Drug Money: Why Legal Businesses Can’t Open Bank Accounts

Toting around millions of dollars in cash is a recipe for disaster, and it’s exactly what most of the cannabis industry has to do. In 2012, a medical cannabis dispensary owner was kidnapped and horrifically tortured by thieves looking to find his stashed cash.  The threat of armed robbery is a real one for dispensary owners. Lives have been lost despite the best security measures cannabis entrepreneurs can scrap together in an industry that has been accepted socially but still struggles to prove its legitimacy to swaths of the business world because of the federal government’s prohibition.

Theft isn’t the only problem this industry faces, though. While the rest of agribusiness takes insurance payouts after natural disasters, cannabis farms lose everything, and depending on the disaster, that can include savings.

The root of these problems is federal prohibition and the inability to use a bank because of it.

FinCEN put the liability of working with a cannabis company on the banksThere are thousands of banks and credit unions in the United States, but only about 400 of them are working with cannabis businesses. That disparity isn’t because banks are mean or prohibitionists—they’re businesses. And working with pot is risky and cumbersome. Here’s why.

The US FinCEN (Financial Crimes Enforcement Network) is an organization within the United States Department of the Treasury dedicated to protecting the financial system from illicit use and money laundering. Since cannabis is a Schedule I drug, it is considered illegal at the federal level, and any entity that exchanges money for it or finances an organization dealing in it is committing a federal crime. This complicates matters for states that have legalized cannabis. The dissonance between federal and state law allows cannabis businesses to operate in their state without providing them with the infrastructure needed to thrive. One really important part of that infrastructure is banks, but under current law FinCEN would regard a bank’s involvement with a cannabis business as money laundering.

How is it possible that several hundred banks are working with pot businesses?

In August 2013, the Deputy Attorney General, James Cole, issued guidance on cannabis enforcement.  That document, referred to as the “Cole Memo,” indicates that the Department of Justice will continue to enforce the Controlled Substances Act, the law that classifies cannabis as a Schedule I substance.  However, it will do so by prioritizing certain acts over others.  For example, preventing the distribution of cannabis to youth and preventing the accumulation of revenue to the black market are considered high priorities. State-licensed entities that operate in compliance with their states’ regulations are regarded as low-priority threats.  In short, the Cole Memo lets states with legal cannabis do their thing.

There are only 400 banks that insure cannabis companiesShortly after the Cole Memo was released, the FinCEN released its own memo issuing guidance on cannabis finances. In the memo, FinCen indicated that it would not penalize banks for working with cannabis businesses if they filed SARs (Suspicious Activity Reports).  These reports are required if a financial institution suspects or knows that a transaction conducted through it “involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity” or “involves the use of the mutual fund to facilitate criminal activity, including those transactions in which legally derived funds are used for criminal activity,” among other acts in violation of the Bank Secrecy Act.

FinCEN requires banks working with marijuana-related businesses to file two types of SARs: marijuana termination filings and marijuana limited filings.  Marijuana termination filings are submitted if a bank closes an account with an organization affiliated with the cannabis industry.

A marijuana limited filing should be submitted if the business the bank is working with does not seem to be in violation of state law or the Cole Memo.  These filings should include the following information: “(i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified.”  After this initial filing, the financial institution should continue to file activity reports which contain the same information as the initial SAR, plus details about the amount and types of transactions conducted in the account since that first SAR was filed.

Is The Liability Worth It?

The requirement to continuously submit filings on cannabis-related businesses is the reason why so many banks have opted out of the industry even though they can technically get involved per the Cole and FinCEN memos. FinCEN’s guidance places liability on the banks, and the time and personnel required to adequately vet a cannabis business is a tough pill to swallow.  If a bank makes a mistake, it could face insurmountable penalties explained Julie Hill, professor at the University of Alabama and former finance attorney, in an interview with the LA Times.

“The FDIC could step in and shut down a bank, and it can do that with very little notice,“ Hill said.  “Nobody’s ever gotten their bank brought back to life after it’s been closed by regulators.”

The banks that have decided to work in the industry compensate for that cost by putting it on their clients.  Some cannabis entrepreneurs pay up to $1,000 a month just to keep their accounts open, and for lots of businesses trying to make it in this nascent and competitive industry, that’s just too expensive.

In November 2014, Colorado tried to remedy this problem by approving Fourth Corner Credit Union’s charter.  Fourth Corner was created to be the cannabis-friendly financial institution industry businesses could turn to in Colorado.  However, the Federal Reserve refused to give the credit union a master account, a necessary step to get it up and running. Fourth Corner took the Federal Reserve to court on this issue but ultimately lost.  The 10th Circuit Court of Appeals judges dismissed the case without prejudice but ultimately argued that the federal illegality of cannabis gave the Federal Reserve the right to deny the credit union a master account.

Though the states move forward on cannabis legislation, the federal government’s power to complicate that progress continues to slow it down and endanger people’s lives. The only way that the banking problem will go away is if it is legislated at the national level. Until then, cannabis entrepreneurs will pay inordinate amounts of money to store their cash, or they will continue to live in fear of the next thief taking their savings, or worse, their lives.

Dianna Benjamin

About the author: Dianna Benjamin is a freelance writer, teacher, wife, and mom horrified and fascinated by social justice and our inability--yet constant pursuit--to get it right.