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Banking in The Medical Marijuana Industry is a Quagmire of Opportunity

By: David S. Mitchell, Jr. & Michael K. Goswami


Aside from a lack of supportive federal legislation to legalize medicinal or recreational marijuana sales, the appropriately-named “marijuana banking problem” is without a doubt the largest hindrance to the legal marijuana industry. The legal marijuana industry is projected to be a $50 billion industry nationally by the year 2026,[1] and the financial sector is eager to take part in the market. However, the federal regulatory and enforcement regime makes many financial institutions understandably skittish to step up to help businesses in the marijuana sector with simple services taken for granted by virtually every other industry. For example, some financial institutions have refused to provide services to the industry altogether, making acquiring a bank account extremely difficult.

This article is intended to inform financial institutions of the legal framework governing the provision of services to businesses operating in the marijuana industry. It also examines data demonstrating that while the “marijuana banking problem” exists, banks are in fact providing banking and financial services to marijuana related businesses (“MRB”). Finally, the article provides considerations and guidance for financial institutions considering whether to participate in this marketplace.

Regulatory Framework for Conducting Business

within the Marijuana Industry

As a result of the passage of the Arkansas Medical Marijuana Amendment of 2016 (the “Amendment”), Arkansas financial institutions must determine whether the risk of federal prosecution or regulatory enforcement is worth the potential reward of being a front-runner for banking and payment needs of Arkansas MRBs. Likewise, Arkansas MRBs will have to face the issue of how to accept payments for product and make payments to employees and vendors. Standing between the supplier and demander in this non-functional financial services marketplace is the wall of tripartite federal prohibition, including the Controlled Substances Act (the “CSA”),[2] the Banking Secrecy Act,[3] and Anti-Money Laundering laws.[4]

This federal prohibition creates a cash-only scenario whereby a MRB might experience a six-to-eight percent increase in costs and a slew of security concerns.[5] Various solutions have been proposed to solve the problem, including using Bitcoin as a payment system or legislatively creating a state-owned bank to solely deal with MRBs. Furthermore, in-store payment systems like those offered by Jane™ continue to surface.[6] Yet, the MRB banking problem will not be conclusively solved without action by Congress because providing banking and financial services to MRBs violates federal law no matter how the facts are tweaked.[7]

Despite these complexities, the decision-making process for financial institutions falls back to the core of the financial industry model: basic risk-reward principles. Charging high monthly and per-transaction fees is common, but banking and lending institutions face fairly high risk by conducting business with MRBs.[8]However, this risk can be significantly minimized by following the guidelines of the Cole Memorandum[9] and the Financial Crimes Enforcement Network (“FinCEN”) guidance.[10] The Cole Memorandum, issued in 2013 to guide federal prosecutors in enforcing the CSA as it relates to state-sanctioned MRBs, states that financial institutions must perform substantive due diligence to ensure that business conducted with MRBs does not facilitate eight high-priority enforcement areas.[11] Pursuant to the Cole Memorandum, FinCEN released guidance in 2014 that reiterated the stance of the Cole Memorandum and gave financial institutions a methodology by which they might conduct business with MRBs regardless of the prohibition stemming from the CSA.

The FinCEN Guidance requires that a Suspicious Activity Report (“SAR”) be filed if a financial institution conducts business with a MRB.[12] Presuming that a MRB is following Arkansas law regarding medicinal marijuana, a banking institution providing services to the MRB would file a “Marijuana Limited” SAR to comply with federal guidance and reduce the risk of prosecution or penalty. There are also “Marijuana Priority” SARs and “Marijuana Termination” SARs, which a bank must file if it believes a MRB is violating one of the eight high-priority Cole Memorandum areas of enforcement or if a financial institution has terminated a relationship with a MRB.[13]

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