What Banks To Expect With Legalization Of Cannabis BankingIn Illinois

The incoming governor-elect of Illinois, J.B. Pritzker has promised to pass legislation that legalizes the sale and consumption of recreational cannabis in Illinois for adults over the age of 21.
Already, Illinois legislators are drafting such legislation with hopes to have it introduced to the Illinois state legislature in January 2019 and on the governor’s desk for signing by May 2019.¹ After the passing of recreational cannabis legislation, experts believe it will take up to 6 months before licenses to distribute recreational cannabis may be issued.² Nonetheless, if recreational cannabis legislation is passed, as promised by J.B. Pritzker, dispensaries may open in Illinois by the end of 2019.³ In this article, we discuss the legal considerations of medical and recreational cannabis banking in Illinois.

According to the University of Illinois, legalization of cannabis in Illinois will generate over half a billion dollars annually in Illinois state taxes from an estimated 2,600 new businesses and 24,000 new jobs.⁴ Recreational cannabis is currently illegal under federal law, causing many banks to avoid the risks and extra work involved in banking proceeds from the sale of recreational cannabis. However, cannabis banking could prove a worthwhile venture for banks that comply with cannabis banking regulations promulgated by the U.S. Department of Treasury, as well as any applicable state regulations.

I. The Federal Barrier to Cannabis Banking

Although Illinois may legalize the use and sale of recreational cannabis, it has and will most likely remain a federal crime to possess, sell or distribute cannabis under the Controlled Substances Act.⁵ Even more concerning, the U.S. Department of Justice issued a memorandum in January 2018 indicating that it will prosecute cannabis-related violations of the Controlled Substances Act in states that have legalized recreational cannabis.⁶ However, extensive federal enforcement of the Controlled Substances Act in states legalizing cannabis remains to be seen. This year, Colorado cannabis dispensaries have made over $1.5 billion in sales so far and have generated a total of over $5.6 billion in revenue since 2014.⁷

A potential cannabis business licensed in Illinois will probably face substantial barriers in obtaining financing and banking services.⁸ This is evident from banks having already refused to work with cannabis businesses in other states.⁹

Many of these banks fear criminal liability for violating federal money laundering statutes by accepting proceeds from an “unlawful activity,” including distributing cannabis in violation of federal financial laws.¹⁰ Banks are already required to report suspicious customer activity that may indicate money-laundering or other federal financial crimes.¹¹ A bank must also file a “currency transaction report” to the Financial Crimes Enforcement Network (FinCEN), an agency within the U.S. Department of Treasury, whenever a bank customer deposits total cash proceeds in excess of $10,000 in a single day.¹²

II. Good News for Banks: The Federal Government Wants to Facilitate Cannabis Banking (But Keep The Drug Itself Illegal)

Some banks have accepted cannabis sellers, growers and distributors as customers. While doing so may violate federal criminal law statutes, FinCEN produced guidance in 2014, entitled “BSA Expectations Regarding Marijuana-Related Businesses” (“FinCEN’s Guidance”), for bank reporting and oversight of customers in the cannabis industry.¹³ This year, the U.S. Treasury Department has voiced support in Congress for cannabis banking in states where the substance is legal for recreational use—in direct contradiction to the Justice Department’s pronouncement that it would enforce the Controlled Substance Act for cannabis-related offenses in states where the drug is legalized.¹⁴ The number of banks willing to work with state-authorized cannabis businesses steadily increased this year by at least 20%.¹⁵ Thus, FinCEN and federal banking authorities have permitted cannabis banking in states with legalized cannabis.

FinCEN’s Guidance is intended to (1) “enhance the availability of financial services for, and the financial transparency of marijuana-related businesses”¹⁶ ; and (2) ensure that serious violations of the Controlled Substances Act related to cannabis are prevented¹⁷ , which include¹⁸:

Sale of cannabis and/or cannabis products to minors
Use of revenue from selling cannabis to fund “criminal enterprises, gangs and cartels”¹⁹
Transport of cannabis and/or cannabis products from a state where it is legal to a state where it is illegal
Violence or use of guns related to any cannabis-related activity
Drugged Operation of Motor Vehicle and “other adverse public health consequences associated with marijuana use”²⁰
Cultivation of Cannabis on Public Land
“Marijuana possession or use on federal property”²¹

To help safeguard these objectives, FinCEN’s Guidance states that banks should conduct “[t]horough customer due diligence,” which includes doing the following:²²

“(i) verifying with the appropriate state authorities whether the business is duly licensed and registered.”²³
“(ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business.”²⁴
“(iii) requesting from state licensing and enforcement authorities available information about the business and related parties.”²⁵
“(iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers).”²⁶
“(v) ongoing monitoring of publicly available sources for adverse information about the business and related parties.”²⁷
“(vi) ongoing monitoring for suspicious activity, including for any of the ‘red flags’ described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.”²⁸

