Holder and DOJ Cannot Change Federal Banking Statutes
Regulators, stakeholders and others took a deep breath last week when U.S. Attorney General Eric Holder sent a memo stating that the feds would not prosecute recreational cannabis purveyors in Washington and Colorado and then sealed it with a phone call to their respective governors Inslee and Hickenlooper. Possession of cannabis is illegal under the Federal Controlled Substance Act, and nothing the states do can change the federal statute. However, as was the case a few years ago with the deluge of medical marijuana laws, the feds simply realize they have “bigger fish” to catch (President Obama’s words). They have stopped spending their limited resources on prosecutions of adults in possession of an ounce or less. Holder warned both Washington and Colorado to keep the product out of the hands of minors and keep it inside their states’ boundaries.
This is all well and good, and it is exciting for the Washington State Liquor Control Board. That is the agency responsible for implementation of I-502, Washington’s new recreational-cannabis law. But while the liquor board worries about enforcement of its soon-to-be (we hope soon) regulations for growing, processing and selling cannabis, an 800-pound banker sits in the backyard, right in the way of practical operation of all cannabis businesses.
The Federal Problem
In late June 2011, the U.S. Department of Justice issued a memo to field offices regarding the enforcement of the law. It reiterated the consequences for those individuals caught cultivating, selling or distributing marijuana. The memo said other parties who “knowingly facilitate such activities” could become targets of prosecution as well. The memo reads:
“Persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law. Consistent with resource constraints and the discretion you may exercise in your district, such persons are subject to federal enforcement action, including potential prosecution. State laws or local ordinances are not a defense to civil or criminal enforcement of federal law with respect to such conduct, including enforcement of the CSA. Those who engage in transactions involving the proceeds of such activity may also be in violation of federal laundering statutes and other federal financial laws.”
Prior to the June 2011 memo, a few banks across the country were providing banking services to the medical marijuana community. But after it was issued, follow-up memos reiterating the stand went to financial institutions from the Federal Reserve, Federal Deposit Insurance Corporation, the National Credit Union Association, and the Comptroller of the Currency. Representatives of the Washington Bankers Association tell us that today they know of no banks that are providing these services.
The Breadth Of The Problem
Banks or other financial institutions, whether chartered nationally or state chartered, can not legally possess, move, receive, or otherwise “touch” money involved in an illegal activity, period. For those thinking that a state-owned bank would be a work-around, we need to understand the breadth of the problem, or the reach of the laws and processes. Even if we take away the deposit-insurance issues, and a state bank were to self-insure deposits, the money could not be moved. Besides deposit and transaction services, the ban by federal regulators includes national check clearing services and all digital or electronic funds transfers.
It gets worse. In addition to the nix on any classic or creative banking activities, even if a shell, non-federally insured, proprietary transfer system were developed, nothing will circumvent the federal prohibition of money laundering. These laws prevent banks from handling deposits that are the proceeds of an illegal activity, and they require banks to file a Suspicious Activity Report any time they suspect a transaction that may violate federal law. It defines money laundering as “the process of taking the proceeds of criminal activity and making them appear legal.”
Money laundering laws are federal and therefore are not affected by Washington’s decision to legalize marijuana. Any banking transaction — a checking account, credit/debit cards, wire transfers — that involve money from the cannabis industry fits this definition of money laundering, because cannabis remains illegal under federal statutes. All banks and credit unions, even state-chartered institutions, are required to comply with federal money laundering laws. Financial institutions that accept deposits from the cannabis industry not only are facilitating money laundering by the cannabis customer, but the financial institution actually is laundering money itself and therefore it also is subject to all applicable criminal and civil penalties. Given certain the philosophical opposition to cannabis legalization from anti-drug groups, civil suits may become a weapon used to halt or slow the process of state-by-state cannabis legalization.
Scott Jarvis, director of the Washington Department of Financial Institutions, openly admits the breadth of the problem. In several meetings with stakeholders for the industry Jarvis and attendees have all come to the same conclusion. They say “we need a federal fix.” Jarvis brings focus to the task when he reminds everyone involved that some of the problem is federal law, but some is regulatory procedure. The Federal Reserve’s 12 governors are appointed by the president and are not directly affected or accountable to Congress. The Fed, as it is affectionately referred to, was established in 1913 by Congress. It intentionally is insulated from the vagaries of partisan politics due to its critical task of setting U.S. monetary policy. If you think Congress is a big enough hill to climb for a cannabis-banking solution, add twelve independent presidential appointees.
