Financial Services for Marijuana Businesses

Financial Services for Marijuana Businesses

November 27, 2019
Financial Services for Marijuana Businesses
A number of states have adopted laws permitting marijuana
These legal risks are not theoretical. Financial institutions
sales and other marijuana-related activities, even though
expend billions of dollars on BSA/AML compliance each
those same activities remain unlawful under federal drug
year. And federal regulators reportedly have prioritized
and financial laws. Because of the legal risks under federal
BSA and AML compliance to fight financial crime in
law, many financial institutions reportedly are unwilling to
recent years by increasing both the number of BSA/AML
provide state-authorized marijuana businesses common
enforcement actions and the size of monetary penalties in
banking products and services, such as debit or credit card
these actions (see CRS Report R45076, Trends in Bank
payment services, electronic payroll services, and checking
Secrecy Act/Anti-Money Laundering Enforcement, by Jay
accounts. This, in turn, reportedly has stifled growth of
B. Sykes). To illustrate the potential severity of legal
state-authorized marijuana businesses and forced these
exposure applicable to financial institutions, HSBC Bank
businesses to operate exclusively in cash, raising concerns
USA in 2012 entered into a legal settlement with the
about, among other things, public safety and tax collection
Department of Justice and federal banking regulators for
compliance.
AML and BSA violations that included asset forfeiture of
$1.256 billion, $665 million in civil money penalties, and
This In Focus analyzes the legal liability that financial
various remedial measures through an administrative
institutions risk by serving marijuana businesses given the
enforcement action (see HSBC Holdings Plc. and HSBC
discordant state and federal marijuana legal regimes. A
Bank USA N.A. Admit to Anti-Money Laundering and
more detailed analysis of and citations for the information
Sanctions Violations, Forfeit $1.256 Billion in Deferred
in this In Focus are available in the “Financial Services for
Prosecution Agreement, Dept. of Justice, Press Release
Marijuana Businesses” section of CRS Report R44782, The
[Dec. 11, 2012]).
Marijuana Policy Gap and the Path Forward, coordinated
by Lisa N. Sacco.
Federal Financial Laws and Marijuana Businesses
By providing financial services, financial institutions that
Overview of Federal Regulation of Marijuana
handle the proceeds of marijuana business activities could
A number of federal laws prohibit activities involving the
be subject to severe penalties under criminal AML laws, the
handling of both marijuana and money tied to marijuana.
BSA, and federal asset forfeiture laws, as well as general
The federal Controlled Substances Act (CSA) criminalizes
banking regulatory administrative enforcement authorities.
the sale, possession, and distribution of marijuana. Under
the CSA, marijuana has “a high potential for abuse” with
Federal AML laws (i.e., Sections 1956 and 1957 of the
“no currently accepted medical use in treatment in the
criminal code) criminalize the handling of financial
United States,” and may be lawfully used only for bona
proceeds that are known to be derived from certain
fide, federal government-approved research studies. CSA
unlawful activities, including the sale and distribution of
violators may be subject to imprisonment or criminal fines,
marijuana. Violators of AML laws may be subject to fines
and property used to grow marijuana or facilitate its sale or
and imprisonment. For example, a bank employee could be
use may be confiscated by federal authorities through civil
subject to a 20-year prison sentence and criminal money
or criminal forfeiture proceedings.
penalties under Section 1956 for knowingly engaging in a
financial transaction involving marijuana-related proceeds
Financial institutions that provide banking account,
with the intent to promote a further offense, such as
electronic payment, and other financial services to
withdrawing funds generated from marijuana sales from a
marijuana businesses would not typically possess,
business checking account to pay the salaries of medical
distribute, or manufacture marijuana in direct violation of
marijuana dispensary employees. Similarly, a bank officer
the CSA. However, federal anti-money laundering (AML)
could face a 10-year prison term and criminal money
laws criminalize the handling of proceeds derived from
penalties under Section 1957 for knowingly receiving
various unlawful activities, including marijuana sales in
deposits or allowing withdrawals of $10,000 or more in
violation of the CSA. The Bank Secrecy Act (BSA)
cash that is derived from distributing and selling marijuana.
requires certain financial institutions to have policies and
procedures in place both to ensure that their clients are not
Moreover, federal authorities can confiscate through civil or
engaging in unlawful behavior, such as selling marijuana,
criminal asset forfeiture proceedings all proceeds derived
and to aid law enforcement by reporting potentially illegal
from and any real or personal property involved in or
or otherwise suspicious activities. BSA and AML violations
traceable to marijuana sales that violate federal law,
can result in severe civil or criminal penalties, as well as
including criminal AML laws, even if state law permits
asset forfeiture and administrative enforcement actions
those marijuana sales. For example, if a bank provides a
initiated by federal financial regulators.
loan to a state-authorized marijuana dispensary, federal
authorities could require the bank to forfeit the dispensary’s
https://crsreports.congress.gov

