Reuters 14 FEB 2014 by David Ingram and Jason Lange
The Obama administration on Friday issued new law-enforcement guidelines aimed at encouraging banks to start doing business with state-licensed marijuana suppliers, like those in Colorado, even though such enterprises remain illegal under federal law.
Administration officials said the policy shift seeks to address problems faced by newly licensed recreational marijuana retailers in Colorado, and medical cannabis dispensaries in other states, that must operate on a cash-only basis, without access to financial services or credit.
It remained to be seen whether many banks would feel sufficiently assured by the new policy, which the Justice and Treasury departments outlined in writing to federal prosecutors and financial institutions nationwide.
The guidance stopped short of promising immunity for banks. But it said criminal prosecution for money laundering and other crimes is unlikely if banks meet a series of conditions, such as avoiding business with marijuana operations that sell to minors or engage in illegal drug trafficking.
If banks turn a blind eye to illegal activity by failing, for example, "to conduct appropriate due diligence of the customers' activities, such prosecution might be appropriate," Deputy Attorney General James Cole warned in the memorandum.
The memo builds on guidelines issued in August when the administration promised new leeway to states experimenting with legalization of marijuana, saying it would focus enforcement against pot suppliers found to be operating outside of state regulation or as a front for outlawed narcotics trade.
The latest directive is designed to address public safety issues raised by legitimate, state-licensed cannabis suppliers' lack of access to financial services, officials said.
Proprietors of state-permitted marijuana distributors in Colorado and elsewhere have complained of having to purchase inventory, pay employees and conduct sales entirely in cash, requiring elaborate and expensive security measures and putting them at risk of robbery.
It also has made accounting for state sales tax collection difficult.
Last month, Colorado became the first state to open retail outlets legally permitted to sell marijuana to adults for recreational purposes, in a system similar to what many states have long had in place for alcohol sales. Washington state is expected to follow Colorado's lead later this year.
The number of states approving marijuana for medical purposes also has been growing. California was the first in 1996. It has since been followed by about 20 other states and the District of Columbia.
U.S. Attorney General Eric Holder said last month that the administration was planning ways to accommodate marijuana businesses so they would not always be dealing in cash.
"There's a public safety component to this. Huge amounts of cash, substantial amounts of cash just kind of lying around with no place for it to be appropriately deposited, is something that would worry me just from a law enforcement perspective," Holder said on January 23 at an appearance at the University of Virginia.
The American Bankers Association expressed skepticism the guidance would make much difference. Pot sales still violate federal law, as the government noted in its memo, so banks are still at risk, said Rob Rowe, a lawyer for the trade group.
"Compliance by a bank will still require extensive resources to monitor any of these businesses, and it's unlikely the benefits would exceed the costs," Rowe said in an email to Reuters.
A separate memorandum from the Treasury Department's Financial Crimes Enforcement Network (FinCEN) laid out the due diligence that banks should carry out, both before working with a marijuana business and during the relationship.
Financial companies should verify state licenses, understand the normal activity for the business and monitor for suspicious activity, the memo said.
"Now that some states have elected to legalize and regulate the marijuana trade, FinCEN seeks to move from the shadows the historically covert financial operations of marijuana businesses," agency Director Jennifer Shasky Calvery said in a statement.
FinCEN expects big banks will still be wary about holding the money of pot retailers with state licenses, a senior official at the agency said.
Still, after consulting with state banking regulators, particularly those in Colorado and Washington state, federal authorities said they believe the new guidance will get more marijuana money into the banking system.
Those most likely to open their doors to marijuana business first would be "probably some of the smaller or medium banks rather than some of the largest ones in this country," a FinCEN official said, adding that some banks were already in the practice of flagging money from marijuana businesses in their filings with regulators.
"The amount of money in this business is significant," the official said.
STILL PRESSING FOR CHANGES
Advocates for the marijuana industry said they would continue to press Congress for changes in federal law that would offer more reassurance and that would survive beyond the Obama administration. President Barack Obama is scheduled to leave office in January 2017.
"Congress must act quickly to solve the problem before we witness a tragedy," Michael Elliott, executive director of the Marijuana Industry Group, which represents pot retailers in Colorado, said in a statement.
The guidance would not protect banks from state laws, and if a wire transfer that moved marijuana-linked money touched a state where the drug is under strict control, a bank that handled the transfer could be open to state prosecution, experts in money-laundering said.
Individual banks may have difficulty identifying which state-licensed businesses would run afoul of the federal guidance, said Peter Djinis, a former regulatory policy official with FinCEN, now in private practice in Florida.
"These complicated and vague policies continue the uncertainty that banks have in determining whether to take the risk of conducting financial transactions with otherwise legitimate marijuana businesses," Djinis said.
(Additional reporting by Aruna Viswanatha, Steve Gorman and Brett Wolf; Editing by Howard Goller, Jan Paschal, Jonathan Oatis and Richard Chang)
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