There can also be no loaning of funds from a financial institution to a cannabis business. The collateral necessary for the loan would involve the pledging of assets from a Federally illegal activity, thus voiding the collateral status under all Federal definitions for loan guarantees or insurance.
The problem of moving money in the cannabis business is saturated with Federal statute, and regulatory blockage. Jarvis tells everyone who will listen that Washington State needs a fix. Denny Eliason, whose firm represents Bank of America before state regulatory and legislative forums, tells us that a “federal work-around is being considered at the national level.” Bank of America holds the accounts for Washington state, including the account in which tax revenue is deposited. It is called a “concentration bank” under provisions of the account. Eliason, a decades-long veteran in the banking field, admits that a permanent solution or even a patch by spring of 2014 will be a longshot. He claims talks are ongoing. Jarvis concurs but surmises any efforts are less formal than Eliason beleives. In either case, for appointed regulators, for federal banking-insurance agencies and the Congress of the United States to act in time for states to have a legal, functioning cannabis enterprise is a huge order. And it is unlikely.
So the present status is that all states’ existing medical marijuana businesses and the soon-to-launch recreational cannabis businesses of Washington and Colorado simply have no legal way to turn cash proceeds into transferable/usable funds. Remember, any transaction that accepts cash rather than “transfers” the money, either by paper check or electronic transfer is, technically washing the money or “laundering” it.
You can watch the movement at the federal level. Watch the U.S. Senate Judiciary Committee hearing scheduled for 2:30 p.m. Sept. 10, headlined “Conflicts between State and Federal Marijuana Laws.” King County Sheriff John Urquhart will testify.
What About The Taxes And Fees?
Chris McGann, spokesman for Washington Treasurer Jim McIntire, admits that the state has chosen to split a hair. The treasurer’s office has chosen to consider cannabis tax revenue as proceeds “not generated” by a federally illegal activity. You can think that one through on your own. Presently any business and occupations or sales and excise taxes that are paid to the Department of Revenue are electronically transferred to Bank of America; from its account money is electronically transferred to the state’s various budget and investment accounts. Taxes and fees are, evidently, a horse of a different color.
The state Department of Revenue presently has policies and procedures for accepting cash tax payments. Each district office is prepared to accept cash payments according to the department’s policies. So when the state “washes” the cash and deposits it with Bank of America, is this a legal transaction, or is it money laundering under the federal definition?
No Problem for Income Taxes
One problem with writing about illegal activity, at least activity that is illegal under federal law, is finding people willing to be quoted by name. In a quick check with prominent medical marijuana business owners in Washington, those who would comment without attribution told us that they not only pay income tax, but one of them is an instructor, holding seminars around the country on the importance of tax compliance. So we have to conclude the IRS also must not consider taxes and tax money to be direct proceeds from an illegal activity. Says one owner, “You bet the feds take our money. …[It] has not been a problem for over a decade.”
Liquor Control Board to Begin receiving License Fee Money.
Liquor Control Board member Chris Marr says that the agency has not yet accepted any funds from the marijuana industry; when money is paid for licenses it will be treated as revenue from fees. The agency will most likely consider the money legal tender. The first license money will of course come from capital sources of the yet-to-operate businesses, but the first renewal will likely be from proceeds of a federally illegal transaction involving some aspect of a federally illegal substance, cannabis.
The Illusion of the Rules
As the Liquor Control Board laboriously finalizes the regulatory framework for recreational cannabis use, it is surrounded by a choking stack of Federal laws and insulated, non-elected officials. Without some “work-around” or permanent fix, both Washington and Colorado could be all dressed up and nowhere to go. The simple fix is the heaviest lift. The Federal Controlled Substance law has to be amended to exclude cannabis and cannabis products. This would create the basis for all regulatory transition. But if 18 states and the District of Columbia permit medical marijuana, and if two states are on the verge of launching a recreational cannabis industry, is this sufficient state’s-rights activity to sway the hundreds of members of Congress who come from less-than-progressive states?
And what are all of those medical marijuana businesses in all those states doing with their money?
Show us the money!