Spanning 34 states and generating $10.8 billion domestically in 2018, banking and cash management is one of legalized marijuana’s greatest obstacles.
While 633 banks and credit unions (financial institutions) provide marijuana growers, processors and sellers (marijuana related businesses or MRBs) with accounts, this is a small fraction of nation’s 11,954 financial institutions, which, to offset onerous compliance costs, impose service fees reaching $10,000 per month per account.
Although marijuana’s 100% federal illegality renders all interstate MRB-generated cash transportation to be potentially violative of federal laws, fewer prohibitions exist if, prior to banking, an MRB transports its own money or signs funds over to a third-party transporter.
Further, despite anti-money laundering laws prohibition of cross-border funds transportation or transmission intended to further activities violating federal law, a “presumption against extraterritoriality” immunizes most foreign MRB’s cash transporting from federal prosecution.
Because the Comprehensive Drug Abuse Prevention and Control Act, 21 U.S.C. Sections 801,(1970) (CSA) prohibits marijuana’s “manufacture, distribution, and dispensation” and any transfer or deposit of monies yielded from cannabis sale may be deemed “money laundering” in violation of the Currency and Foreign Transactions Reporting Act, 31 U.S.C. Section 5311-5330 (Bank Secrecy Act or BSA), most financial institutions refuse to provide MRBs with financial services.
Although several rescinded Justice Department “policy clarifying” memoranda restrain enforcing the CSA in legalized marijuana states (including the Cole Memorandum which lists eight enforcement priorities), any transfer or deposit of monies yielded from cannabis’ sale may be deemed “money laundering” in violation of 18 U.S.C. Section 1956 for the depositor and a BSA violation by the financial institution.
In its Feb. 14, 2014, dated “guidance,” the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) clarified that through adhering to institution specific factors (i.e.,particular business objectives, evaluation of risks associated with offering particular product or service, and capacity to effectively manage risks), banks may provide financial services to MRBs consistent with BSA obligations by: obtaining/reviewing MRB’s information from licensing and enforcement authorities including application, license, and registration documentation; developing an understanding of business’ normal and expected activity including types of to-be-sold product and to-be-served customers; monitoring publicly available sources for adverse information about MRB and related parties; monitoring for suspicious activity, including the guidance’s specified red flags; and routinely updating customer due diligence information commensurate with risk (FinCEN guidance).
These red flags indicating state law or Cole Memorandum priority violations include MRBs: appearing to use license as a pretext to launder “criminal activity-derived funds”; inability to demonstrate a licensed business operating consistently under state law or legitimate source of significant outside investments; concealing or disguising cannabis involvement; are, or have been, subject to a marijuana-related law or regulation enforcement action; engaging in international or interstate activity including making/receiving out-of-state cash deposits or interstate transfers; or purporting to be a “nonprofit” while engaged in commercial activity inconsistent with classification.
As of March 31, FinCEN’s reports that 633 banks provided account to MRBs reflecting a 72% increase over a 24-month span. FinCEN’s calculations are based on suspicious activity report (SARs) filings required of financial institutions providing accounts to MRBs that take three forms: Limited—if providing financial services to an MRB not violating any state law or Cole Memo priority; priority—if reasonably believing that an MRB violates state law or Cole Memo priority; and termination—if facilitating effective anti-money laundering compliance requires terminating an MRB account.
SARs filings are triggered by red flags when a bank providing financial services to an MRB knows, suspects or has reason to suspect that a conducted or attempted transaction: involves—or is an attempt to disguise—funds derived from illegal activity; is designed to evade BSA regulations; or lacks a business or apparent lawful purpose. Thus, because all MRB financial transactions involve funds derived from illegal activity, Financial institutions must file a SAR with every deposit, withdrawal or transfer.
Due to enormous BSA and FinCEN guidance compliance costs, only a small fraction of the nation’s 11,954 banks are capable of profitably provided financial services to MRBs while the recent 72% increase suggests a cost-effective solution to dealing with compliance requirements is near. Pending curative legislation includes:
Although marijuana’s 100% federal illegality renders all interstate MRB-generated cash transportation to be potentially violative of federal laws, fewer prohibitions exist if, prior to banking, an MRB transports its own money or signs the funds over to a third-party transporter.
Federal authorities’ primary concern is detecting and preventing money laundering through filing reports of cash transactions of more than $10,000, i.e., currency transaction report (CTRs), and the laws regulating interstate cash transportation include the BSA, Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprises’ 18 U.S.C. Section 1952 (Racketeering Transportation Act), Money Laundering Act, 18 U.S.C. 18 USC Section 1956, and Money Transmitting Act, 18 U.S.C. Section 1960.
First, because the Money Transmitting Act’s prohibition on “unlicensed money transmitting businesses” is limited to “transferring funds on behalf of the public” an MRB transporting its own cash – – or signing the funds over to a third-party transporter – – is neither transporting public funds nor violating the Money Transmitting Act. Similarly, because transportation would precede banking and, thus, does not trigger a CTR’s filing, moving cash across state lines does not violate that BSA aspect.
