Justice Dept. Reversal to Make Banking Harder for Pot Businesses

By Tripp Baltz

The Justice Department’s decision to reverse a federal “hands-off” policy on state marijuana oversight is expected to further complicate efforts by pot-related businesses to obtain banking services.

“This could have a chilling effect,” Don Childears, president of the Colorado Banking Association, told Bloomberg BNA Jan. 5 “It will motivate some to back up and some to perhaps even retreat. A lot of banks will go into a holding pattern to see what will happen.”

In Colorado, the first state with legal recreational marijuana, about two dozen financial institutions provide services to marijuana related businesses — “all of them small and quite a few of them rural,” Childears said.

‘Shot Across Bow’

Marijuana banking and investment were “already delicate areas,” said Zane Gilmer, partner at Stinson Leonard Street in Greenwood Village, Colo., who advises clients on regulatory, compliance, and litigation issues related to state licensed marijuana businesses. “Banks that were thinking about doing it are probably less likely to get into it now.”

If the Justice Department reversal does drive financial institutions away from the marijuana industry, it could have the opposite effect of its stated intent to reduce violent crime and stem the tide of the drug crisis.

“We’ve worked so hard to diminish and eliminate the black market, and if you push it back into a cash-only economy, that’s going the other direction,” Colorado Gov. John Hickenlooper (D) told reporters at a Jan. 4 press conference. “That engenders a black market and illegal activity.”

An activity that was illegal 10 years ago in Colorado is now a $1 billion industry, he said. “The people who cultivate marijuana, process marijuana, and sell marijuana are not criminals. This is not a black market anymore. We would hate it for the state to go backwards in terms of not letting banks in any way” serve marijuana clients.

Individual Discretion

U.S. Attorney General Jeff Sessions said his reversal of three memos guiding state regulation and enforcement of marijuana cultivation, sale, and use represents a “return to the rule of law” that has governed since enactment of the Controlled Substances Act in 1970.

He directed all U.S. Attorneys to enforce federal law and follow “well-established principles when pursuing prosecutions related to marijuana activities.” The change removes a singular, centralized “hands-off” approach developed during the Obama administration to one where individual federal districts have discretion with respect to enforcement and prosecution.

In a statement issued Jan. 4, Andrew Lelling, the U.S. Attorney for the District of Massachusetts signaled he may make it difficult for marijuana businesses to use traditional banks. “Our office will aggressively investigate and prosecute bulk cultivation and trafficking cases, and those who use the federal banking system illegally,” Lelling said.

In contrast, Colorado U.S. Attorney Bob Troyer issued a statement saying he would continue focusing on “identifying and prosecuting those who create the greatest safety threats to our communities around the state.”

Following the release of his statement, Colorado Attorney General Cynthia Coffman (R) said she reached out to Troyer, and was assured his office would prioritize the black and gray markets in the state, instead of shifting focus to shutting down state-licensed recreational and medical marijuana businesses.

FinCEN Guidance

Sessions’ rescinding of the three guiding policy memos on state marijuana regulation appeared to undermine guidance issued in February 2014 by the Treasury Department’s Financial Crimes Enforcement Network on the Bank Secrecy Act and measures financial institutions should take with respect to reporting requirements if they opt to do business with marijuana clients.

The FinCEN guidance was predicated on the Justice Department memos, Gilmer said. “You could make an argument it has been implicitly invalidated,” he said.

The FinCEN memo had the effect of creating a comfort level for some institutions to begin doing business in the marijuana space, he said. Banks that followed the FinCEN guidance “and were participating might take a second look,” he said.

FinCEN was silent on its 2014 guidance after Sessions announcement. In a statement to Bloomberg BNA Jan. 4, FinCEN said it “works closely with law enforcement and the financial sector to combat illicit finance and provide relevant information that allows law enforcement to pursue their priorities. We will continue to work with DOJ and other stakeholders on this issue.”

With assistance from Aaron Nicodemus.

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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