News & Press: ACFCS News

NYDFS bucks federal tiptoeing, exhorts state financial institutions to bank medical marijuana firms

Saturday, July 7, 2018   (2 Comments)
Posted by: Brian Monroe
Share |

By Brian Monroe
bmonroe@acfcs.org
July 7, 2018

New York’s chief financial regulator has taken a firm stand against what it considers antiquated national laws, discordant government agencies and tiptoeing federal regulators by exhorting state-chartered banks and credit unions to establish banking relationships with legal medical marijuana businesses.

The move this week spelled out in guidance by the New York State Department of Financial Services (NYDFS) comes with the explicit support and urging of New York Governor Andrew Cuomo, who noted the issue is a polarizing one on the federal stage.

Cuomo makes note of the rancor and mixed messages in his statement, cognizant that Attorney General Jeff Sessions in January formally rescinded Obama-era protections dubbed the Cole Memo stating federal investigative agencies would not target legal cannabis businesses regulated and in good standing at the state level.

“The ability to establish a banking relationship is a challenge that legal industries face unlike no other,” Cuomo said in a statement. “As the federal government continues to sow discord surrounding the medical marijuana and industrial hemp businesses, New York has made significant progress in creating a supportive economic development and regulatory landscape for these companies.”

To pave the way for such relationships, the NYDFS stated clearly it “will not impose regulatory actions” on any New York state-chartered bank or credit union for opening an account or starting a new banking relationship with a medical marijuana-related business that complies with federal and state laws.

The statement is laced with irony as technically, marijuana is still listed as a schedule one drug at the federal level – on par with cocaine, heroin and meth – and handling and moving funds derived from even legal cannabis is tantamount to money laundering.  

Not surprisingly, many banks at the state and federal levels have chosen to shy away from legal marijuana-related businesses as that dichotomy and implicit conflict would put institutions at odds with rules to create anti-money laundering (AML) programs designed to detect, prevent and report on suspicious activity that could be related to financial crimes.

Without access to bank accounts, many legal cannabis businesses must do everything in cash, raising the risk of employees getting targeted and robbed by criminal groups or opportunists looking to make an easy score.

Moreover, not having access to banks typically means no access to checking and wire transfer services, meaning some legal cannabis firms may have to lie to get an account.

That dynamic can cause AML, risk ranking, customer due diligence and transaction monitoring issues, as legal businesses are forced to work with an ever-changing carousel of secretive individuals to get cannabis profits surreptitiously into the financial system and move funds to do something as simple as pay utility bills and rent.

AML implications in guidance

Without banks having a clear view into where the money from banking clients is coming from, it can mean they are later accused of AML due diligence failures, Financial Services Superintendent Maria Vullo said in a statement.

“New York's financial institutions should provide banking services to these legal businesses, in accordance with established principles and procedures, including customer due diligence and transaction monitoring,” she said. “In this way, New York's businesses can operate more effectively under the law to serve New Yorkers.”

Moreover, forcing medical marijuana and industrial hemp businesses to “operate solely with cash creates a public safety issue, as cash intensive businesses and their suppliers, employees and customers become targets for criminals,” according to the guidance.

As well, large amounts of cash “distributed outside the regulated banking system is unacceptable and creates risks to the companies, and their employees and business partners,” the NYDFS said in the guidance.

Further, “large scale cash operations impede tracking funds for tax and anti-money laundering purposes,” the guidance stated. “None of this is necessary. Positions taken by the federal government are only exacerbating these problems, rather than remedying them. New York must act.”

To counter a lack of a bank account and prevent being preyed upon, many armored car services in legalized states have taken the mantle of being both a protector and mover of cannabis-derived cash, something banks are still digesting on the risk analysis side of the AML, cannabis connection conundrum.

The governor and regulator stated they decided to make the changes and formally nudge banks to foster connections to cannabis firms because of the “demonstrable medical benefits of marijuana” borne out in the “findings of respected medical practitioners and researchers” as well as anecdotal reports of how much seriously ill patients have benefited.


