Investment advisers and broker-dealers ask more and more whether they can safely provide investment services to prospective customers in the marijuana industry.
There is still a risk of liability under federal law, but that risk can be addressed by closely following guidance issued by the U.S. Department of Justice and the Financial Crimes Enforcement Network (FinCEN).
Current Guidance
Under the federal Controlled Substances Act, marijuana continues to be listed as a dangerous drug that is illegal to grow and distribute. Investment advisers and broker-dealers are affected by the Controlled Substances Act through the Bank Secrecy Act, an anti-money-laundering law that provides for criminal liability against anyone who engages in a financial transaction knowing that the property involved represents proceeds from unlawful activity.
The Department of Justice enforces the Controlled Substances Act and the Bank Secrecy Act. During the Obama administration, the Department of Justice issued guidance that U.S. attorneys should not focus resources on targeting financial institutions for providing services to cannabis-related businesses if the financial institutions did their due diligence on their customers pursuant to the Bank Secrecy Act.
FinCEN issued a memorandum in 2014 (which is still in effect) providing guidance for how financial institutions could service cannabis-related businesses while still performing their obligations under the Bank Secrecy Act.
First, investment advisers and broker-dealers need to evaluate their own business objectives, risk tolerance and capacity to manage those risks effectively.
Second, they must conduct extensive due diligence about the cannabis-related business to determine suitability and compliance with federal guidance and state law. This due diligence includes, among other things: (a) verifying that the prospective cannabis-related business customer is licensed and registered with the appropriate state authorities; (b) reviewing available information about the business and related parties from state-licensing and enforcement authorities; (c) developing an understanding of what is normal business activity; (d) ongoing monitoring of publicly available information about the business and related parties; and (e) ongoing monitoring of suspicious activity, including “red flags” set out by FinCEN.
Third, investment advisers and broker-dealers must file an appropriate Suspicious Activity Report (SAR) with FinCEN. Financial institutions are required to file a SAR if, among other reasons, it knows or has reason to suspect that a transaction involves funds derived from illegal activity. Because federal law prohibits the distribution and sale of marijuana, even state-permitted businesses may be considered illegal activity. Nevertheless, there are two types of SARs — “Marijuana Limited” and “Marijuana Priority” — that require different levels of information and documentation depending on whether due diligence uncovers any of the red flags highlighted by FinCEN.
Future Priorities
On April 5, 2017, Attorney General Jeff Sessions issued a memo to U.S. attorneys. The memo reiterated the Department of Justice’s commitment to investigate, prosecute and deter violent criminals. The memo also states that a task force had been created to identify ways to better address violent crime such as gun crime, drug trafficking and gang violence.
However, the memo went on to state that the task force would be reviewing “existing policies in the areas of charging, sentencing, and marijuana to ensure consistency with the Department’s overall strategy on reducing violent crime …” There was no further mention of marijuana or its purported connection with violent crime.
At this time, the Department of Justice’s official guidance to the U.S. attorneys remains unchanged from that of the Obama administration regarding marijuana businesses and financial institutions serving marijuana businesses. Therefore, investment advisers and broker-dealers can manage risk as outlined above.
Whether investment advisers and broker-dealers have to change how they manage risk for servicing marijuana businesses will depend on whether the Department of Justice’s enforcement priorities change. In the future, the Department of Justice’s enforcement priorities may depend on whether Congress supports the department’s focus on marijuana.
There is reason to believe that Congress will not support the Department of Justice enforcing federal law against marijuana businesses that are duly licensed under state law. In the temporary spending bill passed in the spring, Congress effectively prevented the Department of Justice from enforcing federal marijuana laws against state-legal businesses.
With respect to marijuana laws in 44 states, plus Washington, D.C., Guam and Puerto Rico, the Consolidated Appropriations Act of 2017 contained the explicit provision that “None of the funds made available in this Act to the Department of Justice may be used … to prevent any of the states from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”
But investors should continue to keep a close eye on Congress and the Department of Justice just to be safe, and we will continue to do the same.
Kavita Goswamy Shelat is an attorney in Baker Donelson’s Memphis office where she assists bank clients with a variety of legal and regulatory issues, including residential mortgage litigation, commercial loan litigation and compliance with federal consumer financial protection statutes such as ECOA, FCRA, RESPA, TILA, FDCPA and TCPA. She can be reached at kshelat@bakerdonelson.com.