Legalized marijuana is here to stay – in what form and with how much risk is yet to be determined. To assess and control that risk, South Dakota bankers should become familiar with the various new state and local laws and have a clear understanding of the Federal laws regarding banking a Marijuana Related Business (MRB). And this is true even if your bank does not intend to offer services to MRBs. Davenport Evans lawyer Dixie Hieb explains.
Currently, medical marijuana is legal under South Dakota law (with the details as to that legality still being determined). The legality of recreational marijuana in South Dakota is currently being decided by the South Dakota Supreme Court. Under Federal law, marijuana is classified as a Schedule 1 drug under the Controlled Substances Act. Given the fact that marijuana remains illegal under Federal law, many banks may determine that the risks related to banking MRBs are too high and may thus simply conclude that “our bank will not offer any products or services to Marijuana Related Businesses.” Implementation of such a policy, however, requires an understanding of what constitutes a Marijuana Related Business and ensuring your bankers can recognize an MRB.
A Marijuana Related Business may be either a direct business or an indirect business that deals with marijuana. Examples of direct marijuana businesses include growers, processors, distributors, and retailers. Indirect (often referred to as ancillary) marijuana businesses include businesses that derive revenue from transactions with direct marijuana businesses, such as a landlord whose strip mall houses a marijuana retailer or an electrician who provides services to a marijuana growing greenhouse. Does your bank intend to offer services to any ancillary Marijuana Related Businesses? If so, what due diligence is required with respect to such indirect MRBs businesses? Are Suspicious Activity Reports required when banking indirect MRBs with respect to their interactions with direct MRBs? The answers to these questions should be reflected in your marijuana banking policy.
When developing your bank’s marijuana banking policy, one of the primary resources is the guidance issued by FinCEN on February 14, 2014, entitled “BSA Expectations Regarding Marijuana-Related Businesses.” The FinCEN guidance lays out the best practices for customer due diligence if a bank decides to offer services to MRBs, discusses the Suspicious Activity Report filing requirements, and identifies a non-exhaustive list of eleven red flags that indicate an MRB may be engaged in activity that implicates one of the Federal marijuana enforcement priorities.
The SAR filing requirements should be of particular interest if a bank determines not to offer services to direct MRBs but intends to offer services to ancillary businesses. The SAR filings in connection with Marijuana Related Businesses include Marijuana Limited SARs, Marijuana Priority SARs, and Marijuana Termination SARs. A Marijuana Limited SAR is required when a bank is providing financial services to an MRB it reasonably believes, based on its customer due diligence, does not violate state law or implicate any of the Federal enforcement priorities. Does the required “customer due diligence” extend to the direct MRBs with which an ancillary MRB is doing business? If your ancillary MRB customer is interacting with a direct MRB whose business either violates state law or implicates one of the enforcement priorities, it would seem that a filing could be required. However, the direct MRB is not your customer, so there is no clear answer and the Federal regulators have not provided further guidance on this question. It is our understanding that FinCEN has advised financial institutions a SAR is not required simply because a customer relationship indirectly involves a state-regulated MRB, so long as there is not any other suspicious activity that would otherwise warrant the filing of a SAR.
There are no easy answers with respect to banking (or not banking) Marijuana Related Businesses, but there are certainly questions your bank should address in its policies and procedures, particularly with respect to SAR filing requirements.