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Banking Mrbs and Lessons from NCUA Enforcement Action

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Banking Mrbs and Lessons from NCUA Enforcement Action Banking MRBs and Lessons from NCUA Enforcement Action Thursday, July 15, 2021 Aliza Pescovitz Malouf Richard Garabedian Associate Counsel Hunton Andrews Kurth LLP Hunton Andrews Kurth LLP 1445 Ross Avenue, Suite 3700 2200 Pennsylvania Avenue, NW Dallas, Texas 75202 Washington, D.C. 20037 Tel: 214‐979‐8229 Tel: 202‐419‐2117 Email: [email protected] Email: [email protected] This Program Covers . I. Difference Between Marijuana and Hemp II. Background on Legalization of Cannabis III. Current State of Cannabis Legalization IV. Financial Benefits of Banking Marijuana Related Businesses V. Regulatory Landscape VI. Live Life Enforcement Action VII. Best Practices 2 Cannabis: Marijuana vs. Hemp Marijuana Hemp Marijuana is abundant in THC with concentrations Hemp contains a very low concentration of THC (0.3% or between 15% to 40%. less). Marijuana is grown for recreational and medicinal Hemp is grown primarily for industrial purposes. purposes. Marijuana can be smoked, inhaled, ingested or injected Hemp's rapid growth and strong fibers make it ideal for directly into the body. THC is also commonly extracted crafting durable rope, clothing, sails, and paper. With the from the plant and used in a variety of methods fast‐growing popularity of CBD, hemp is also used to including vaporizers, capsules, edibles and more. produce a wide variety of THC‐free CBD products. Still a Schedule I drug under the federal Controlled No longer a Schedule I drug under the federal Controlled Substances Act. Substances Act as of December 20, 2018. 3 Background on Legalization of Cannabis History of Cannabis in the United States • 1619. Virginia Assembly passed legislation requiring every farmer to grow hemp. • 1937. Marijuana Tax Act. • 1970. Passage of Controlled Substances Act. Marijuana listed as a Schedule I drug. 5 The Path to Legalization 2014 2012 Utah became the first state to pass 1998 First Recreational a low‐THC, high‐ marijuana – CBD medical 1996 Oregon, Alaska, Washington and cannabis law** and Washington Colorado CA first legalized all legalized medical medical marijuana cannabis* *Followed by 17 other states **3 –5 states per year starting in 2014 6 The Path to Legalization (Continued) 2020 2019 USDA finalizes regulations and 2018 States apply to states implement USDA for licensing program 2014 Farm Bill expands approval of Hemp Hemp Program production plans Farm Bill creates Pilot Program for Hemp 7 Current State of Cannabis Legalization Federal Law: Current State Landscape Marijuana Hemp Still a Schedule I drug under the Federal Controlled Substances Act. NOT a Schedule I drug under the federal Controlled Cole Memos Substances Act. 2018 Farm Bill removes hemp Financial Crimes Enforcement Network (FinCEN) (hemp cannot contain more than 0.3 percent of Guidance on Marijuana SARs. THC) from the Controlled Substances Act. Multiple bills working through Congress (SAFE Act; STATES Act). 9 9 State Law: Marijuana Current Landscape • Fully illegal: 3 states (Idaho, Kansas, Nebraska) • Fully legal: 16 States and D.C. recreational and medical • Legalized medical use: 36 states with some requirements and limitations • Multiple bills in state legislatures Source: Wikipedia 10 10 State Law: Hemp Current Landscape Under Review • Only Idaho still needs state legislation • 2 state plans still under review by USDA (AZ, CA) Source: NCSL.org (National Conference of State Legislatures) 1111 Polling Question 1 Is your financial institution currently providing financial services to MRBs? A. Yes B. No C. Not yet, but thinking about it D. Not yet, but actively working to enter this space E. No, and never will 12 Financial Benefits to Banking Marijuana Related Businesses What’s driving the cannabis push? • Marijuana sales nationwide totaled $17.5 bb in 2020, a growth of 46% over 2019 – Forbes • The U.S. hemp crop tripled in 2018 with acreage rising rapidly in the 24 states actively growing – Hemp Industry Daily • U.S. hemp‐based CBD market was $5 billion in 2019 and expected to be $18 billion by 2025 – William Reed Ltd. 14 Why should credit unions care? Financial benefit Building community relations Create a niche market within the community General loan and deposit growth Offer accessible and safer method of banking Marijuana transactions are cash transactions 15 Types of Fees Financial Institutions Can Charge . Fees on account opening – $2,500 to open. Monthly account fee – $1,800 a month. Fees for onsite visit – $200 a quarter. Fees for cash deposit – Require client to deposit cash from the business by armored truck, for a fee. Cash deposits of potentially $10 mm or more per customer. 