MARIJUANA BUSINESSES

Navigating the Federal Guidance for

Washington State Banks and Credit Unions

Presented by

WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS

April 17, 2014

Background on Initiative 502

Legalizes recreational

marijuana.

Liquor Control Board

granted rulemaking and

regulatory authority.

http://liq.wa.gov/marijuan

a/I-502

Licensees

Producers

Processors

Retailers

Strict Vetting Procedures

Robust Traceability

System

2 4/17/2014

Background on Medical Marijuana

SB 5887 did not pass

during the 2014 WA

Legislative Session.

Medical marijuana

remains unlicensed

and not legal.

Affirmative defense to

prosecution for

persons with

authorizations (not an

Rx) from qualified

health professionals.

The Legislature has only

authorized “collective

gardens” of up to 10

authorized people to

grow and use medical

marijuana – by law not

supposed to be a

business.

3 4/17/2014

Federal Controlled Substances Act

Production, processing,

distribution, sale, or use

of marijuana

(“marijuana-related

activity”) is still a federal

crime.

Includes both interstate

and intrastate activity.

Marijuana is lumped in

with heroin and LSD as a

Schedule I drug.

4 4/17/2014

Federal Law:

Deposits & Money Transmission

Knowingly depositing

proceeds from

marijuana-related

activity in a bank or

credit union is a federal

crime punishable as a

felony for both the

depositor and the

financial institution.

Knowingly transmitting

proceeds from

marijuana-related

activity is a federal crime

punishable as a felony

for the transmitter , the

transferor , and the

transferee.

5 4/17/2014

Background on Federal Law: Lending

Knowingly lending money for

marijuana-related activity or

accepting loan collateral that

is involved in marijuana-

related activity is a federal

crime punishable as a felony.

“Innocent owner”

defense to civil forfeiture

exists if the lender:

Did not know of

activity when loan

made; and

Took diligent steps to

stop the illegal use of

property when

discovered.

Lender may be able to

argue that the Cole

Memo endorsed lending

to licensed businesses.

6 4/17/2014

Washington Regulation:

Liquor Control Board

Strict vetting of owner/licensees.

No interstate ownership.

No “vertical integration.”

Strict advertising restrictions.

No in-store use.

Quality control.

Strict-seal packaging.

Complete end-to-end traceability throughout the supply chain to prevent diversion.

Not near schools.

Periodic field examination.

7 4/17/2014

Negotiations with

DOJ & FinCEN (Treasury)

Discussions concerning

public safety and the

need for basic banking

of state legal

recreational marijuana

took place during 2013.

DOJ declared on

8/29/2013 that it would

not stop I-502 per se.

On 8/29/2013, DOJ

issued the Cole Memo

with its 8 prosecutorial

priorities.

The stage was then set

to formally call for a

practical banking

solution.

8 4/17/2014

8 Priorities of The Cole Memo

Prevent distribution to

minors.

Prevent revenue to

criminal enterprises,

gangs, or cartels.

Prevent diversion to

“illegal states.”

Prevent cover or pretext

for illegal activity.

Prevent violence or use of firearms.

Prevent drugged driving and increased health problems.

Prevent growing on public lands.

Prevent possession or use on federal property.

9 4/17/2014

The Federal Guidance: Overview

FinCEN issues Guidance

entitled BSA

Expectations Regarding

Marijuana-Related

Businesses, dated

2/14/2014 (FIN-2014-

G001), consistent with

the Cole Memo.

DOJ issues guidance to

United States Attorneys

which amounts to an

instruction on when to

exercise “prosecutorial

discretion” in banking

matters, consistent with

the Cole Memo.

10 4/17/2014

The Federal Guidance:

Know Your Customer 1

Verify with LCB whether

business is licensed and

registered.

Review all LCB license

documentation.

Request from LCB

all available

information about

licensee and related

parties.

Develop

understanding of

expected activity of

the business – types

of products and

customers.

11 4/17/2014

The Federal Guidance:

Know Your Customer 2

Monitor adverse public

information.

Monitor for suspicious

activity, including any

red flags.

Periodically refresh KYC

info and more often

depending on risk.

You may reasonably

rely on the accuracy

of information

provided by LCB.

Does your

monitoring suggest

a business may be

operating in a

manner inconsistent

with the Cole Memo

Priorities or state

law?

12 4/17/2014

The Federal Guidance:

When Is Any SAR Required? When you suspect funds

are derived from illegal

activity.

When you suspect a

transaction is an attempt

to disguise funds

derived from illegal

activity.

When you suspect a

transaction is designed

to evade BSA

regulations -such as

“structuring.”

When you suspect the

customer is violating

federal or state law.

13 4/17/2014

No. 1 Red Flag: Front/Pretext to Hide Other Illegality

Receives substantially more revenue than:

Scope of LCB license.

Local competitors

Area demographics.

Depositing more cash than reporting to taxing authorities.

Cannot show revenue all from legal activity.

