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Recreational Marijuana is Lawful in States Bordering Wisconsin: Can Wisconsin Banks Lawfully Bank Marijuana-Related Businesses Operating in These States?

On January 1, 2020, recreational marijuana becomes lawful in Illinois, making it the eleventh state in the country to legalize marijuana for recreational use. When Illinois Public Act 1010027 was enacted this past June, Illinois also became the second state bordering Wisconsin to legalize marijuana for recreational use, second to Michigan where licenses began being issued in November. Marijuana legalization in neighboring states raises the following question: Can a Wisconsin bank lawfully bank marijuana-related businesses (MRB) that operate in states where recreational marijuana is legal?

State v. Federal Legality

To answer that question, it requires an understanding of the current legal landscape. At a state level, individuals and businesses acting consistent with state law requirements (e.g. licensure, age restrictions) will be deemed lawful actors within the state. However, current federal law muddies the waters regarding whether those individuals and business are acting entirely lawfully. This is because marijuana is still unlawful at the federal level – the Controlled Substances Act (CSA) characterizes marijuana as a Schedule I Controlled Substance and makes it illegal under federal law to manufacture, distribute, dispense, or possess marijuana. Technically speaking, then, individuals acting consistent with state marijuana laws are violating federal law. But, you ask, why don’t we often hear of lawful state actors being penalized by federal law enforcement officials? 

Enter the Cole Memo. On August 29, 2013, then-Attorney General James Cole issued a Memorandum (the Cole Memo”) in response to several states legalizing marijuana. The memo, in so many words, defers enforcement of marijuana-related activity to the states that have enacted laws legalizing marijuana in some form. The Cole Memo sets forth a number of federal enforcement priorities pertaining to marijuana including, for example, preventing the distribution of marijuana to minors, preventing violence and use of firearms in the cultivation and distribution of marijuana, and preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels. Outside of the enforcement priorities delineated in the Cole Memo, the federal government will rely, as it has traditionally relied, on states and local law enforcement agencies to address marijuana activity through enforcement of their own narcotics laws.” 

After the issuance of the Cole Memo, individuals and businesses could act pursuant to state marijuana laws without fear of prosecutorial action from the feds, assuming their actions did not implicate an enforcement priority indicated in the Cole Memo. That relief” was short-lived, however, as on January 4, 2018, then-Attorney General Jeff Sessions rescinded the Cole Memo. The Cole Memo remains rescinded today. In practice, however, the spirit of the Cole Memo appears to live on, as the rescission issued by Attorney General Sessions continued to provide prosecutorial discretion.” 

Thus, in summary, though recreational marijuana may be lawful at the state level, it remains unlawful and subject enforcement action at the federal level. In practice, however, it is clear that federal law enforcement officials do not necessarily prioritize taking enforcement action against individuals and businesses acting consistent with state marijuana laws. 

BSA Responsibilities

Of course, the legality question is a relevant one for banks because of Bank Secrecy Act (BSA) obligations. As banks, it’s imperative that you meet your (BSA) obligations, consistent with your Customer Due Diligence (CDD) program. In short, the bank must ensure that the transactions conducted through the bank are not derived from illegal activity. As described above, however, transactions flowing through an MRB are, very clearly, derived from illegal activity. 

Recognizing the precarious position of financial institutions and the practical realities of having an unbanked yet burgeoning MRB population, the Financial Crimes and Enforcement Network (FinCEN) issued guidance entitled BSA Expectations Regarding Marijuana-Related Businesses” on February 14, 2014 (“FinCEN Guidance”). The FinCEN Guidance, which is still alive and well today, leaves direction to banks to determine whether to provide financial services to MRBs, but indicates that customer due diligence is a critical aspect” of this determination. To this end, the FinCEN Guidance delineates financial institutions’ due diligence responsibilities when banking MRBs. Specifically, it outlines requirements including, for example, verifying state licensure and registration and reviewing associated documentation, requesting information about the MRB and related parties from state licensing and enforcement authorities, developing an understanding of the normal and expected activity of the business, and conducting ongoing monitoring. 