16 Regulatory Landscape MRB Challenges: Federal Enforcement Anti‐Money Laundering Statutes • An offense committed knowingly to promote an unlawful activity or to conceal the nature, source, or ownership of funds from a specified unlawful activity is money laundering. • “Manufacture, importation, sale, or distribution of a controlled substance” is listed as a “specified unlawful activity.” 18 2013 Cole Memo • On August 29, 2013, DOJ Deputy Attorney General James M. Cole provided guidance regarding marijuana enforcement. • While continuing to conclude that marijuana is a “dangerous drug and that the illegal distribution and sale of marijuana is a serious crime,” the DOJ committed to “using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.” 19 Enforcement Relief For Banks? Eight Enforcement Priorities • Preventing the distribution of marijuana to minors; • Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels; • Preventing the diversion of marijuana from states where it is legal under state law in some form to other states; • Preventing state‐authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; 20 Enforcement Relief For Banks? • Preventing violence and the use of firearms in the cultivation and distribution of marijuana; • Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use; • Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and • Preventing marijuana possession or use on federal property. 21 2014 Cole Memo • On February 14, 2014, General Cole released the second memo to address the impact the guidance in the First Cole Memo “would have on certain financial crimes for which marijuana‐related conduct is a predicate.” • Reiterated the 8 priorities from the First Cole Memo. • Expressed that provisions of the money laundering statutes and Bank Secrecy Act are still in effect with respect to marijuana related conduct. 22 2014 Cole Memo (Continued) • Explained that a financial institution knowingly providing services to an MRB that is violating state regulations may be subject to prosecution. • Stressed that financial institutions providing services to MRBs must comply with the guidance issued by FinCEN. • Reminded prosecutors that they “should continue to review marijuana‐related prosecutions on a case‐by‐ case basis and weigh all available information and evidence in determining whether particular conduct falls within” the 8 priorities. 23 FinCEN Guidance “This FinCEN guidance clarifies how financial institutions can provide services to marijuana‐related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance should enhance the availability of financial services for, and the financial transparency of, marijuana‐related businesses.” 24 Customer Due Diligence Requirements • Verify proper business license and registration. • Review business license application. • Requesting information from state licensing and enforcement authorities. • Develop understanding of expected business activity. • Ongoing monitoring of public sources for adverse business information. • Ongoing monitoring for suspicious activity. • Refresh due diligence on periodic basis. • Consider whether MRB implicates one of Cole Memo priorities or violates state law. 25 SARs Filings “Marijuana Limited” SAR filings if… • A financial institution is providing financial services to an MRB that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law. • SAR includes: • Identifying information of subject and related parties • Addresses •Fact that filing is solely because of MRB •Fact that no additional suspicious activity identified • Continuing activity reports. 26 SARs (Continued) “Marijuana Priority” SARs filings if: • A financial institution is filing a SAR on a marijuana‐related business that it reasonably believes, based on its customer due diligence, implicates one of the Cole Memo priorities or violates state law should file a “Marijuana Priority” SAR. “Marijuana Termination” SAR filings if: • A financial institution deems it necessary to terminate a relationship with a marijuana‐related business in order to maintain an effective anti‐money laundering compliance program. 27 Red Flags (Examples) • Front for Money Laundering • Unable to demonstrate legitimate source of outside investments • Unable to produce evidence of licensing • Prior Criminal Record • MRB Purporting to be “Non‐Profit” Engaging
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