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The Tension Between Financial Institutions and Recreational Marijuana Businesses



To date, eight states and the District of Columbia have legalized recreational marijuana. As you might expect, there are countless key players and businesses involved in the marijuana supply chain, including producers, processors, transporters, retailers, and in some jurisdictions, distributors. In Washington State alone, total sales since the state's legalization of recreational marijuana have exceeded $1.5 billion.

Generally speaking, the financial services industry has expressed mixed feelings about offering financial services to marijuana businesses. For one, the federal Controlled Substances Act prohibits everyone, including financial institutions, from dealing with controlled substances (which includes marijuana) or the proceeds from them, which could include any cash collected from the retail sale of recreational marijuana. However, where states have legalized recreational marijuana, many marijuana businesses have excess cash on hand, with nowhere (or limited options) to deposit it. This inconsistency between federal and state law has resulted in a barrier to entry for many marijuana businesses trying to secure traditional banking services (such as a business account, business loan, line of credit, etc.).

Despite the fact that recreational marijuana remains illegal under federal law, a number of financial institutions have started to offer services to marijuana businesses. For the most part, these marijuana-friendly institutions have justified their decision to offer such services on several federal memoranda issued by both the U.S. Department of Justice (one issued in 2013, commonly referred to as the "Cole Memo," and another issued in 2014) and the U.S. Financial Crimes Enforcement Network (which memorandum is based, in large part, on the Cole Memo). These federal memoranda, which were issued during the Obama administration, create a "hands-off" approach to federal enforcement in the states that have legalized marijuana for medical and recreational use, provided that certain criteria are met. Although the assurances contained in the memoranda sound somewhat accommodating to marijuana-friendly institutions, it is important to remember one thing: The memoranda are not laws and the production and sale of recreational marijuana remains illegal federally. Accordingly, a major concern with financial institutions engaged in these activities is that these memoranda could be reversed at any time.

In light of the new Trump administration and his questionable stance on recreational marijuana, many financial institutions have adopted a "wait-and-see" approach. For those institutions that have already entered the marijuana industry, they have kept a close eye on President Trump's pick for U.S. Attorney General, Senator Jeff Sessions, who some have called the "Drug War Dinosaur." Mr. Sessions has a somewhat notorious history with respect to his stance on marijuana use. In April of 2016, Mr. Sessions stated that "good people don't smoke marijuana" (which statement he has since explained was taken out of context), and that marijuana "is not the thing that ought to be legalized." In response to a question during his confirmation hearing pertaining to state-legalized recreational marijuana, Mr. Sessions vaguely responded, stating that he "won't commit to never enforcing federal law."

If confirmed as the new U.S. Attorney General, Mr. Sessions would have the authority to revoke the Cole Memo discussed above, which would destroy the foundation on which marijuana-friendly financial institutions have justified their decision to offer financial services to marijuana businesses. As such, you can't blame these financial institutions and their individual financial officers for their apprehension to accommodate marijuana businesses, especially in light of the potential risks associated with engaging in such activities, which could include revocation of a financial institution's charter or losing its FDIC insurance coverage.

Although Mr. Sessions has not explicitly stated an interest in reversing the Cole Memo, he indicated that he would evaluate the original justifications for the memo and how any circumstances may have changed since its inception. By contrast, President Trump has previously stated that recreational marijuana should be a "state issue, state-by-state." Many others believe that federal reversal would undoubtedly encounter serious financial and political hurdles. In Washington State, Attorney General Bob Ferguson has stated that he would be "looking very closely" at any federal administration that is "violating the law in a way that damages the rights of Washingtonians."

At this point in time, we can probably expect the song to remain the same. The marijuana-friendly institutions will likely continue the course, and the risk-averse institutions will remain "hands off." In the meantime, some financial institutions might choose to offer financial services to businesses that have direct relationships with marijuana businesses (such as landlords, contractors, and tech companies). In fact, as the marijuana industry becomes more pervasive, many financial institutions will learn that they have already been (unknowingly) offering financial services to businesses with connections to the marijuana industry. In the end, state-legalized marijuana businesses have a lot of cash, and there are some significant opportunities and risks for those who are willing to "take the plunge" and face the uncertainty between these competing laws. While some institutions may choose to face this risk, many others will wait on the sidelines, anxiously awaiting any solid guidance from the federal government.

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