Bankers are often told that as long as they take the right precautions, the marijuana business no longer needs to be off-limits.
Still, this once-illicit, rapidly growing market continues to carry clear risks for the banking industry. Millennium Bank, a $75 million-asset institution in Des Plaines, Ill., recently learned this lesson the hard way.
Illinois legalized medical marijuana in January 2014, and Millennium was one of a small number of banks that showed interest in serving the state's nascent pot sector, sources told American Banker.
In February 2014 the Financial Crimes Enforcement Network issued guidance to banks and credit unions that was meant to bring pot businesses nationwide into the financial mainstream. The guidance lays out numerous factors that banks are supposed to consider when evaluating cannabis firms.
But in March 2016, Millennium Bank entered into a consent order with the Federal Deposit Insurance Corp. and the Illinois Division of Banking related to alleged violations of the Bank Secrecy Act.
While the consent order never mentioned marijuana, a source familiar with the matter said that the agreement stemmed from the bank's involvement in serving pot businesses.
The consent order requires Millennium to make changes to its programs for complying with the Bank Secrecy Act, doing due diligence on customers, and monitoring and reporting suspicious activity.
Under the agreement, Millennium neither admitted nor denied the allegations. The bank's chief executive officer, Frank Guerino, did not return calls seeking comment.
Millennium Bank had just 27 employees as of March 31, and it operates a single branch in Des Plaines. The consent order calls for the bank to provide "an adequate number of qualified staff" in its Bank Secrecy Act department.
The Illinois Division of Banking declined to comment on the reason for the consent order, saying that it relates to confidential supervisory information. The FDIC also declined to comment on the situation at Millennium Bank.
The Millennium episode illustrates the potential perils of offering banking services to the pot industry.
"This sets a challenging precedent for banks currently, or considering, serving marijuana because there is no template that they can follow to be assured they won't get into trouble," Steven Kemmerling, the head of a company that sells customer-screening services to banks, said in an email.
"I anticipate more consent orders as regulators continue to refine and enforce how to safely bank marijuana," added Kemmerling, CEO of MRB Monitor.
Marijuana remains illegal under federal law. At the same time it is legal, either for medicinal or recreational use, in 25 states plus the District of Columbia.
The discrepancy between federal and state laws has made many banks wary of the pot business. As of March 2016, 301 financial institutions, or less than 3% of all banks and credit unions nationwide, had banking relationships with marijuana-related businesses, according to Fincen.
Millennium Bank is not the first small bank to get tripped up by marijuana. Last year, MBank in Gresham, Ore., reportedly decided to close all of its pot accounts.
"It just ultimately boils down that as a small community bank, we do not have the resources to manage the compliance needed for this industry," Jefry Baker, CEO of the $168 million-asset bank, told Willamette Week in April 2015. "We thought we could, but we can't."
It is unclear whether any other banks have been the target of enforcement actions related to marijuana since Fincen issued its guidance. If another consent order did relate to a bank's involvement in the cannabis business, the public document would not necessarily say so.
The FDIC, the Office of the Comptroller of the Currency and the Federal Reserve Board all use the 2014 guidance in their examinations of banks.
That guidance states that banks should verify where a marijuana business is licensed, get an understanding of the firm's normal activity, and conduct ongoing monitoring for suspicious activity.
Bankers are also told to be on the lookout for cannabis firms that appear to be a front for money laundering, as well as for bank customers who try to disguise their involvement in the pot industry. If a bank discovers certain red flags, it is supposed to file more detailed reports with Fincen.
Marijuana firms have been saying for years that the current hodgepodge of federal and state laws, and the wariness it breeds inside banks, leaves much of the industry reliant on cash and vulnerable to crime. Last month, a security guard at a pot dispensary in Aurora, Colo., was shot and killed during an attempted robbery.
"The financial services industry needs clarity in order to be able to serve these businesses," said Taylor West, deputy director of the National Cannabis Industry Association.