More than half of all US states have legalized cannabis for medical use and eleven have legalized recreational use for adults. This is a good thing for state’s bottom lines, additional tax revenue! But bad for public safety. Why? Because currently most banks will not transact with a cannabis company so those businesses are left to deal in cash. This means that when large tax or vendor bills are to be paid, they have to be paid in cash. Carrying around large amounts of cash is always risky, and dangerous when people with nefarious intent find out. No bank account also means no electronic transactions, for payroll, paying tax bills, paying vendors, etc.
How do other states do it?
The short answer – in secret. States like Colorado and Washington state have used the guidance provided on February 14th, 2014 by the Department of Treasury, Financial Crimes Enforcement Network (FinCEN) which has laid out the conditions under which FinCEN will eschew the prosecution of banks that do business with the cannabis industry in their state. There were just a few simple but important conditions banks have to adhere to:
• Prevent the distribution of marijuana to minors;
• Prevent revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
• Prevent the diversion of marijuana from states where it is legal under state law in some form to other states;
• Prevent state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Prevent violence and the use of firearms in the cultivation and distribution of marijuana;
• Prevent drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
• Prevent the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
• Prevent marijuana possession or use on federal property.
Simple right? But how would a bank accomplish all those things? Well, close the bank account if they suspect any of those things are happening.
Follow the Money
You may remember shortly after the events of 9/11 the Patriot Act was passed. Part of what that Act did was shore up and reinforce already existing regulations to prevent money laundering. One of the things that banks have long had to do was to file a Suspicious Activity Report (SAR) if facts of their banking relationship with a customer illuminate possible criminal behavior and money laundering activities including but not limited to filing reports to US authorities each time more than $10,000 is deposited in cash in an account in a day – and this is aggregate, meaning you can’t deposit $5000 twice and get away with it.
Banks can also, and do, look at your Facebook page and see who the account holder is associating with, or where they are and extrapolate from that enough “suspicious activity” to close an account. Fun fact: a bank can close a customer’s account for any reason, and at any time, just because they want to, and they do not have to disclose to the customer why. Banks do, however, have to fully cooperate with authorities. So, if they file an SAR because you deposited cash of $25,000 you received from your grandmother’s inheritance, and the FBI wants to look into what else you have deposited in your bank account or spent, they can, and the bank has to help.
What Can Banks Do
Under the FinCEN guidance a bank can work directly with a business in a state where cannabis is legal. However, they are under obligation to keep a closer watch on those customers activities than perhaps they would want to or are equipped for. If a very successful dispensary, for instance, was depositing more than $10,000 in cash daily that bank would be under obligation to file an SAR. If this is something banks are willing to do, grand. But the FinCEN can still swoop in and close an account, and penalize the bank for non-reporting if an SAR was not filed timely or at all for activity they deem suspicious. Closing customer’s accounts is, as you can imagine, not good for business.
You’ve Seen the Sign
FDIC – or Federally Deposit Insurance Corporation – is the body that insures deposits against a bank failure for up to $250,000 an account. That means if you have an account in a bank and that bank is insured by FDIC then if that bank should fail you will get your money back, up to $250,000. It is a perk for a bank to be able to offer to their customers. And just as a bank can close a customer’s account for doing illegal things, so the federal government could yank the FDIC coverage if a bank is caught doing illegal things, or even suspicious things, or even tacitly letting illegal things happen under their nose. This risk is why, despite the Guidance offered by FinCEN in 2014 on how to work with marijuana companies, many banks are reluctant to even try.
Next up: SAFE Banking Act explained.