Lack of State Data, Federal Guidance Still Obscuring Cannabis Account Holders

By Valentina Pasquali

Financial institutions in U.S. states that have legalized the sale and use of marijuana still struggle to obtain the data they need to screen existing and prospective clients for involvement in the industry, sources told ACAMS

Thirty-one U.S. states and the District of Columbia have made the cultivation and distribution of cannabis and cannabis-derived products legal for medical or recreational purposes, but the substance remains prohibited by the federal government, exposing banks that handle the proceeds to criminal prosecution.

The “chasm” between state and federal laws and the tenuous regulatory framework now in effect has made it difficult for lenders to identify customers that may directly or indirectly engage with marijuana-related businesses, or MRBs, a senior Bank Secrecy Act officer at a community bank on the East Coast said.

“Existing customers want to keep their bank accounts, and potential clients are seeking bank accounts,” said the senior BSA officer, who asked not to be identified by name. “So this aspect drives their perceived need to be secretive.”

Until cannabis’ legal status is resolved at the federal level, the senior BSA officer’s institution will not “knowingly” provide services to “Tier I” MRBs, including growers, distributors and other firms directly “touching” the product.

The same policy applies to “Tier II” MRBs such as payment processors, security firms or advertisers that serve the state-licensed marijuana industry, on the basis that those companies likely receive payment for their services in marijuana proceeds.

The institution may on a case-by-case basis entertain relationships with “Tier III” clients such as attorneys, accountants and commercial landlords that derive only “incidental” income from Tier I MRBs.

But the institution, which has branches in West Virginia and several other states, struggles to comply with its MRB policies because it cannot rely on clients and state officials to supply accurate or timely licensing data, according to the senior BSA officer.

West Virginia, for example, legalized medicinal marijuana in April 2018 but the state’s Bureau for Public Health is only now drafting rules to govern the trade.

“We had a customer who stated that they were going to rent to a hemp growing and processing business,” said the senior BSA officer, who asked not to be identified by name. “His main source of income was as a construction company so we thought initially that we were dealing with a Tier III MRB.”

The bank eventually discovered that the customer had a more direct interest in the marijuana industry than he initially represented.

“He was also an officer of the MRB business that he was intending to rent the property to, so he was really more like a Tier I MRB,” the senior BSA officer said.

Complicating matters further, West Virginia state authorities only confirm if an individual client has registered as an MRB, instead of providing the bank a list of newly licensed cannabis firms against which the bank could cross-check its entire customer roll, according to the senior BSA officer.

The uncertainty surrounding U.S. lenders’ dealings with state-licensed cannabis firms has only increased since January, when U.S. Attorney General Jeff Sessions rescinded 2013 federal guidance directing U.S. prosecutors to enforce against eight egregious aspects of the cannabis trade, such as sales to minors and profits benefiting criminal groups.

“Each U.S. attorney has been given discretion to use their own subjective reasons as to whether or not they choose to enforce the [federal] cannabis prohibition,” said Barry Grissom, former U.S. attorney for Kansas. “That in and of itself has created a lot of confusion.”

Meanwhile, guidance issued months later by the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, remains in effect. The guidance instructs banks to flag any relationships with MRBs through one of three different types of suspicious activity reports, but does not explicitly direct them to sever ties to those firms.

The disconnect between federal and state laws and from federal agency to federal agency has left financial institutions to navigate the compliance minefield on their own, even in states like California, Colorado and Oregon, where marijuana has been licensed for years.

Lenders in several western U.S. states can at least obtain lists of licensed cannabis businesses, according to a West Coast-based senior AML compliance manager for an institution that does not bank MRBs at any tier.

It’s not uncommon for state agencies to be behind in updating their registries of MRBs,” the AML compliance manager told ACAMS on condition of anonymity. “You have to use a couple of additional tools to gather information.”

Those tools include open source websites such as and, and vendors that produce lists of MRBs similar to those that name government-designated individuals and entities.

“Those get updated quickly enough,” the compliance manager said, adding that the first indication that an existing client quietly entered the legal marijuana industry typically arises from transactional red flags, like a surge in cash deposits or patterns of cash transactions that depart from the customer’s original profile.

To a lesser degree, those same issues also obstruct banks that have decided to serve legal cannabis clients from gathering the information necessary to vet and monitor them sufficiently.

Grissom, who now runs a consulting firm for state-licensed MRBs, cited the hypothetical example of a longstanding banking customer who decides to take a stab at investing in an MRB after years of operating in the distillery business.

“If they go to the bank and secure a loan based on their prior relationship, without undergoing additional due diligence, is that going to put the bank at peril if the Treasury Department or the local U.S. attorney decides to take a closer look?”

Topics : Anti-money laundering
Source: U.S.: FinCEN
Document Date: October 8, 2018