New U.S. prosecution easing on marijuana does not cut laundering risk for banks, sources say

By Guest Contributor
September 6, 2013

By Brett Wolf, Compliance Complete

NEW YORK, Sept. 6 (Thomson Reuters Accelus) - A Justice Department memorandum circulated last week that gave U.S. states leeway to experiment with pot legalization failed to address the provision of financial services to marijuana dispensaries, which suggests the Obama administration still is not prepared to allow money from state-recognized pot sales to flow into banks and other financial institutions, money-laundering policy experts said.

“The Justice Department could have gone the next step and at least applied its new standards to financial transactions that derive from medical marijuana proceeds. That at least would have been an attempt to take the burden away from the financial services community to make some very difficult determinations,” said Peter Djinis, a former regulatory policy official with the U.S. Treasury Department’s anti-money laundering unit, the Financial Crimes Enforcement Network (FinCEN). 

“Either Justice officials were not aware of this dilemma, which is hard to believe, or they didn’t want to enter into that fray.”

A Justice Department spokesman did not respond to a request for comment.

The Justice Department last week sent a four-page memorandum to federal prosecutors nationwide outlining eight priority areas for marijuana enforcement. While it reiterated the department is committed to enforcing federal restrictions on marijuana, it told prosecutors not to press cases that fell outside of eight areas.

The areas include distribution to minors, situations when marijuana proceeds are benefiting organized crime groups, trafficking across state lines and growing on public land.

The document did note that a marijuana dispensary will not be charged simply because it is large or profitable, criteria that under previous Department policy seemed to make pot businesses prime targets.

While this might be viewed as an indicator of an eventual move toward allowing such entities access to financial services, explicit permission to provide bank services to marijuana businesses is needed due to the risks involved, sources said.

Handling the proceeds of marijuana dispensaries, even those peddling state-sanctioned “medical” marijuana, could still prompt a money-laundering prosecution under federal law or the law of another state, should a pot-tainted money transfer cross state lines, said Jimmy Gurule, a former enforcement official at the U.S. Treasury.

“There are simply too many unanswered questions at this time. I don’t think that the banks will run the risk of criminal prosecution,” said Gurule, who is now a University of Notre Dame law-school professor.

Roughly 20 states, plus the District of Columbia, have legalized the use of medical marijuana, and voters in Colorado and Washington went a step further in November 2012, legalizing recreational use. The medical marijuana business was worth $1.7 billion in 2011 and growing, according to a study by financial-analysis firm See Change Strategy.

Still, marijuana remains illegal and tightly controlled under federal law, creating a legal dilemma that has become a growing burden to the financial services industry, which has received no regulatory guidance.

Steve Hudak, a spokesman for Treasury’s FinCEN, said it is “reviewing the latest developments.” He declined to comment further.

Nearly all depository institutions have shunned marijuana businesses. As a result, dispensaries have begun flocking to money services businesses to obtain money orders, placing a compliance burden on an industry that is not uniformly well prepared to manage it, Djinis said.

Djinis, who is now in private practice in Florida and is helping clients cope with this compliance dilemma, said it “continues to be a real mess” despite the new Justice policy.

“This new policy doesn’t solve the problem at all for the financial services community. If anything, it makes it more cumbersome, more confusing and less satisfying,” he said. “Given the fact there is no change in law and no change in policy as it relates to the financial side of marijuana dispensaries, there is really little hope to solving this problem for the sake of compliance.”

For instance, he said it is clear that marijuana dispensaries that distribute to minors will be targeted for prosecution. But since a financial institution would have no way of knowing whether a client had engaged in that or another activity highlighted by Justice, it could not even accurately weigh the risks associated with a particular business.

“That’s a determination that is very difficult for a bank to make,” he said. “When you’re only looking at the financial activity of a state-sanctioned marijuana business, those kinds of determinations are virtually impossible to make.”

A former Justice Department official who asked not to be named said the Drug Enforcement Administration and the Justice Department “will continue to maintain that the proceeds are still illicit.”

“I don’t think the big banks will change their present policy and bank these outfits,” he said. “It’s not worth the risk.”

Rob Rowe, a lawyer with the American Bankers Association’s Center for Legal and Regulatory Compliance, said that while some of ABA’s members would like to provide services to marijuana dispensaries, they cannot due to the risk of a federal prosecution.

Rowe added that even if the Justice Department were to put out a policy memorandum that explicitly stated that banks could serve state-authorized marijuana dispensaries, a “rogue” U.S. attorney or a bank examiner might have a different view and go after a bank.

“I know from anecdotal conversations we have had with our members some think it should stay illegal and others in say Colorado or Washington State think that it’s a viable small business opportunity that they could offer banking services. But until Congress changes the law, there is not a lot a bank can do,” he said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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