Hundreds of U.S. banks and credit unions that serve the marijuana industry, and others that have considered jumping into the fast-growing niche, suddenly face heightened risks.
On Thursday, Attorney General Jeff Sessions announced that the Department of Justice is rescinding the Obama-era memo that helped foster the pot sector’s rapid growth.
How extensively banks and credit unions will be impacted remains to be seen. But depository institutions will almost certainly become warier of the pot industry, particularly in the eight states that have legalized the recreational use of the drug.
“I do think this is going to have a chilling effect,” said Don Childears, who as president of the Colorado Bankers Association has long urged banks to heed the risks of serving pot businesses. “Nobody knows what is going to shake out of this.”
Sessions is a fierce critic of pot, and ever since his selection by President Trump as attorney general, marijuana advocates have worried that he will preside over a crackdown on the drug, which has long been illegal under federal law.
Sessions’ decision to rescind a 2013 DOJ memo written by then-Deputy Attorney General James Cole seems to confirm the pot industry’s fears. “Attorney General Sessions has been a consistent opponent of a policy of loosening federal drug laws that include marijuana sales,” Joseph Lynyak, a lawyer at Dorsey & Whitney, noted in an email.
The Cole memo instructed federal prosecutors not to prioritize cases against businesses that are operating in accordance with their own states’ laws. Now that the memo is obsolete, pot dispensaries will have to worry again about the possibility of federal raids.
The impact of Sessions’ decision on banks is less direct, though it still figures to be significant. That is because the Cole memo provided the foundation for 2014 federal guidance that was intended to provide a degree of comfort to banks and credit unions nervous about doing business with cannabis firms.
The Financial Crimes Enforcement Network, which issued the guidance to depository institutions, declined to comment Thursday on whether that document will be rescinded, though the agency did provide a statement.
"FinCEN works closely with law enforcement and the financial sector to combat illicit finance and provide relevant information that allows law enforcement to pursue their priorities," an agency spokesman said in an email. "We will continue to work with DOJ and other stakeholders on this issue."
Meanwhile, some observers questioned the continuing viability of the 2014 Fincen guidance.
“I think the FinCEN guidance dies if the Cole Memo is rescinded,” Julie Hill, a law professor at the University of Alabama, wrote on Twitter.
“We always sort of cautioned that this is guidance, that it could be rescinded at any time,” said Beth Mills, spokeswoman for the California Bankers Association.
Banks and credit unions that are most likely to feel the effects of Sessions’ decision are those that currently serve the pot industry. These tend to be small institutions, and they typically keep a low profile about their involvement with cannabis.
As of Sept. 30, some 400 U.S. depository institutions reported that they bank marijuana businesses, according to Fincen data. That is up from around 150 in late 2014.
In addition, depository institutions that were thinking about becoming involved — cannabis firms typically pay high fees because of the risks associated with their accounts — may now decide to stay out of the fray.
The legal risks associated with pot figure to be biggest in the eight states where recreational pot is currently legal — Colorado, Oregon, Maine, Massachusetts, Nevada, Alaska, Washington and California, where cannabis advocates celebrated legalization on New Year’s Day.
While federal law prohibits the Justice Department from using funds to interfere with the implementation of state medical marijuana laws, no such protection exists for recreational pot.
“I personally would not expect an immediate, widespread crackdown,” Steve Kemmerling, CEO of the consulting firm MRB Monitor, said in an email, “but I do expect a big chill to fall across the marijuana industry.
"The ‘recreational’ marijuana market in particular could be facing some serious challenges as it has zero protections from federal prosecution.”
John Hudak, a senior fellow at the Brookings Institution, agreed that recreational pot growers and dispensaries face the biggest risks. But he also noted that a lot of companies are involved in both recreational and medical cannabis.
“There could be spillover effects,” he said. “You might find that banks are a bit less willing to work with recreational firms, but they also might be less willing to work with medical firms, as those risk assessments play out.”
One key question now is whether Sessions’ hard-nosed stance will spark a backlash on Capitol Hill. As a presidential candidate, Trump said that the question of marijuana legalization should be left up to the states, though he also expressed some concern about recreational pot.
Congressional supporters of the pot industry reacted angrily Thursday to Sessions’ announcement.
“This reckless and irresponsible action from the Department of Justice will not go unanswered,” Rep. Denny Heck, D-Wash., said in a written statement. “To prevent this action from spiraling out of control, Congress must immediately remove marijuana from the list of controlled substances, in order to preserve the legal marijuana markets present in 37 states.”
Sen. Cory Gardner, R-Colo., accused Sessions of failing to fulfill a pledge that he made before being confirmed as attorney general. He vowed to hold up Justice Department nominees until Sessions reverses course.
But some observers are skeptical that pot advocates will muster the votes in Congress to overturn Sessions’ decision.
“That’s a heck of a fight,” Hudak said. “Recreational cannabis reform is not as popular in Congress as medical cannabis reform is.”
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Updated January 4, 2018 at 8:09PM: This story has been updated to add comment from a Fincen spokesman.