By Ted Kirsch of Sichenzia Ross Ference LLP and Ion Legislation.
Because the hashish business continues to develop, so too will the universe of present and potential banking prospects that can essentially have monetary or enterprise relationships with licensed hashish firms (“Licensees”). Whereas the SAFE Banking Act languishes in Congress, beneath the restricted present federal guideline out there, even banks that don’t do enterprise straight with Licensees are discovering it needed to handle the attainable necessities for enhanced due diligence, documentation and monitoring that may be required when contemplating doing enterprise with prospects which have pursuits and relationships that may be thought of “marijuana related businesses” (“MRBs”) even when the proposed banking relation is completely separate from, and unrelated to, the shopper’s hashish pursuits. In fulfilling their know your buyer (“KYC”) duties at consumption and on an ongoing foundation, banks should be alert to those potential necessities. They have to additionally perceive that the banking regulators are each sensitized to the chances and look like working cooperatively to handle them, so transparency with regulators is, on the similar time, a should.
Whereas securing providers from monetary establishments has been a problem for MRBs, there are a number of dozen federally insured banks and credit score unions that brazenly provide such providers. To mitigate the danger of working afoul of a myriad of federal monetary crimes legal guidelines by doing so, banks (and banking regulators) draw upon steering in a launch dated February 14, 2014 issued by the Monetary Crimes Enforcement Community (“FinCen”), “BSA Expectations Regarding Marijuana-Related Businesses” (the “Guidance”).
FinCen is a bureau of the U.S. Division of the Treasury, the mission of which is to safeguard the monetary system from illicit use and fight cash laundering and promote nationwide safety. The textual content of the Steering articulates as its objective as clarifying “how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations….” It additional articulated that the Steering was supposed to “enhance the availability of services for, and the financial transparency of, marijuana related businesses.”
The Steering cites as underlying precepts the priorities established pursuant to a memorandum issued by U.S. Division of Justice Deputy Legal professional Normal James M. Cole dated August 29, 2013 (the “Cole Memorandum”). Though the Cole Memorandum was supplemented by advisories from different Assistant U.S. Attorneys, the priorities have basically been left in place. Additionally it is essential to remember the fact that the Cole Memorandum (as supplemented) offers steering solely. Early in his tenure, Legal professional Normal Periods issued a “recission” of the steering, however there was no perceptible change on the enforcement degree.
The Cole Memorandum priorities embrace:
Stopping distribution to minors;
Stopping income from the sale of marijuana from going to prison enterprises;
Stopping the diversion of marijuana to states through which it’s not authorized;
Stopping state licensed marijuana actions from getting used as a canopy for different; drug trafficking or criminality;
Stopping the usage of firearms within the cultivation and distribution of marijuana;
Stopping drugged driving and different antagonistic well being penalties.
The Steering additionally offers a laundry listing of pink flags, and dictates that monetary establishments searching for to behave in compliance with the Steering should tailor their relationships with MRBs to handle and mitigate the danger of interfering with the accomplishment of the priorities proven above.
Sadly, the Steering doesn’t outline “marijuana related business,” and FinCEN has not issued any additional steering relating to this definition. Nonetheless, the Steering makes clear that the classification consists of extra than simply plant touching enterprises, selecting to straight lengthen the classification so far as to landlords of MRB’s. Whereas not dispositive nor binding because it pertains to the Steering, an expansive studying is supported by a Small Enterprise Administration Coverage Discover efficient April 3, 2018, which provided the next definitions:
(a) “Direct Marijuana Business” — a enterprise that grows, produces, processes, distributes, or sells marijuana or marijuana merchandise, edibles, or derivatives, whatever the quantity of such exercise. This is applicable to private use and medical use even when the enterprise is authorized beneath native or state regulation the place the applicant enterprise is or will likely be positioned. (b) “Indirect Marijuana Business” — a enterprise that derived any of its gross income for the earlier 12 months (or, if a start-up, initiatives to derive any of its gross income for the subsequent 12 months) from gross sales to Direct Marijuana Companies of services or products that would moderately be decided to assist the use, progress, enhancement or different improvement of marijuana. Examples embrace companies that present testing providers, or promote develop lights or hydroponic gear, to a number of Direct Marijuana Companies.
Below the circumstances, and notably in view of the sensitivity of bank regulators to those points, it appears prudent for banks to think about the definition expansively, a minimum of for functions of a threshold dedication relating to whether or not and what degree of enhanced consideration is important. Banks have to be alert to even what appear to be pretty attenuated monetary and enterprise relationships in contemplating, underwriting, structuring and monitoring any transaction involving a buyer that could possibly be deemed an MRB.
In reference to any buyer that could possibly be so categorised, banks ought to contemplate and deal with the extent to which any of the Cole Memorandum priorities could possibly be implicated and, subsequently, which pink flags to be alert to. Merely put, the larger the danger a precedence is implicated, the extra a bank might want to do in these regards. Conversely, because the Steering acknowledges, to the extent sure priorities usually are not implicated, a bank’s method may mirror the decrease degree of threat and stay in compliance with the Steering. Documenting affordable consideration of those elements is important, not only for functions of compliance with the Steering, but in addition to mitigate the dangers of federal asset seizure of any belongings materials to the shopper relationship, an space of regulatory concern.