Marijuana by the Numbers: More States getting on board the h(igh)pe train 

Green: Recreational              

Orange: Medical

Yellow: Medical CBD, which has no THC

Map of marijuana laws by state

Nine states and the District of Columbia allow recreational sales of marijuana as well as

medical; an additional 21 only allow medical use. Others allow only for the sale of CBD, an extract which is non-psychoactive.

Source: NORML, NCSL, MPP.org 

Map, writeup courtesy: CNN


Cannabis relationships, with caveats

In the guidance, DFS advised New York's chartered institutions that it will not impose any regulatory actions if these institutions comply with the requirements of:

Ø  The 2014 Financial Crimes Enforcement Network guidance: In that guidance, FinCEN noted that federal laws and regulations still required institutions to file SARs on any transactions tied to the marijuana trade, even in states where the substance had been legalized. To designate filings on legal marijuana businesses, FinCEN instructed institutions to use the phrase “Marijuana Limited” in the narrative portion of the SAR form.

Ø  The guidance and priorities set forth in the Department of Justice's 2013 memorandum from Deputy Attorney General James M. Cole: The “Cole Memo,” The policy stated that federal authorities were guided to not arrest, forfeit and prosecute firms selling marijuana where it is legal at the state level.

Ø  AML, other risks: Banks and credit unions still must engage in an evaluation of the overall risks associated with offering products and services and its ability and systems to effectively manage those risks, including AML, as all DFS-regulated institutions do with regard to all their banking relationships.

Guidance a kidney shot to AG Sessions

The guidance is also a clear gut shot to Sessions, who in January broke with an Obama-era Department of Justice (DOJ) policy to not arrest, forfeit and prosecute firms selling marijuana where it is legal at the state level, called the “Cole memo.”

In the new memo issued this year by Sessions, he announced a “return to the rule of law and the rescission of previous guidance documents.”

Since the passage of the Controlled Substances Act (CSA) in 1970, Congress has generally prohibited the cultivation, distribution, and possession of marijuana, according to the latest memo.

Under his leadership, Sessions is directing all U.S. Attorneys to “enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities.”

He stated this “return to the rule of law is also a return of trust and local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs,” Sessions wrote.

The memo goes against growing momentum where states like California have legalized recreational marijuana and dozens of others have legalized medical marijuana, where recreational marijuana is legal in nine states and medical marijuana is legal in 30 states, according to marijuana legalization statistics.

New York officials believe they are on the right side of history, siding with this national momentum.

“We're cutting the red tape and removing regulatory barriers to support businesses in the legal cannabis industry,” said Lieutenant Governor Kathy Hochul. “While the federal government ignores the reality of the benefits of medical marijuana and industrial hemp, New York has supported the development of the industry and advanced our agricultural economy.” 

Comments...

Nathaniel Gurien says...
Posted Sunday, July 8, 2018
FI sustainable compliance for marijuana-related businesses and those who provide them goods and services is relatively simple in concept but execution is granular and labor-intensive. The FI is required to confirm only 3 main points: the principal operators and BOs are all 'good actors', that there is no co-mingling of licensed and other revenue, and that no cannabis inventory is diverted (particularly out-of-state or to minors). Get your examiners/regulators on board on day 1, and collaborate with a proven cannabis-specific AML consultant (our firm FINCANN can assist with referrals). Bear in mind that no FI has yet been penalized who has made a reasonable and diligent effort to bank the industry. Increased compliance costs are borne by the customer often at a profit to the FI. The Feds (and obviously the States) earnestly desire FIs to bank the industry to avoid the incubation of violent and organized crime, tax evasion and other shady business practices. The opportunity is now!
Akinsola S. Oyetunde says...
Posted Sunday, July 8, 2018
The due diligence to cover the scope of medical marijuana and creating banking relationships still remain an open-ended issue. I hope the banking industries will not be found wanting and pencil down on possible AML that may arise from its relationship with Medical marijuana customers.

©2018 Association of Certified Financial Crime Specialists
All Rights Reserved