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Is It Illegal to Do Business with Businesses in the Legal Drug Industry? by Christopher P

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Is It Illegal to Do Business with Businesses in the Legal Drug Industry? by Christopher P COMMERCIAL TRANSACTONS arlier this year, Minnesota became with business and owners of businesses the 22nd state to legalize medical engaged in Minnesota’s legal marijuana marijuana. According to a recent trade, great caution must be taken. report, the Minnesota Department The clash between banks and state- of Health is seeking a director for its Office of legal marijuana businesses and business EMedical Cannabis, whose responsibilities will owners is not new in other states across the include overseeing a program that monitors nation. Under federal regulations, financial manufacturers selected to grow marijuana in institutions (banks and securities firms) Minnesota. This means that very soon, there are required to establish AML programs will be businesses in Minnesota whose sources designed to detect and report suspicious of revenue is derived from the lawful sale of transactions relevant to possible violations marijuana in Minnesota, and business owners of federal laws or regulations. Initially, whose income is derived from the same these programs were intended to detect source. Although this may increase revenue and report those engaged in white-collar for the state through taxes and increase jobs crimes or income tax evasion. Over the for those in the marijuana industry, it will years, however, AML provisions have create significant complications for financial broadened to include terrorism and the Is It Illegal To Do Business With Businesses In the Legal Drug Industry? By Christopher P. Parrington & Courtney Blanchard institutions and members of the financial illegal drug trade. Therefore, financial services industry seeking to do business with institutions doing business with members the companies and their owners engaged in of Minnesota’s legal medical marijuana Minnesota’s legal drug trade. industry should still treat those customers Currently, although the manufacturing, as potential AML concerns under federal distribution and sale of marijuana (in some laws and regulations. form or another), is legal in 22 states across In recent years, federal agencies have the nation, the federal government has provided some guidance for banks doing not recognized these business activities as business with members of the legal Christopher P. Parrington chairs legal under federal law. Therefore, although marijuana industry. For example, the U.S. the national securities practice businesses engaged in the legal marijuana Department of Justice (DOJ) recently group at Foley & Mansfield. trade are acting within the bounds of their issued a memorandum authored by James Representing businesses, broker/ respective state laws, they are technically M. Cole, entitled “Guidance Regarding dealers, registered representatives still violating certain federal laws. For those Marijuana Related Financial Crimes.” This and fund managers, his practice businesses not directly involved in the legal memorandum identifies eight enforcement centers on matters involving marijuana trade but doing business with direct priorities for federal prosecutors deciding FINRA arbitration and securities members of the legal marijuana trade, such whether to bring charges against a bank litigation, and other complex business activities can become problematic that has taken the business of a customer business and commercial under federal laws and regulations. The involved in the legal drug trade. If a bank matters. Chris can be reached at cparrington@foleymansfield. largest categories of business caught in this and its customer do not implicate one com. Courtney Blanchard is conundrum are banks and securities firms of these criteria, the DOJ, according to preparing for a judicial clerkship governed by federal anti-money laundering Cole’s memorandum, recommends that this fall and will be joining the firm (AML) laws. For those banks and securities prosecution is not a priority. However, as an associate in the fall of 2015. firms in Minnesota, who seek to do business the decision not to prosecute is purely discretionary and the memorandum makes clear that operating within the confines of its guidance is not a defense for banks prosecuted for violating federal AML laws. The other significant guidance in recent years came from FinCEN, entitled “BSA Expectations Regarding Marijuana-Related Businesses.” According to FinCEN, banks doing business with customers in the legal drug trade must first be cognizant of detailed red flags associated with members of the legal drug trade, and then take two major steps when doing business with those customers: perform due diligence when deciding whether to take on a customer in the legal marijuana trade; and file a Suspicious Activity Report (SAR) after accepting the customer’s business. The due diligence should be designed to ensure that the bank has a full and detailed understanding of the customer’s business and to ensure that all drug-related activities are lawful under the respective state laws. The SARs should be submitted in one of two formats: if the business satisfies the eight priorities set forth in the Cole Memorandum, then the bank should file a “Marijuana Limited SAR.” If one of the Cole Memorandum priorities is implicated, then the bank should file a “Marijuana Priority SAR” according to FinCEN. Although FinCEN and the DOJ have provided guidance to banks doing business with customers involved in state-legal drug industries, this guidance has not yet been expanded specifically to securities firms. However, securities firms desiring to do business with customers whose income is generated from the legal marijuana trade, should operate with the same caution as banks and in accord with the Cole Memorandum and FinCEN, at the very least. And regardless of whether the criteria of the Cole Memorandum and FinCEN are satisfied, banks and securities firms must still evaluate the risks of doing business with customers in the legal drug industry because ultimately, compliance with this guidance and criteria is not a defense for banks and securities firms subject to prosecution, and by filing SARs, the institutions are essentially admitting violations of the AML laws and regulations and hoping that federal authorities chose not to prosecute. July 2014 Attorney at Law Magazine® Twin Cities | 13.
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