Second, the Racketeering Transportation Act bans: traveling “interstate” with intent to “distribute the proceeds of any unlawful activity” defined as “any business enterprise” involving “controlled substances;” and “intrastate incidents of the traffic in controlled substances.” Because transporting MRB generated cash across state lines could be deemed “traveling interstate with intent to distribute unlawful activity proceeds,” a prosecutor could assert a Racketeering Transportation Act claim against an MRB transporting its own cash.
Third, the Money Laundering Act bans transporting funds within the United States “with the intent to promote the carrying on of specified unlawful activity” or knowing that funds represent unlawful activity proceeds and are being transported to “conceal or disguise specified unlawful activity’s nature, location, source, ownership, or control” or avoid a state/federal transaction reporting requirement. Although less troubling than Racketeering Transportation Act exposure, because proceeds are being transported pre-CTR filing, the Money Laundering Act may come into play.
Fourth, the BSA makes it a crime to smuggle or attempt to smuggle more than $10,000 in currency or monetary instruments into or out of the United States with the specific intent to evade U.S. currency reporting requirements. Although the cash will be remaining within the United States, and, like with the Money Laundering Act, the prosecutor would need to establish an “intent to deceive,” because the currency will be transported prior to a CTR filing the cash is vulnerable to seizure.
In the absence of specific guidance of what constitutes a prosecutable BSA, Racketeering Transportation Act, or Money Laundering Act violation, the U.S. Attorneys’ manual provides the criteria of what constitutes a “prosecutable federal offense” hinging on whether a prosecution serves a “substantial federal interest.” To commence a prosecution, the U.S. Attorney must believe that: conduct constitutes a federal offense; admissible evidence will probably be sufficient to obtain and sustain a conviction; and a substantial federal interest would be served by the prosecution, see “Grounds for Commencing or Declining Prosecution,” Manual, Section 9-27.000.
The “relevant considerations” the manual instructs weighing in determining whether a prosecution serves a “substantial federal interest” include: federal law enforcement priorities, including any federal law enforcement initiatives or operations aimed at accomplishing those priorities; nature and seriousness of offense; deterrent effect of prosecution; person’s culpability in connection with offense; person’s history with respect to criminal activity; person’s willingness to cooperate in investigation or prosecution of others; interests of any victims; and probable sentence or other consequences if person is convicted, see “Initiating and Declining Charges—Substantial Federal Interest,” Manual, Section 9-27.230.
The manual provides that the Justice Department needs to prioritize its use of federal resources and instructs that, in assessing offense’s seriousness, must weigh whether violation is technical or relatively inconsequential in nature and what the public attitude may be toward prosecution under the circumstances of the case” including that the public “may be indifferent, or even opposed, to enforcement of the controlling statute whether on substantive grounds, or because of a history of non-enforcement, or because the offense involves essentially a minor matter of private concern and the victim is not interested in having it pursued”.
Whether MRB proceeds may enter or exit this country hinges on the respective laws of the nations from which the funds are departing and arriving.
Domestic anti-money laundering laws (AML) prohibit cross-border transportation, transmission, or transfer of monetary instruments or funds intended to further activities violating U.S. federal law including growing, processing and selling cannabis. In contrast, Canadian federal law permits marijuana growing, processing and dispensing subject to regulation.
Due to a “presumption against extraterritoriality,” i.e., that U.S. laws may only restrict domestic activities, most foreign MRB’s transporting cash have little federal prosecution risk. See RJR Nabisco v. European Community,136 S. Ct. 2090, 2100 (2016) (“Absent clearly expressed congressional intent to the contrary, U.S. federal laws [are] construed to have only domestic application.”). Stated another way, unless providing “a clear, affirmative indication that it applies extraterritorially,” a U.S. statute does not apply unless some conduct relevant to the statute’s focus occurred within the United States.
Because it is subject to the presumption against extraterritoriality, the CSA’s failure to prohibit growing, processing or selling cannabis outside of the U.S. prevents its extraterritorial application. Thus, because the CSA does not apply to Canadian MRBs, moving Canadian MRB funds into the United States violates no AML laws nor the BSA, Racketeering Transportation Act, or Money Laundering Act or Money Transmitting Act.
However, AML creates criminal liability for conduct occurring outside of the United States for anyone transporting, transmitting, or transferring a monetary instrument or funds “from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States” with the intent of carrying on “specified unlawful activity” which include conduct that violates the CSA.
The AML also criminalizes transfers of funds derived from unlawful activity in or out of the United States if: transfer is intended to conceal or disguise the nature, location, source, ownership, or control of such activity’s proceeds; or transaction’s value exceeds $10,000 and involves a financial institution.
2019 National Law Journal “Finance, Banking, & Capital Markets Trailblazer” award winner, Steve Schain is Senior Counsel at Smart-Counsel, LLC, a 100% female owned boutique Cannabis law firm. Steve represents entities, governments and individuals in litigation, regulation and compliance, financial services, license applications and entity formation. Reach Steve at [email protected]
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