The Cole Memo and Banks: What Does it Mean to Minnesota Medical Marijuana Manufacturers?
In 2009 and 2011, U. S. Department of Justice issued guidance to federal prosecutors regarding marijuana enforcement under the Controlled Substances Act. Then, in August 2013, James M. Cole, the Deputy Attorney General, issued new guidance regarding marijuana enforcement. This memo is currently written and referred to as the “Cole Memo.”
The Cole Memo, states that the Department of Justice is committed to enforcing the CSA. In enforcing the CSA, the Departments of Justice is placed enforcement on the following priorities: preventing the distribution of marijuana to minors, preventing revenue from the sale of marijuana from going to criminal enterprises, games, and cartels, preventing the diet version of marijuana from states where it is legal under state law in some form to other states, preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity, preventing violence and the use of firearms in the cultivation and distribution of marijuana, preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use, preventing the growing of marijuana on public lands in the attendant public safety and environmental dangers posed by marijuana production on public lands, and preventing marijuana possession or use on federal property.
Essentially, the Cole Memo states that jurisdictions that have legalized marijuana in some form are less likely to be a threats to the federal priorities under the CSA if they have implemented strong and effective regulatory and enforcement systems to control marijuana growth and distribution. The Cole Memo also gives wide prosecutorial discretion whether to prosecute state legal marijuana enterprises and hinted that it is probably not efficient use of federal resources to focus enforcement on state legal businesses.
So What Does the Cole Memo Mean for Financial Institutions?
After the Cole Memo, the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), published its own expectations regarding marijuana related businesses guidelines. This guidance specifically references the Cole Memo and its priorities. And while the FinCEN the guideline provides for financial institutions to service state legal marijuana businesses, it reiterates that financial institutions must file suspicious activity reports if necessary.
Financial institution must file a suspicious activity reports if the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity, is designed to abate regulations promulgated under the Bank Secrecy Act, or lacks a business or parent lawful purpose. In essence, a financial institution is required to file a suspicious activity report involving any marijuana related business because federal law still prohibit the distribution and sale of marijuana.
Types of Suspicious Activity Reports
The FinCEN guideline provides assistance to financial institutions on how to file a suspicious activity report and provides descriptions of various types of filings.
“Marijuana Limited” Filings: if a financial institution believes that one of its marijuana business customers does not set forth one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” suspicious activity report. This type of report should include identifying information of the subject and related parties, addresses of the subject related parties, details regarding the enforcement priorities the financial institution believes have been implicated, and dates amounts and other relevant details of financial transactions involved in the suspicious activity.
“Marijuana Termination” Filings: if the financial institution terminates a relationship with the marijuana related business so it can avoid violating the anti-money laundering compliance program it should file a suspicious activity report and use the term “marijuana termination” in the narrative section. If the financial institution believes that the marijuana business will go to a second financial institution, the original financial institution should alert the second financial institution of potential illegal activity.
“Red Flags” to Distinguish Priority Suspicious Activity Reports: financial institutions are encouraged to use red flags if they believe that the marijuana business they are servicing implicates a Cole Memo priority or violates state law.
Red flags should be communicated if one of the following is present, the customer appears to be using a state licensed marijuana related business as a front or pretext to launder money derived from other criminal activity or derived from marijuana related activity not permitted under state law. To determine if this is an issue the following activity could be an indication:
- The business receive substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates,
- The business receive substantially more revenue than its local competitors are than might be expected given the population demographics,
- Business is depositing more cash than is commensurate with the amount of marijuana related revenue it is reporting for federal or tax state purposes,
- The business is unable to demonstrate that its revenues derived exclusively from the sale of marijuana in compliance with state law,
- The business makes cash deposits and withdrawals over a short period of time that are excessive related to local competitors or the expected activity of the business,
- Deposits apparently structured to avoid Currency Transaction Report requirements,
- Rapid movement of funds such as cash deposits followed by immediate cash withdrawals,
- Deposits by third parties with no apparent connection to the count holder,
- Excessive combing going of funds with the personal account of the businesses owners, managers, are with accounts of seemingly unrelated businesses,
- Individuals conducting transactions for the business or to be acting on behalf of other, undisclosed parties of interests,
- Financial statements provided by the business to the financial institution are inconsistent with actual account activity,
- A surge in activity by third parties offering goods or services to marijuana related businesses, such as equipment suppliers or shipping servicers,
- The business is unable to produce satisfactory documentation or evidence to demonstrate that is duly licensed and operating consistently with state law,
- The business is unable to demonstrate the legitimate source of significant outside investments,
- The customer seeks to conceal or disguise involvement in marijuana related business activity,
- Review of publicly available sources and databases about the business, its owners, managers, or other related parties, 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,
- The business, its owners, managers, or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering and enforcing marijuana related laws or regulations,
- A marijuana related business engages in international interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries,
- The owners or managers of a marijuana related business reside outside the state in which the business is located, a marijuana related business is located on federal property or the marijuana sold by the business was grown on federal property,
- Marijuana related businesses proximity to a school is not compliant with state law, and
- A marijuana related business purporting to be a “non-profit” is engaged in commercial activity inconsistent with that classification or is making excessive payments to its managers or employees.
In sum, the FinCEN guidance is lengthy and provides for specific requirements of financial institutions that service marijuana related businesses. Minnesota’s two marijuana manufacturers may have a difficult time finding a financial institution in state, however, if the manufacturers are transparent in their business and follow all reporting requirements and laws than Minnesota banks and financial institutions should be able to service marijuana related businesses.