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The gradual lowering of barriers that have kept legal marijuana merchants outside of the financial mainstream gained momentum Friday in Washington, D.C. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCen) and the U.S. Department of Justice announced new guidelines that signal federal approval for banks to serve legal marijuana sellers provided they keep a close watch on suspicious activity.
FinCen said it recognizes the risks for businesses dealing only in cash. “The guidance provides that financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity,” FinCen said in a press release. “Providing clarity in this context should enhance the availability of financial services for marijuana businesses. This would promote greater financial transparency in the marijuana industry and mitigate the dangers associated with conducting an all-cash business.”
Colorado on Jan. 1 became the first state with stores that can legally sell small amounts of marijuana for recreational use. Washington state also has legalized recreational pot, and 20 states and the District of Columbia permit marijuana for medicinal purposes. But many legal marijuana merchants deal only in cash because of the reluctance of banks and payment card processors to serve them since marijuana is still illegal under federal law and the laws of more than half the states.
Friday’s announcement continues a trend of more tolerance for legal marijuana. The Justice Department last August signaled through its so-called “Cole Memo” that it would back off on enforcement of the marijuana provisions of the Controlled Substances Act in states where cannabis is legal, provided marijuana is kept away from minors and otherwise kept under strict control. And while the payment card networks ban merchant acquirers from signing illegal businesses as merchants, Visa Inc. recently said that it would leave it up to the discretion of its acquirers on whether they want to book legal marijuana sellers.
“Now that some states have elected to legalize and regulate the marijuana trade, FinCen seeks to move from the shadows the historically covert financial operations of marijuana businesses,” FinCen Director Jennifer Shasky Calvery said in the release. “Our guidance provides financial institutions with clarity on what they must do if they are going to provide financial services to marijuana businesses and what reporting will assist law enforcement.”
Banks, credit unions and money-services businesses are supposed to file so-called suspicious-activity reports (SARs) with FinCen when they suspect a customer of money laundering, terrorism financing, or other criminal activity. In the new guidance, FinCen said it expects financial institutions to perform their usual due diligence in evaluating a legal marijuana seller as a business customer, including whether that business has the proper licenses. But it also outlines three types of SARs for financial institutions serving marijuana clients:
• The “marijuana-limited” SAR simply notifies FinCen that the financial institution’s customer is a legal marijuana seller and no illegal activity is suspected.
• “Marijuana-priority” SARs notify FinCen that the bank believes a legal marijuana business has violated provisions of the Cole Memo or state law.
• “Marijuana-termination” SARs declare that the financial institution ended its relationship with a marijuana seller because retaining that relationship would undermine its anti-money-laundering compliance program.
The guidance provides examples of red flags, including more sales than could be reasonably expected from a marijuana retailer’s demographic base and limitations under state law; deposit velocity, and other signs that the business may be selling illegal drugs, engaging in interstate or international transactions, or otherwise violating state or federal laws.
A few payment processors do serve some marijuana merchants, but most acquirers still shun the niche. The new guidelines could help change that, although an attitude adjustment may take some time. “As I thought, the government is carving some regulations, and if this is sufficient from the banks’ perspective we can expect to see the credit card processing being unleashed,” says payments consultant Todd Ablowitz of Centennial, Colo.-based Double Diamond Group.
