Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

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Tuesday, February 18, 2014

Using Banks to Police the Marjiuana Industry

As I noted Friday, the Treasury Department just issued new guidance designed to make it easier for banks to serve state-authorized marijuana businesses. In a less-noticed move, the DOJ also issued new guidance urging federal prosecutors not to pursue financial crimes charges against marijuana businesses outside of the circumstances outlined in its August 2013 memo regarding drug crimes. The Treasury guidance and new DOJ memo can be found here.

Banks have long refused to serve the marijuana industry, citing, among other reasons, federal statutes that criminalize financial transactions involving proceeds of illegal activity, including marijuana sales. Sam Kamin and Joel Warner discuss the banking issue here.

Now, I doubt this new guidance will convince many banks to serve the marijuana industry. Among other things, and as I explained in a paper critical of the DOJ’s first marijuana enforcement guidelines (the 2009 Ogden memorandum), such guidance does not shield banks from all of the relevant federal sanctions that serving marijuana businesses might trigger.

But if banks DO end up serving marijuana businesses, it might give a boost to state and federal efforts to police the marijuana industry. In particular, banks could help government officials determine whether the marijuana industry is violating state law and / or engaging in behavior that would justify federal legal action under those 2013 DOJ enforcement guidelines (e.g., selling to minors).

Here’s how. Federal law requires banks to monitor and report on the financial transactions of their clients. Under federal law, for example, banks are required to file “Suspicious Activity Reports” anytime they know, suspect, or have reason to suspect a client is engaging in a financial transaction involving proceeds of illegal activity. The government then uses these SARs to investigate and prosecute federal crimes committed by the clients.

Importantly, the bulk of the new Treasury guidance is actually devoted to reaffirming and clarifying the duty of banks to file SARs on clients engaged in the marijuana industry. It makes abundantly clear that a “financial institution that decides to provide financial services to a marijuana-related business would be required to file suspicious activity reports (“SARs”) . . .  if, consistent with FinCEN regulations, the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution . . . involves funds derived from illegal activity.” (emphasis added)

To be sure, the reporting requirement could simply overwhelm government agents, since every transaction involving a marijuana business might trigger a new report. Indeed, federal agents are already deluged with SARs; in 2009, for example, banks submitted more than 700,000 SARs (banks in Colorado and Washington submitted more than 17,000 SARs), far too many for the government to investigate them all.

But the new Treasury guidance instructs banks to distinguish between good and bad marijuana businesses. Namely, if a bank believes a marijuana business is abiding state law and avoiding activities the federal government considers objectionable (e.g., selling across state lines), the bank may file an abbreviated SAR, simply by writing “MARIJUANA LIMITED” in the notations section of the report. But if the bank believes the business is flouting state law or engaging in one of those objectionable activities, it is supposed to file more detailed SAR, writing “MARIJUANA PRIORITY” in the notations section and explaining why the bank believes the business deserves closer scrutiny.

The information provided on these SARs could greatly enhance the efforts of federal and state enforcement agencies to police the marijuana industry. Banks won’t necessarily have perfect information about their clients, but they will often possess information that government agencies cannot realistically gather on their own. Indeed, as I’ve discussed at length elsewhere, governments commonly use private parties to gather information they need to enforce their regulations; e.g., without the W-2s filed by employers, the IRS would struggle (mightily) to collect individual income taxes. And requiring banks to further distinguish between law-abiding and law-shirking marijuana business greatly enhances the utility of this information for government agencies.

Knowing that banks will share information with the federal government could have a powerful deterrent effect on marijuana businesses. These businesses need bank services – try operating any business without a checking account, for example. But if they misbehave, banks will shun them, or worse yet, report their misbehavior to the feds. To be sure, some misbehaving businesses will simply avoid the banks altogether. But those businesses will be put at a serious competitive disadvantage vis a vis their more law abiding rivals.

In sum, if the guidance works (a big if), marijuana businesses will get access to banking services; banks will expand their market; and government agencies will get a new watchdog to help police the marijuana industry.  Looks like a win win win.

http://lawprofessors.typepad.com/marijuana_law/2014/02/using-banks-to-police-the-marjiuana-industry.html

Criminal justice developments and reforms, Current Affairs, Federal Marijuana Laws, Policies and Practices, Medical Marijuana State Laws and Reforms, Recreational Marijuana State Laws and Reforms | Permalink

Comments

thanks..

Posted by: kel | Jul 3, 2014 9:34:57 AM

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