What exactly are the “red flags” mentioned in the passage above of FinCEN’s Guidance? The “red flags” refer to conduct indicating criminal activity and/or the laundering of funds obtained from criminal activitythat include²⁹ :

The business generating more revenue than what would be reasonably expected under the limitations of its state of operation
More cash is being deposited by the business than reported on tax filings
“The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law . . .” ³⁰
“Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals” ³¹
“Deposits by third parties with no apparent connection to the account holder”³²
False Financial Statements

FinCEN’s Guidance further instructs banks to check for other “red flags”, including: ³³

Insufficient documentation of licensure to operate cannabis business
Non-compliance with state laws and regulations
Engagement by the business in activities in other states
“Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, [which may] reveal negative information, such as [a] criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.”³⁴

Under FinCEN’s Guidance, a bank must file a “suspicious activity report” (SAR), pursuant to the Bank Secrecy Act, for every cannabis business.³⁵ However, FinCEN allows banks to file a “ Marijuana Limited” SAR for cannabis businesses that are in full compliance with FinCEN’s Guidance. Banks must file a “Marijuana Priority” SAR for cannabis businesses violating FinCEN’s Guidance. Banks shouldfile a “termination-SAR” to report the end of a banking relationship caused by concerns over suspicious activity.³⁶

The SAR requirements essentially mean banks are mandated reporterssince they must file an SAR upon learning of red flags of “suspicious activity.” Moreover, banks will have to ensure cannabis businesses are complying with state laws.³⁷ Doing so will require banks to engage in frequent contact with cannabis businesses, as well as review revenue and inventory records.³⁸ Banks may even need to track inventory with digital software and conduct site visits to ensure compliance with state regulations. Therefore, banks considering cannabis banking must strategize about how they will be able to maintain a trusting and continuous relationship with cannabis businesses while also fulfilling its “due diligence” and reporting requirements.

III. Illinois Banks May Also Be Subject to State Cannabis Banking Laws

Banks in Illinois hoping to take cannabis businesses as customers should be aware of potential state regulations.³⁹ Already, FinCEN’s Guidance requires banks to report state law violations, which practicallyleaves banks having to ensure cannabis businesses comply with state regulations. However, states will also have their own regulations applicable to banks.

For example, the State of Colorado requires banks to obtain approval for any ownership interest in a cannabis business.⁴⁰ Further, Colorado bans the use of cannabis inventory as a security interest on a loan.⁴¹

In many other states, bank regulators are exploring various options to facilitate cannabis banking. The unwillingness of many banks to accept proceeds from cannabis sales has created significant barriers for cannabis sellers in simply storing and maintaining cash.⁴² In fact, the difficulties of cannabis banking has led to a letter from state financial regulators asking for federal laws to protect and allow cannabis banking.⁴³

IV.Financing and Loans: It’s Complicated

Federal law prohibits banks from financing or otherwise loaning money to cannabis businesses. Under state laws, banks must be mindful of FinCEN’s Guidance, as well as state regulations.InColorado, state regulations permit investing and financing in the state’s cannabis industry but limit banks to an ownership interest of 30% of total shares and require reporting of financing.⁴⁴

Banks may encounter otherwise unexpected trouble from federal regulatory agencies. Banks may not issue loans pursuant to the Small Business Administration or the Federal Housing Administration to individuals with income derived from the sale of cannabis or from providing any service to a cannabis business.⁴⁵⁴⁶

Financing cannabis businesses may further expose a bank to federal criminal and civil penalties. Unlike passively holding the proceeds of cannabis businesses, financing is an overt act that enables growth of the cannabis industry and may involve a bank holding an ownership interest in a federally illegal cannabis business—all of which could draw attention from federal regulators from various agencies, especially if a cannabis business is violating FinCEN’s Guidance.

V. Don’t Forget About The Risks

It is still illegal under federal law for banks to conduct transactions with cannabis businesses, which may expose banks to criminal liability and civil penalties.Even though the law in Illinois may change, most forms of cannabis are still illegal and Illinois banks cannot yet work with recreational cannabis businesses.

Banks may jeopardize relationships with federal lending programs, such as that of the Small Business Administration, by working with cannabis businesses. If recreational cannabis is legalized in Illinois, obtaining state approval and navigating complex state and federal regulations could cost a bank significant time and money.

Some banks have performed exceedingly well by working with the cannabis industry. For example, one local credit union in Colorado reported receiving $160 million in October 2018 –just from cannabis businesses. Regardless of the risks, it is worthwhile for banks to continually monitor the fast changes in federal and state laws regulating the cannabis industry.