Short-term deposits and withdrawals excessive relative to local competitors or expected activity.

Structured to avoid Currency Transaction Report (“CTR”) requirements.

Rapid funds movement.

Third-party deposits with no

apparent connection to

depositor.

Excessive commingling of

accounts.

Appearing to act on behalf of

other undisclosed persons.

Financial statements out of

line with business activity.

Surge in third-party vendors

to marijuana business.

14 4/17/2014

Other Red Flags 1

Inability to produce satisfactory

evidence of LCB license in good

standing.

Inability to demonstrate

legitimate source of significant

outside investments.

Concealing or disguising

involvement in marijuana-related

business activity (e.g.,

nondescript name).

Public info sources reveal negative information.

The business, or owner, manager, or related parties are, or have been, subject to enforcement action by the state or local authorities – including LCB and Dept. of Revenue.

International or interstate activity, including flow of funds.

15 4/17/2014

Other Red Flags 2

Owner or manager resides outside Washington State.

Business located on federal property or the marijuana grown on federal property.

Business proximity to school in violation of state law.

Purporting to be a “non-profit” but actually engaged in commercial activity or making excessive payments to manager or employees.

16 4/17/2014

Federal Guidance:

“Marijuana Limited” SAR Filing

When is the ML SAR

to be used?

After thorough

customer KYC.

No apparent

implication of any of

the 8 Cole Memo

Priorities.

No violation of state

law.

Content of ML SAR:

Names/addresses.

State that filing is

solely because the

customer is engaged

in marijuana-related

business.

State that no

additional suspicious

activity identified.

Use in narrative the

term “MARIJUANA

LIMITED.”

17 4/17/2014

Federal Guidance:

Continuing Activity Report

Every 120 days per

FinCEN FAQ

Question No. 16.

Contents:

Same limited content

as the initial ML SAR.

Details about the

amount of deposits,

withdrawals, and

transfers in the

account since the last

ML SAR.

If the bank or credit union detects changes in activity that potentially implicate one of the Cole Memo Priorities or violate state law, then a “Marijuana Priority” SAR should be filed.

18 4/17/2014

Federal Guidance:

“Marijuana Priority” SAR Filing

When is the MP SAR

to be used? When

reasonable belief:

One of 8 Cole Memo

Priorities implicated or

Violation of state law.

Content of MP SAR: Names/addresses of

subject and related parties.

Details of Cole Memo Priorities implicated.

Dates, amounts, and other relevant details of financial transactions involved.

Use in narrative the term “MARIJUANA PRIORITY.”

19 4/17/2014

Federal Guidance:

“Marijuana Termination” Filing

When is the MT SAR to be used? When terminating any

relationship with a marijuana-related business; or

When necessary in order to maintain an effective anti-money laundering compliance program.

Content of MT SAR:

Note in the narrative the basis for the termination.

Use in the narrative the term “MARIJUANA TERMINATION.”

20 4/17/2014

Federal Guidance:

CTRs & Form 8300

Cash transaction reports

(“CTRs”) are to be

handled with the same

diligent compliance.

See BSA Rules.

Form 8300 requirements

are the same.

See BSA Rules.

21 4/17/2014

Overview on Lending

The Guidance does not address lending.

Without guidance on lending, we do not have

certainty as to the policy of DOJ on lending.

Banks and credit unions should proceed with

enhanced due diligence and care.

No special guidance exists for SAR reporting

in relation to lending to marijuana-related

businesses.

At a minimum , a bank or credit union should

be guided by the same considerations as the

Cole Memo and FinCEN Guidance.

22 4/17/2014

Unsecured Credit-Card Lending

Unsecured merchant credit-card lending would facilitate the ability of LCB marijuana licensees to operate the same as any other legitimate business.

If the account is closed with a balance owing, the bank or credit union has no collateral anyway – the risk is the outstanding balance.

Unsecured merchant credit card lending should have separate monitoring of how merchant credit cards are used – similar to the way the FinCEN Guidance requires for deposits and withdrawals.

23 4/17/2014

Concluding Watchwords 1

Basic banking services – deposit-taking

and withdrawals – to LCB licensees under I-

502 are critical to assuring public safety.

Banks and credit unions must make their

own independent determination whether to

extend merchant deposit services or make

loans to LCB licensees, consistent with the

Financial Guidance.

Consistent with the risks, banks and credit

unions considering relationships with LCB

licensees are advised to seek the advice of

independent legal counsel knowledgeable

in this area.

24 4/17/2014

Concluding Watchwords 2

If basic banking is extended to LCB

licensees who comply with the 8 Priorities

of the Cole Memo and do not have any red

flags, then it appears likely at this time that

the United States Attorneys in Washington

State will not prosecute the LCB licensees

or act to prevent basic banking or seize the

accounts.

While less certain, banks or credit unions

considering lending to LCB licensees

should weigh the considerations and risks

and consult with independent legal counsel

before doing so.

25 4/17/2014