Evaluation And Conclusions
1. Banks in states with giant and increasing authorized hashish markets ought to put in place procedures particularly designed to alert them to potential MRB points. They may additionally want to contemplate a minimum of common insurance policies so that they have a framework in place and may react in a businesslike course of and aggressive time-frame when a horny alternative arises.
2. A bank’s regulators ought to be stored within the loop and consulted as bank’s insurance policies and procedures are developed and evolve. Doing so in session with regulatory authorities not solely assures transparency, but in addition allows a bank to learn from the expertise and experience being developed by regulatory authorities which might be more and more being referred to as upon as each the marijuana business and its intersections with the banking business develop.
3. There are a variety of sections of the Steering that mirror FinCEN’s recognition of the relevance of “reasonableness” and sensible concerns relating, amongst different issues, to the unavailability of knowledge or supplies relating to the precise Licensee. Whereas it calls upon monetary establishments to think about, “to the extent applicable,” the Cole Memorandum priorities referred to within the Steering, it additionally explicitly acknowledges distinctions primarily based on the extent to which any specific marijuana-related enterprise might implicate Cole Memorandum concerns and that deciding to “indirectly” present providers to a marijuana-related enterprise is “a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances.”
The Steering specifically acknowledges that a few of the data instructed in it may be confidential and unavailable to a bank not doing enterprise straight with a Licensee. The Steering notes, “With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available”. In such circumstances, it may be prudent to ask the shopper what might be offered or make out there to help the bank in taking the actions contemplated by the Steering relating to (i) monitoring cash transactions, (ii) verification of the license and that the MRB is being operated in conformity with the Cole Memorandum. A bank may additionally want to guarantee ongoing monitoring of publicly out there sources for antagonistic details about the enterprise and associated events and for suspicious exercise, together with for any of the pink flags described within the Steering, and refreshing data obtained as a part of buyer due diligence on a periodic foundation and commensurate with the danger.
Lastly, points associated to the potential threat of federal seizure of belongings are sophisticated and, as with a lot of the regulation associated to the hashish enterprise, lower than clear and look like evolving because the business matures.
Usually talking, to assist a seizure, notably one through which an asset is topic to a perfected safety curiosity, the federal government should show, amongst different issues, that the asset represented the fruits of an unlawful enterprise. With that in thoughts, primarily based on circumstances described under, the danger of an asset collateralizing a credit score transaction being misplaced attributable to federal seizure might be considerably mitigated, if not completely eradicated if a bank (i) adheres to the Steering, (ii) workout routines and paperwork due diligence, underwriting and monitoring procedures applicable to the actual circumstances, (iii) takes care in documentation, and (iv) regardless that the burden of proof may be on the federal government, if the bank can exhibit it was not acquired with proceeds of unlawful actions.
Absent different elements, such because the failure to file Suspicious Exercise Experiences (“SAR”) or exercise that in any other case impairs the Cole Memorandum priorities, there seems restricted urge for food for asset seizure enforcement on the federal degree with respect to medical marijuana actions authorized on the state degree. To a sure extent this displays growing public acceptance of decriminalization, not too long ago at greater than two-thirds. As well as, extra doubtless than not, additionally a mirrored image or byproduct of the shift in public opinion, since 2014 annual bi-partisan price range appropriations have included a prohibition in opposition to the Division of Justice use of appropriated funds to prosecute in circumstances the place there was full compliance with state medical marijuana legal guidelines. In 2016, this limitation was utilized within the U.S. ninth Circuit Courtroom of Appeals case, United States v. McIntosh. The Courtroom held that 11 USC § 542 prohibits the DOJ from spending funds from related appropriations acts for the prosecution of people who engaged in conduct permitted by state medical marijuana legal guidelines and who totally complied with such legal guidelines. Nonetheless, the ninth Circuit additionally held that it will not be improper to sue beneath 11 USC § 542 and in the end have the DOJ use appropriations act funds to grab the belongings of people who don’t strictly adjust to all state-law circumstances relating to the use, distribution, possession, and cultivation of medical marijuana.
With the foregoing in thoughts, the next further feedback and options are provided:
1. In underwriting any credit score transaction, a bank ought to be ready to exhibit that it’s going to not look to the value or revenues of the MRB as sources of reimbursement.
2. The preliminary and ongoing underwriting protocols, due diligence, monitoring and documentation ought to:
a. Limit cash transactions, maybe and, if attainable, by requiring any funds obtained by a buyer from or in reference to an MRB shall have been paid by examine drawn on a federally insured depositary establishment;
b. Guarantee that non-MRB belongings and revenues stay adequate;
c. Require immediate discover of any change within the standing of the Licensee triggering the MRB definition or in any banking relationship of such MRB.
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