NEW YORK (TheStreet) -- The long-awaited guidance on banking for marijuana businesses is not giving the American Bankers Association very much comfort. The Department of Justice (DOJ) and the Financial Crimes Enforcement Network issued guidance on Friday clarifying expectations of financial institutions serving marijuana businesses, but the guidance fell short of what many businesses were hoping for.
"While we greatly appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn't alter the underlying challenge for banks. As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution," said Robert Rowe, Vice President and Senior Counsel for the American Banks Association.
Rowe is right, the guidance makes it clear from the start that marijuana is still illegal under the Controlled Substances Act. It cites the Cole Memo from the DOJ that reiterates that marijuana is illegal and they can prosecute it, but it won't be the focus of their resources. Money laundering is the main concern for the DOJ and it puts the responsibility for this on the banks. Banks can open the accounts, but they will have to decide if it is worth the risk.
"The Department shares the concerns of public officials and law enforcement about the public safety risks associated with businesses that handle significant amounts of cash. These guidelines, together with the Treasury Department's guidance to financial institutions, are intended to increase the availability of financial services for marijuana businesses - that are licensed and regulated - while at the same time preserving and enhancing important law enforcement tools," said Allison Price, a Department of Justice spokesperson.
If a bank chooses to begin a relationship with a marijuana related business, it will be required to file a suspicious activity report ("SAR") on each account. The banks will have to designate the SAR as "Marijuana Limited" if the bank believes the customer is operating within the guidelines of the Cole memo, a "Marijuana Priority" if they think the customer is breaking the Cole memo and the SAR would be tagged "Marijuana Termination" if it decides to end the banking relationship due to the customer breaking the guidelines of the Cole memo.
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The onus is put upon the bank to determine whether the business is using the operation as a front to launder money. The bank would have to know how much revenue is too much for the business. For example, an extremely successful marijuana retailer (as compared to the competition) would be flagged as having too much revenue. Excessive cash deposit and withdrawals compared to local competition will also be cause to be flagged.
The bank will also have to watch for co-mingling of funds between personal accounts and the marijuana business. Financial statements will have to be reviewed to make sure that are consistent with the actual account activity. Interstate activity will be cause for concern, which could hurt dispensaries hoping to create a chain of businesses among different states. If the owner of the business lives outside the state where the business is located, this could be seen as a potential problem.
Marijuana businesses will not be exempt from the Currency Transaction Report obligations, so any deposits of more than $10,000 in cash will have to be reported. If the bank thinks the customer is trying to get around that, say by depositing $9,999, then the bank will need to red flag the SAR.
As long as marijuana remains listed as a drug under the Controlled Substances Act, banks see no reason to take on this risk for a relatively small number of local businesses. The bank would have to invest huge amounts of time to verify that the revenue levels are appropriate for the business and this is something that many banks just can't do.
The government may feel like it has issued the guidance that the businesses were hoping for, but the banks see no comfort in the responsibilities that have been placed on their shoulders.
Written by Debra Borchardt in New York.