Financial Services for Marijuana Businesses
loan payments on the grounds that such payments can be
marijuana-related business would generally involve
traced to federally prohibited marijuana sales.
funds derived from illegal activity. [A] financial
institution is required to file a SAR on activity
Additionally, federal regulators can exercise administrative
involving a marijuana-related business (including
enforcement actions against financial institutions, their
those duly licensed under state law) in accordance
employees, and certain affiliated parties for violating the
with this guidance and [FinCEN regulations].
BSA or AML laws. For example, federal banking regulators
(i.e., the Office of the Comptroller of the Currency, Board
The guidance advises financial institutions serving
of Governors of the Federal Reserve System, Federal
marijuana businesses to file one of the three types of SARs.
Deposit Insurance Corporation, and National Credit Union
A marijuana limited SAR should be filed when a financial
Administration) implement comprehensive supervisory
institution determines, after exercising due diligence, that a
regimes to ensure that depository institutions operate in a
marijuana business is not engaged in any activities that
safe and sound manner and comply with applicable laws.
violate state law or implicate enforcement priorities
To this end, banking regulators have strong, flexible
outlined in the guidance. A marijuana priority SAR must
administrative enforcement powers, which they may use
be filed when a financial institution believes a marijuana
against depository institutions and their directors, officers,
business is engaged in activities that implicate enforcement
controlling shareholders, employees, agents, and affiliates
priorities. Additionally, a marijuana termination SAR
that act unlawfully, including for engaging in marijuana-
should be filed when a financial institution finds it must
related activities that violate the BSA or AML laws.
sever its relationship with a marijuana business to maintain
Banking regulators may, for instance, issue remedial
an effective AML program. The FinCEN guidance also lists
measures through cease-and-desist orders, assess civil
examples of “red flags” that may indicate that a marijuana
money penalties, and issue prohibition orders that
priority SAR is appropriate, such as if a business fails to
temporarily or permanently ban individuals from working
sufficiently document state law compliance.
for depository institutions. In extreme cases, banking
regulators also may revoke an institution’s federal deposit
As of June 30, 2019, FinCEN reported that it has received
insurance and take control of and liquidate a depository
nearly 90,000 marijuana-related SARs and that over 700
institution under certain circumstances, including a criminal
depository institutions reported providing some form of
conviction under the BSA or AML laws.
financial services to marijuana-related businesses.
However, the depth and breadth of financial services that
Furthermore, the BSA requires financial institutions to aid
depository institutions are providing marijuana businesses
law enforcement in investigating and prosecuting those who
is unclear. Moreover, whether these depository institutions
violate federal laws, including the CSA. Under the BSA,
are serving businesses that are directly involved in
financial institutions must file suspicious activity reports
cultivating and selling marijuana, or are only serving
(SARs) with the Treasury Department’s Financial Crimes
entities that are indirectly involved in the marijuana
Enforcement Network (FinCEN) regarding transactions
business (e.g., landlords renting office space to marijuana
suspected to be derived from illegal activities, including
businesses) is uncertain.
marijuana sales. The BSA also requires depository
institutions (e.g., banks, thrifts, and credit unions) and
Federal Legislative Proposals
certain other financial institutions to establish and maintain
Both the Senate Banking and House Financial Services
AML programs designed to prevent institutions from
Committees have held hearings in the 116th Congress on the
facilitating money laundering and financing terrorist
challenges state-authorized marijuana businesses face given
activity, and to ensure that the institutions’ officers and
their lack of access to financial services. Members from
employees have sufficient knowledge of their customers to
both chambers have introduced bills to address these
identify when SARs should be filed. Bank personnel who
challenges. Specifically, S. 1200/H.R. 1595, the Secure
willfully fail to file SARs can be subject to imprisonment of
And Fair Enforcement Banking Act of 2019 (SAFE
up to five years, and institutions that fail to implement a
Banking Act), are designed to (1) constrain federal banking
sufficiently rigorous AML program can suffer stiff criminal
regulator authority to penalize depository institutions for
money penalties.
providing financial services to marijuana businesses
complying with state laws; and (2) protect depository
FinCEN Guidance to Financial Institutions
institutions and their personnel from some legal liability
Although the federal banking regulators have yet to issue
under the BSA, AML, and asset forfeiture laws when
any formal guidance in response to state and local
providing financial services to, or investing proceeds
marijuana legalization efforts, in February 2014, FinCEN
derived from serving, marijuana businesses complying with
issued guidance on financial institutions’ SAR reporting
state laws. H.R. 1595, as amended, passed the House in
requirements when serving marijuana businesses. The
September 2019 and was referred to the Senate Banking
guidance identified transactions that might trigger federal
Committee. S. 1200 also has been referred to the Senate
enforcement priorities, which include distributing to minors
Banking Committee.
and supporting drug cartels or similar criminal enterprises,
noting the following:
David H. Carpenter, Legislative Attorney
Because federal law prohibits the distribution and
IF11373
sale of marijuana, financial transactions involving a

https://crsreports.congress.gov

Financial Services for Marijuana Businesses

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11373 · VERSION 30 · NEW