Mckenna Storer has a strong legal team experienced in Banking Law. For any questions or legal assistance surrounding cannabis banking in Illinois, it is best to reach James A. Cook by e-mail at jcook@mckenna-law.com

Footnotes

¹ Robert McCoppin, “With Pritzker Win, Pot Legalization is Now in Legislators’ Hands, but Not All are on Board,” CHICAGO TRIBUNE(Nov. 9, 2018), https://www.chicagotribune.com/news/local/breaking/ct-met-pritzker-illinois-marijuana-legalize-legislature-20181108-story.html.
² Id
³Id
⁴ Id.
⁵ DRUG ENFORCEMENT AGENCY, “Drug Scheduling” (last visited Nov. 26, 2018), https://www.dea.gov/drug-scheduling; see also 21 U.S.C. §§ 802, 813.
⁶Jeff Sessions, OFFICE OF THE ATTORNEY GENERAL, U.S. DEPT. JUSTICE (Jan. 4, 2018), https://www.justice.gov/opa/press-release/file/1022196/download.
⁷Office of Research and Analysis, COLO. DEPT. REVENUE, “Marijuana Sales Report” (Nov. 2018), https://www.colorado.gov/pacific/revenue/colorado-marijuana-sales-reports.
⁸See Gali-Velazquez, supra footnote 10.
⁹ Id.
¹⁰ Id. (citing 18 U.S.C. §§ 1956, 1957)
¹¹21 U.S.C. §§ 1951-1959.
¹²31 C.F.R. 1010.311.
¹³See U.S. Dept. Treasury, Financial Crimes Enforcement Network, “BSA Expectations Regarding Marijuana-Related Businesses” (Feb. 14, 2014), https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses; see also Joseph Lynyak& Nick Ackerman, Dorsey & Whitney, LLP, “Clarification From FinCEN – Updating Marijuana Limited SARS” (June 27, 2018), https://www.dorsey.com/newsresources/publications/client-alerts/2018/06/clarification-from-fincen-updating-marijuana.
¹⁴ Tom Angell, “More Banks Working With Marijuana Businesses, Despite Federal Moves,” FORBES (June 14, 2018), https://www.forbes.com/sites/tomangell/2018/06/14/more-banks-working-with-marijuana-businesses-despite-federal-moves/#d6225c1b1b2d.
¹⁵ Id.
¹⁶U.S. Dept. Treasury, Financial Crimes Enforcement Network, “BSA Expectations Regarding Marijuana-Related Businesses” (Feb. 14, 2014), https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses
¹⁷ Id.
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³⁸See Hillary V. Bricken, “Navigating the Hazy Status of Marijuana Banking,” Business Law Today, AMERICAN BAR ASSOCIATION (September 19, 2018), https://www.americanbar.org/groups/business_law/publications/blt/2017/08/03_bricken/.
³⁹U.S. Dept. Treasury, Financial Crimes Enforcement Network, “BSA Expectations Regarding Marijuana-Related Businesses,” supra, footnote 16.
⁴⁰See 1 CCR 212-2, R. 103, R. 202.1(K).
⁴¹1 CCR 212-2, R. 204.5.
⁴²Lisa Bernard-Kuhn, “Marijuana Industry Banking Woes: Here’s How Some States are Struggling to Address Them,” MARIJUANA BUSINESS DAILY (June 7, 2018), https://mjbizdaily.com/cannabis-industry-banking-woes-heres-how-some-states-are-struggling-to-address-them/.
⁴³Kyle Jaeger, “State Financial Regulators Push Congress to Fix Marijuana Banking Problems,” MARIJUANA MOMENT (August 27, 2018), https://www.marijuanamoment.net/state-financial-regulators-push-congress-to-fix-marijuana-banking-problems/.
⁴⁴1 CCR 212-2, R. 204.5
⁴⁵See “SBA Policy Note,” Standard Operating Procedure (SOP) 510 10 5(j), SMALL BUSINESSADMINISTRATION (eff. April 3, 2018), https://www.sba.gov/sites/default/files/resource_files/SBA_Policy_Notice_5000-17057_Revised_Guidance_on_Credit_Elsewhere_and_Other_Provisions.pdf
⁴⁶Margaret Curley Nash, “Federal Prohibition of Marijuana Restricts Lenders’ Ability to Issue Loans to Borrowers Employed in Marijuana Industry,” HINSHAW (April 9, 2018), https://www.hinshawcfs.com/federal-prohibition-of-marijuana-restricts-lenders-ability-to-issue-loans
⁴⁷Bloomberg News, “Pot Banking Takes Off in U.S. as Women Forge Path Around Ban,” AMERICAN BANKER (November 15, 2018), https://www.americanbanker.com/articles/pot-banking-takes-off-in-us-as-women-forge-path-around-ban?tag=0000015c-c71f-dc44-a57c-e75fca7c0000.