Why crackdown on pot sales could cause banks to steer clear of industry
Regulators could push banks to rein in or scrap their dealings with cannabis companies.
U.S. Attorney General Jeff Sessions’ decision Thursday to scrap an Obama administration policy that offered legal shelter for state-sanctioned marijuana sales does not necessarily mean a wave of federal drug busts. But it could crimp California’s marijuana industry in another way: cutting its already-tenuous access to the financial system.
Most banks and credit unions won’t accept deposits from marijuana businesses, but the few that do have been relying on federal guidelines that state how they can accept deposits from those companies. Although those guidelines remain in effect for now, many expect they will have to change because they were underpinned by one of the policies just rescinded — a 2013 document known as the Cole memo.
Without that memo, and with the possibility of changes to the guidelines, some banks and credit unions that were considering working with cannabis companies will probably back down from those plans, said Joshua Schneiderman, a partner in the Los Angeles office of law firm Snell & Wilmer.
“I’ve talked to institutions in California looking to get into the industry, and I don’t think they’re going to move forward at this point,” he said. “Banks are notoriously conservative, and the Cole memo was a critical underpinning of their decision to get into the cannabis space.”
Ken Berke, president of PayQwick, a Calabasas (Los Angeles County) company that works with banks to offer paymentprocessing services for marijuana businesses, said it’s not clear that Thursday’s announcement will cause a significant change, but he agreed that it will push some institutions to reconsider their plans.
“If there are banks that are not serving the industry now but were thinking about it, this will have a chilling effect,” he said. “And if you already have cannabis clients, you may decide to wait 30 days or 60 days before opening any new accounts.”
The Cole memo, written by James Cole, a deputy attorney general in the Obama administration, said the Justice Department, in states where marijuana sales were legalized, should focus its marijuana-enforcement efforts on serious crimes such as sales to minors or sales involving drug cartels.
In 2014, in accordance with that memo, the federal Financial Crimes Enforcement Network, a Treasury Department bureau, issued guidelines for banks that want to serve cannabis businesses. The guidelines directed banks to file reports on their marijuana clients and to be on the lookout for the potential serious illegal activities spelled out in the Cole memo.
With that memo now rescinded, the guidelines may be scrapped or at least amended, said Julie Hill, a law professor at the University of Alabama who follows cannabis banking law.
“The whole (report) filing system doesn’t make any sense without clear enforcement priorities,” Hill said. “I don’t know what you do about that. I think it was risky before, and it’s even more risky now.”
Other bank regulators, not just FinCEN, could push banks to rein in or scrap their dealings with cannabis companies.
Neil Zick, chief executive of Twin City Bank, a Longview, Wash., institution that accepts deposits from cannabis businesses, said he worries that the Federal Deposit Insurance Corp. will see cannabis businesses as riskier clients now that the Cole memo has been rescinded. That, in turn, could allow the FDIC to put so many conditions and requirements on the bank’s cannabis dealings that it would no longer be worth the bank’s while.
“They’ll say, ‘Well, you can do it, but you have to do this and this and this,’ ” Zick said. “At some point, you say ‘screw it,’ and it forces those businesses out of your institution.”
It’s unclear, however, whether Sessions’ decision to rescind the Cole memo and four other enforcement guidelines will lead to a federal crackdown on marijuana in states that have legalized it.
A key constraint is a 2014 federal budget amendment co-authored by Rep. Dana Rohrabacher, R-Costa Mesa (Orange County), which prevents the Justice Department from spending money on prosecuting medical marijuana users or businesses if they are complying with state law.
The U.S. 9th Circuit Court of Appeals, which has jurisdiction over federal cases in California and eight other Western states, has interpreted that law to bar any prosecutions in medical pot cases.
However, Sessions issued his new guidance just days after the recreational sale and use of marijuana became legal. That is not explicitly covered by the Rohrabacher amendment.
Still, not everyone in the banking industry is convinced that the crackdown will result in locking out all marijuanarelated businesses from the financial system.
Only about 400 banks and credit unions — out of more than 10,000 institutions in the country — openly work with cannabis businesses, according to FinCEN, and many cannabis businesses have accounts but don’t disclose their business to their bank.
“The reality is, there are very few banks that will openly bank cannabis,” said Aaron Herzberg, a local cannabis business owner and attorney. “So you’re talking about things that are very theoretical. I don’t think things are going to change for banks, or change for the industry.”