In addition, the FinCEN Guidance outlines the obligation of financial institutions to file Suspicious Activity Reports (SARs) on activity involving MRBs, which, according to the Guidance is unaffected by any state law that legalizes marijuana-related activity.” If a bank is providing financial services to an MRB, the bank must file one of the following types of SARs, consistent with FinCEN’s suspicious activity reporting requirements and related thresholds: 

  • Marijuana Limited”
  • Marijuana Priority”
  • Marijuana Termination”

Determining which type of SAR to file is described within the FinCEN Guidance. In summary, the determination is based on whether or not Cole Memo priorities are implicated (despite its rescission) and if the account activity leads the bank to terminate the relationship with the customer. 

Finally, the FinCEN Guidance notes that a bank’s Currency Transaction Reporting (CTR) responsibilities are unaffected by the fact that a customer is deemed an MRB

Banks planning to provide financial services to MRBs should familiarize themselves with the obligations outlined in the FinCEN Guidance. 

Regulator Considerations

In addition to the criminal liability risks and practical considerations that a bank must consider in weighing the decision to bank MRBs, the regulator risk must also be weighed. Based our current understanding the various regulators’ position on banking MRBs, the direction is to follow FinCEN Guidance.” Thus, assuming the bank is following the FinCEN Guidance and has followed applicable policies and procedures, one would assume enforcement action would be avoided. 

To the extent your bank is considering providing financial services to MRBs, I suggest getting in touch with your regulator for guidance. 

So, What Do I Do?

The head-in-the-sand approach to banking MRBs is not a good one, as the issue will eventually present itself if it hasn’t already. Thus, I suggest banks take the following actions: 

  • Consider whether your answer to will you bank an MRB?” is a yes (under certain circumstances)” or no”. Develop policies and procedures accordingly and as necessary. 
  • Regardless of your policy, it’s important to know if your customer is an MRB; thus, you should ask. If the customer is an MRB and your policy says you won’t bank them, don’t bank them. If your policy is that yes” (you will consider banking the MRB), you need additional information before you should bank or continue banking the self-identified MRB
  • That additional information is information and documentation that allows the bank to determine whether or not the customer is in compliance with state law. Such collection will typically take the form of a Questionnaire and Certification and will require supporting documentation from the customer. Information will vary from state to state and any such information collection documentation should be developed in consultation with counsel who is familiar with the marijuana laws of the state.
    • If, based on the bank’s reasonable due diligence, the customer appears to be in compliance with state law at account-opening or when the bank confirms compliance of an existing customer, I suggest the following:
      • Designate the customer as High Risk”. Consistent with such designation, continue to monitor your MRB customer for compliance with state law on an ongoing basis; and 
      • Follow FinCEN Guidance. This includes monitoring the account for the presence of red flags identified in the FinCEN Guidance and filing SARs as appropriate. 
    • In contrast, if, based on the bank’s reasonable due diligence, the customer appears to NOT be in compliance with state law, the activity is unlawful and inconsistent with FinCEN Guidance. Accordingly, I do not suggest banking the customer. 

The Future

The good news is that we only anticipate greater clarity as time marches on. Such clarity could come with enactment of the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”), which has already cleared the House and is now in the hands of the Senate. In summary, the Act would provide protections for financial institutions that provide financial services to legitimate cannabis-related businesses and services providers. The Act would allow banks to serve cannabis-related businesses without fear of adverse action from the regulators or criminal liability. The Act would not eliminate the need for banks to make policy decisions and draft implementing policies and procedures pertaining to MRBs, but it would certainly reduce ambiguity and provide protections that bankers need to feel comfortable serving this clientele. Stay tuned on the SAFE Banking Act and/​or other possible legislative fixes to the precarious relationship between the banker and the MRB

Note: A marijuana-related business (MRB) is not a defined term, though it has been used in various guidance issued by federal agencies. Questions remain regarding whether a business needs to touch the plant” to be considered an MRB (e.g. grower, processor, or retailer) or if MRB would include parties accepting monies from MRBs (e.g. landlords, vendors, or suppliers). This definitional question is one for the bank to grapple with, possibly in consultation with regulators, until additional clarification is provided.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.


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