Marijuana Banking Fraud: What You Need to Know

marijuana banking fraud california
“Offshore cannabis bank.”

Of the many issues that prevent cannabis businesses from acting like regular businesses, lack of access to banking is probably the most hindering. Since commercial cannabis activity remains a federal crime, the federal Bank Secrecy Act prohibits financial institutions from accepting cannabis-generated dollars. Most cannabis businesses therefore must operate on an all-cash basis. This makes them targets for actual criminals and helps further the need for access to a bank account.

This lack of bank access in turn creates desperation, which hucksters and fraudsters then prey upon. This post is dedicated to helping cannabis stakeholders avoid those who blow smoke about “marijuana banking.”

Because marijuana is still a Schedule I controlled substance, proceeds from cannabis sales trigger anti-money laundering laws for banks. The Bank Secrecy Act requires banks combat fraud and money laundering and protect against criminal and terrorist activity. Certain banking laws require that national banks and credit unions file Suspicious Activity Reports (“SARs”) with the Financial Crimes Enforcement Network (“FinCEN”), when the financial institution knows or suspects an account holder is engaged in or trying to cover up illegal activity. Consequently, banks routinely deny or shut down cannabis business bank accounts (and cannabis-based financing) even in cannabis-friendly states.

In 2014, new FinCEN guidelines for cannabis banking provided that financial institutions could provide services to state-legal marijuana businesses without running afoul of federal regulations so long as they do the following:

  • Verify with state authorities that the business is duly licensed and registered.
  • Review the state license application and related documentation the cannabis business used to obtain its state license to operate its marijuana-related business.
  • Request from the state licensing and enforcement authorities available information about the cannabis business and related parties.
  • Develop an understanding of the normal and expected activity for the cannabis business, including the types of products to be sold and the types of customers to be served.
  • Monitor publicly available sources for adverse information about the cannabis business and related parties.
  • Periodically refresh information obtained as part of customer due diligence using methods and timetables commensurate with the risk.

These guidelines are still in place, despite Attorney General Jeff Sessions’s rescinding of the 2013 Cole Memo, and the Department of Justice’s Guidance Regarding Marijuana Related Financial Crimes. Banks acting under the FinCEN guidelines must file SARs for all their marijuana businesses customers. There are no direct consequences arising from these SAR filings, but this means that the federal government knows exactly who is involved in the marijuana indusry and with whom they’re banking.

The FinCEN guidelines demand transparency and strict due diligence of cannabis customers. Because of this, in states like California that are just coming online with a regulated cannabis regime, there are a host of fraudsters who claim to have access to “marijuana banking,” when all they are really doing is opening bank accounts with shell companies and/or obscure offshore entities and then running cannabis operators’ money through those accounts. This clearly violates the FinCEN guidelines and it puts both the financial institution and the cannabis company at great risk. My firm’s California cannabis lawyers are seeing a lot of this in California, to the point that many cannabis companies are convinced that what they are doing is legal.

What are the specific red flags to look for if you’re being pitched on a “solution to the marijuana banking problem”?

  1. A refusal or inability to disclose the actual financial institution is the biggest red flag. There’s no reason why the financial institution that will hold your cannabis funds cannot be disclosed to you by the person pitching you. And any third party that’s telling you otherwise is probably illegitimate and not planning to operate in line with the FinCEN guidelines.
  2. If the third party does not discuss the FinCEN guidelines or the level of reporting you will need to do with your financial institution or the level of due diligence with which the financial institution will put you through, you are almost certainly dealing with a hack.
  3. Huge fees to third parties that are unrelated to opening a legitimate bank account. The third party will tell you that you need to pay them a large premium for them to get you a coveted bank account, but there is rarely any reason why this should be the case.
  4. Running money through various accounts and third parties that are supposed to be acting as wardens of your cannabis money. The FinCEN guidelines demand direct relationships and full transparency between banks and cannabis customers, which makes third-party banking relationships a non-option.
  5. Offshore or even out-of-state accounts are a massive no-no. No bank following the FinCEN guidelines will do business with cannabis licensees not in their own state because interstate money trafficking will likely get them into big trouble with FinCEN.

At least twice a week, one of my firm’s cannabis business lawyers will get contacted by an ancillary company trying to pitch us on referring our clients to them for “marijuana banking services,” claiming they’ve cracked the code on marijuana banking. We routinely ignore these solicitations and all cannabis stakeholders should do the same.

What then should you do to properly secure a legitimate cannabis bank account? I’ll cover that in my next post.

Editor’s Note:  A version of this post originally appeared in an Above the Law column, also by Hilary Bricken.

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Author: Hilary Bricken

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