4364 ................
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