The Bank Secrecy Act (“BSA”) implementing regulations at 31 CFR Chapter X require covered financial institutions to file reports of suspicious transactions with the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) in circumstances where the bank knows, suspects, or has reason to suspect that the transaction “involves funds from illegal activities.”  The requirement to file such suspicious activity reports or “SARs” arises under federal law.  Marijuana-related business activity that has been legalized under certain state laws—e.g., recreational cannabis dispensaries in Colorado—remains illegal under the federal Controlled Substances Act.  The conflict between state and federal law is, in the words of Attorney General William Barr, “intolerable.” But thanks to FinCEN guidance, banks’ SAR filing obligations with regard to so-called “plant-touching” customers are relatively clear.  But what about so-called “ancillary businesses” that only service plant touching businesses?  Here, the situation is much less clear.

FinCen’s 2014 Guidance

FinCEN published guidance in 2014—”BSA Expectations Regarding Marijuana-Related Businesses“—to clarify that “the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity.”

The Guidance instructs financial institutions to file SARs relating to marijuana-related activity as follows:

  1. a Marijuana Priority” SAR in a circumstance where the transaction involves marijuana-related activity that “violates state law” (or implicates one of the now-defunct Cole Memorandum priorities); and
  2. a Marijuana Limited” SAR in a circumstance where “a financial institution provid[es] services to a marijuana-related business that it reasonably believes” does not violate state law (or implicate one of the now-defunct Cole Memorandum priorities for federal prosecutors concerning marijuana enforcement[1]);
  3. a Marijuana Termination” SAR in a circumstance where a financial institution has elected to terminate a relationship with a marijuana-related business “in order to maintain an effective anti-money laundering compliance program.”

But what about ancillary businesses?

The Guidance provides much needed clarity on the state-federal issue, but does not tell banks what to do when they have a marijuana related transaction, but no customer relationship with the marijuana-related business.  Consider a circumstance where a bank customer leases commercial space to a recreational marijuana dispensary.  The customer deposits a rent payment from the dispensary.  The payment “involves funds from illegal activities.”  But the customer does not seem to qualify as a “marijuana related business” as that term is used in the Guidance.  (For example, it is not capable of violating the Cole Memorandum priorities and is not subject to the kinds of customer due diligence recommended by FinCEN, such as verification of a state issued license to sell marijuana). What is the bank to do?

The question arises in part because the Guidance suggests that a “Marijuana Limited“SAR is only required if a financial institution is “providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence,” does not violate state law or implicate the Cole Memorandum priorities.  Similarly, the Guidance on the filing of a “Marijuana Priority” SAR also refers to conclusions as to the nature of the marijuana-related business activity “based on customer due diligence.”  This suggests that the SAR filing obligation only applies when the customer is a marijuana-related business, rather than an ancillary business.  It follows that where the marijuana-related business activity is engaged not by the customer, but by one of its counterparties, no SAR is required. After all, a bank cannot perform customer due diligence on a business that is not a customer.  Nor does it provide financial services to non-customers.  Under this interpretation, the bank in our hypothetical lease case would not have to file a SAR.

At the same time, this approach appears inconsistent with the spirit of the Guidance and the plain language of the relevant FinCEN regulations which require covered financial institutions to file SARs with respect to transactions of more than $5,000 that “involve[] funds derived from illegal activities.” That requirement, taken together with language from the Guidance noting that “financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity” suggests that a bank should file a “Marijuana Limited” SAR in circumstances where its client is involved in a transaction with a marijuana-related business that operates legally under state law (and a “Marijuana Priority” SAR where the bank suspects the business is not operating consistent with state law).

Unfortunately, FinCEN has not yet clarified this issue.  A bank that fails to file SARs on ancillary businesses would certainly have good arguments in its defense for all the reasons set forth above.  However, until FinCEN provides more clarity, the safer approach, given the plain language of the BSA and its underlying purposes, would be to file a “Marijuana Limited” SAR with respect to deposits by ancillary businesses of funds received from state compliant, plant touching businesses. 


[1] The “Cole Memorandum” was a Department of Justice memorandum issued on August 29, 2013 by Deputy Attorney General James M. Cole titled “Guidance Regarding Marijuana Enforcement.”  The Cole Memorandum provided guidance to federal prosecutors on enforcement priorities for marijuana-related offenses: (i) preventing the distribution of marijuana to minors; (ii) preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels; (iii) preventing the diversion of marijuana from states where it is legal under state law in some form to other states; (iv) preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; (v) preventing violence and the use of firearms in the cultivation and distribution of marijuana; (vi) preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use; (vii) preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and (viii) preventing marijuana possession or use on federal property.

Author

Terence Gilroy is a partner in the New York office of Baker McKenzie and a member of the Compliance and Investigations Practice Group. Terry advises businesses and individuals on white collar and financial crime issues and has significant experience conducting investigations relating to compliance with the US Foreign Corrupt Practices Act (FCPA) and related bribery and corruption statutes, economic sanctions regulations, and the Bank Secrecy Act and related anti-money laundering regulations and statutes.

Author

Tom Firestone is Co-Chair of the firm's North American Government Enforcement practice and is a member of the Firm's Global Compliance & Investigations Steering Committee. He represents clients in matters involving anti-corruption and the US Foreign Corrupt Practices Act (FCPA), internal investigations and transactional due diligence. He is also a member of the firm's Cannabis Review Committee and has advised clients on compliance issues related to cannabis.