Pot banking comes with little guidance, lots of liability

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Since the day in 2014 when I sniffed a $20 bill on camera at the request of a Fox News reporter, it has been clear that on the issue of banking marijuana “we don't know what we don't know.”

FYI, the reporter was asking if you really could smell marijuana on money that marijuana businesses were attempting to sneak into banks. (The answer is yes and that took us through the phases of would-be, but unwanted, depositors trying to disguise the smell with Febreze and later attempting to remove the smell by laundering the currency — literally — in a washing machine.)

We’re beyond those 2014 developments and dozens of other iterations, but it is clear: There is no clear, firm or reliable regulatory guidance to minimize bank liability, whether a bank chooses to try to block marijuana deposits as most banks do — or chooses to work with the cannabis industry, as a few have. And yet this guidance is growing increasingly necessary.

Many bankers will assert, “We’re not banking marijuana!” to which we retort, “Are they sure about that?” Marijuana depositors are clever, and you do not want them to outsmart you, since banks are liable.

It doesn’t stop there. Third parties such as landlords, employees and electricians still get paid with proceeds from the federally illegal activity. Their deposits should be reviewed too.

In recent years, mixed signals have come from all sides: the Trump Administration’s actions, permissive legislation that goes nowhere in Congress, regulatory agencies that fail to provide clear guidance and courts that have rendered mixed opinions, resulting in blocked access to the Federal Reserve and the payment system for marijuana-focused depository institutions.

In light of U.S. Attorney General Jeff Sessions’ decision to rescind the Cole Memo, which didn’t alter the criminality of marijuana federally but attempted to reduce prosecution of marijuana offenses by providing direction to U.S. attorneys in determining the priority for those prosecutions, it is critical that Congress provide access to banking services for this multi-billion-dollar industry. Thirty states have legalized medical or adult-use marijuana, and an additional 15 states permit cannabinoid oil for medicinal purposes. These activities, which are legal in certain states, still violate federal law, creating the catch-22 for banks. And yet the number of states involved in this activity grows with each election. This industry involves billions of dollars in financial transactions currently lacking the transparency provided by the banking system. And the penalties for banks violating federal law are serious.

Since 2013, the Colorado Bankers Association has favored congressional action to permit the banking of this federally illegal activity in states where it has been legalized. (The 2012 Colorado election authorized recreational marijuana as of 1/1/2014.) We didn’t support legalization, but we believe this is the only practical way to address the issue in light of the number of permissive states and the public safety need to bank it in order to get huge volumes of cash off the streets, coupled with the need to track the funds so government can regulate and tax the industry. Congressional action can also provide needed direction to banks.

When CBA first took this position, we were a voice of one, but now our assertion is the consensus. As we expected, other options can’t provide solutions. States can’t establish pseudo-banks; they still are subject to federal law precluding illegal activity. Even recently touted state-owned banks run into this brick wall despite the strong wishes of marijuana advocates and proponents of publicly owned banks. There is no viable substitute. Needed clarity for bank regulators and banks can only come from congressional action.

No state has the power to resolve it. No federal agency or group has the authority to ignore federal law. The President doesn’t have the power — he can’t direct independent agencies, key to this issue. Courts have been asked to resolve the conflict of federal and state laws and haven’t. There are no other viable alternatives.

The House did approve an amendment to create a safe harbor for banks providing services to marijuana businesses and insulate them from regulatory criticism introduced by Rep. Ed Perlmutter, D-Colo., in July 2014, by a vote of 231-192. That was a step in the right direction. Half of Colorado’s GOP members of Congress, and all of the state’s Democrats, supported the measure. But the underlying bill was never passed — and so nothing has changed.

At the same time, the scale has tipped as more states legalize cannabis in one form or another. Regardless of local law, marijuana deposits seem to be pervasive. We’ve fielded calls from banks not in marijuana jurisdictions looking for advice on how to keep the illicit funds out of the bank; they’re facing such deposits despite no accommodating state law. Deposits from marijuana sources and the threat they pose to banks are inescapable. To protect themselves, banks need to their A-game.

With substantial bank liability from the Bank Secrecy Act, the Anti-Money Laundering Act and other laws, banks and their associations have sought clear guidance. That hasn’t come. Regulators aren’t about to bless it and don't want to get caught in the political debate. That leaves banks yearning for direction in a guidance-free zone. Despite that, today in Colorado there are about 20 smaller banks and credit unions that have elected to take the risk and do accept marijuana-related deposits. Other banks that have opted not to accept them often unwittingly have them in the bank — to their surprise and their peril.

Banks needs good risk management in this complex shifting issue. That requires good knowledge of biggest threats and best practices. Banks in nonpermissive states — and permissive ones alike — need to ask, “Are we sure we’re not banking marijuana? If we are inadvertently, what does that say about our risk management?”

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