Twenty-three states, plus Washington, D.C., have legalized medical marijuana. Another seven states have passed laws permitting limited medical use of non-psychoactive strains of marijuana. Alaska, Colorado, Oregon, Washington and Washington, D.C. have legalized recreational marijuana. At least a dozen more states are expected to see bills and ballot measures aimed at legalizing recreational marijuana in the next two years. Regardless of how those bills and measures are ultimately decided, one thing is clear––marijuana-related businesses (“MRBs”) are here to stay, and they will generate revenue that needs to be banked.

According to data from the Colorado Department of Revenue, as of December 2014, 323 licenses have been issued to retail marijuana businesses. And revenue from the sale of recreational marijuana grew from $15 million in January 2014 to $34.1 million in December 2014. In Washington state, revenue from the sale of recreational marijuana during the first two months were $3.2 million and $6.9 million. Revenue through November 2014 totaled more than $40 million. The state Liquor Control Board intends to issue 334 licenses to marijuana-related businesses. MRBs present a unique opportunity to financial institutions. As of August 2014, just 105 banks, making up less than 1 percent of all financial institutions nationwide, reported banking MRBs. While there is tremendous opportunity and incentive for financial institutions to bank the underbanked MRBs, there are considerable obstacles that must be negotiated.

First, although the list of states that have legalized marijuana is ever-growing, it is still illegal under federal law. The Controlled Substances Act (21 U.S.C. § 801, et seq.) (“CSA”) makes it illegal to manufacture, distribute or dispense marijuana. Financial institutions that choose to bank MRBs risk violating the CSA. Guidance provided by the federal government to date has not given a clear “green light” to financial institutions to bank MRBs.

In August 2013, the Department of Justice (“DOJ”) issued a memorandum to federal prosecutors regarding prosecuting marijuana-related crimes. Known as the “Cole Memo,” the DOJ outlined eight enforcement priorities (for example, preventing distribution of marijuana to minors and preventing revenue from the sale of marijuana from going to criminal enterprises). The Cole Memo acknowledges that “jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems” are less likely to threaten the federal government’s priorities. However, the Cole Memo is clear that it “does not alter in any way the Department’s authority to enforce federal law” and that neither “state [nor] local law provides a legal defense to a violation of federal law.”

In February 2014, the DOJ issued a second memorandum attempting to provide further clarification of the Government’s priorities in prosecuting marijuana-related financial crimes. This second memorandum explains that investigations into, and prosecutions of marijuana-related financial crimes will be focused on “the most significant marijuana-related cases.” Reading between the lines, the memorandum suggests that banking MRBs in the ordinary course will not subject a bank to prosecution. But on its face, the memorandum leaves open that possibility: “[I]f a financial institution or individual offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, prosecution for these offenses may not be appropriate.” (emphasis added). It goes without saying that what “may not” be appropriate is subject to the whims of the prevailing political environment.

Despite the fact that the DOJ’s guidance is opaque and does not change the legal effect of the CSA, there are no publicly-available records of any enforcement action or prosecution against a financial institution for simply banking a MRB.

Second, financial institutions choosing to bank MRBs also face onerous, if not uncertain, reporting obligations under the Bank Secrecy Act (“BSA”). Here too, the Government has provided uncertain guidance. On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued guidance to financial institutions concerning BSA reporting requirements specifically relating to MRBs. FinCEN’s stated goal was to clarify “how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.”

Like the “Cole Memos,” FinCEN’s guidance does not give banks the express go-ahead to bank MRBs. Rather, it places the decision to bank MRBs squarely on the shoulders of financial institutions and outlines, in broad terms, customer due diligence that should be undertaken. As part of that recommended due diligence, FinCEN puts the onus on the financial institution to determine “whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law.” FinCEN also offered guidance on how to determine whether a MRB was running afoul of the Cole Memo or state law. That guidance consisted of 23 “red flags”––including “[t]he business receives substantially more revenue than its local competitors or than might be expected given the population demographics,” “[t]he owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located” and “[a] marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property.” It goes without saying that before getting into the business of banking a MRB, a financial institution must develop and deploy a sophisticated due diligence program.

The FinCEN guidance further muddies any clarity it intended to provide by reminding financial institutions that they are still required to file a suspicious activity report (“SAR”) “consistent with FinCEN regulations.” Under 31 C.F.R. § 1020.320, a SAR is required to report any suspicious transaction relevant to a possible violation of law or regulation. And until the CSA is amended, the sale of recreational marijuana is still a violation of federal law. Therefore, to comply with its reporting obligations under the BSA, a financial institution must file a SAR with respect to any MRB it chooses to bank. Compounding this obligation, FinCEN rolled out three separate SAR forms designed to assist financial institutions in keeping up with their BSA reporting obligations: the “Marijuana Limited” SAR, the “Marijuana Priority” SAR and the “Marijuana Termination” SAR.

Data made available by FinCEN regarding the filing of marijuana-related SARs confirms that financial institutions are not rushing to bank MRBs. As of August 2014, FinCEN had received 502 “Marijuana Limited” SARs (required to be filed by any financial institution providing financial services to a MRB). Through the same time period, 475 “Marijuana Termination” SARs (required to be filed by a financial institution terminating a relationship with a MRB) were filed with FinCEN. It is not difficult to make the argument that these numbers reflect deliberate “de-risking” of MRBs by financial institutions.

Although FinCEN’s records reflect the industry’s current appetite for banking MRBs, FinCEN has not taken action against or imposed any penalties against any financial institution for banking a MRB.

Third, apart from the legal hurdle presented by the CSA and the reporting obligations under the BSA, banking MRBs presents a real security concern––how to safely receive cash deposits. The recreational marijuana business is a cash business. Although data is hard to come by given the fact that MRBs are underbanked, one Denver-based MRB is reportedly taking in $500,000 in cash each month. And a private firm providing armored truck and security services to MRBs reports collecting tens of thousands of dollars in cash each week. All of this adds up to a lot of cash that must be safely integrated into the financial system.

The continuing evolution of state law is creating opportunity for financial institutions to bank emerging MRBs. Although there are very real legal risks, reporting obligations and logistical issues that must be considered before offering financial services to MRBs, there is no doubt that MRBs are here to stay and must be incorporated into the financial system.

For more information regarding banking marijuana-related businesses, contact Mark I. Wraight at