Compliance

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Jonathan Camhi
Jonathan Camhi
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How Legal Pot Makes Compliance More Complex for Banks

Colorado has revealed a new compliance problem for banks that regulators seem unprepared to deal with.

As bankers try to get a handle on the ever-shifting regulatory landscape, a new source of complexity for banking compliance is growing in Colorado - legalized marijuana.

Colorado State law now allows marijuana stores to legally sell pot to the public for recreational use, but those involved in the legal sale and production of weed have been stonewalled by financial institutions when applying a bank account. Since marijuana is still illegal under federal law, banks are scared that of running afoul of anti-money laundering regulations if they provide banking services to marijuana shops or producers, according to an article published yesterday on Salon.

Financial institutions don’t want to run afoul of the Anti-Money Laundering Act, which can charge fines of up to $500,000 per transaction for working with companies who sell illegal products. Though Colorado and Washington have been cleared for adult recreational use sales, and 21 states (plus the District of Columbia) have legalized pot for medicinal use, marijuana remains illegal under the federal Controlled Substances Act. Even a state-owned bank, which one Washington lawmaker has proposed, would have to abide by federal banking laws. The discrepancy between state and federal law puts financial institutions at risk of money laundering prosecution, and they want precise assurances before assuming that risk.

The article tells the story of the first legal pot producer in Washington State, which is also legalizing marijuana, who lost his account with Boeing Employees Credit Union when the institution found out about his work.

“We operated, by their own description, ‘an exemplary account,’” Cooley said. “It’s frustrating, because they were saying to us, ‘we found out about you because you’re trying to be legitimate. So now we’re going to close your bank account.’”

The result is that many of legal marijuana businesses have to do all of their transactions in cash. One Washington congressman related a story about the owner of a medical marijuana stores showing up to pay his state taxes in $40,000 in cash.

The Salon article rightly points out what an ironic twist this development is after HSBC was found last year to have knowingly laundered money for Mexican drug cartels and was fined $1.9 billion. But no bank is willing to do business with legal businesses involved in the same trade. Regulators have issued no guidance for banks though now that pot’s being legalized, and banks are playing it safe.

The Bank Secrecy Act Advisory Group was supposed to address this issue in a closed meeting last month, but no guidance came out of the meeting. And whatever guidance regulators issue might be meaningless anyway:

Any guidance would still be discretionary, and a zealous prosecutor or a change in administration could reverse that at any time. “It would be completely ridiculous for JPMorgan Chase to accept business from a marijuana shop,” said UCLA professor Mark Kleiman. “Why would they expose themselves to prosecution from President Huckabee’s attorney general?”

Two Congressional representatives from Colorado and Washington have introduced a bipartisan bill to clear the way for banks to work with legal marijuana businesses. Regulators and government officials are going to be hard-pressed over the the next few years to come up with a solution for this problem. New York is now the latest state to contemplate legalizing marijuana, and it seems reasonable to expect more states to follow. And banks aren’t going to risk further court actions with the industry’s reputation slammed by recent legal settlements that have made big headlines.

[For More Regulatory Coverage, See “JPMorgan $13B Mortgage Settlement May Be Only the Beginning”]

Presumably as the legal marijuana business grows across the country, lawmakers aren’t going to want all of those transactions occurring in cash given the opportunity that creates for tax evasion. So it is certainly in the interest of government officials to make it legal for banks to service these businesses.

In the meantime, for any banker suffering from a headache over all the regulatory change in the market, well, in Colorado they can give you a good prescription for that.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

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Becca L
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Becca L,
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1/16/2014 | 6:32:30 PM
re: How Legal Pot Makes Compliance More Complex for Banks
Hmm. So many of the things reported across the UBM Tech sites could use some lawyering perspective. I keep finding legal issues popping up as the crux of holdups in simple progress. With the high cost of going to court, the small benefits may never come about.
Jonathan_Camhi
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Jonathan_Camhi,
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1/15/2014 | 10:11:49 PM
re: How Legal Pot Makes Compliance More Complex for Banks
Yeah it is too unpredictable how the courts would handle it to risk that path.
Greg MacSweeney
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Greg MacSweeney,
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1/15/2014 | 12:03:51 PM
re: How Legal Pot Makes Compliance More Complex for Banks
It is very hard to say what would stick in court. Right now, there are conflicting laws at the federal and state level. So banks are playing it safe.

And although the charges might not stick in court, a bank would have to spend a lot of time and money defending itself in court proceedings that could take months or years to complete. A big legal risk, definitely.
Jonathan_Camhi
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Jonathan_Camhi,
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1/14/2014 | 9:25:36 PM
re: How Legal Pot Makes Compliance More Complex for Banks
Sounds like you could use a trip to Colorado to mellow out.
Byurcan
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Byurcan,
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1/14/2014 | 2:57:09 PM
re: How Legal Pot Makes Compliance More Complex for Banks
Following the court system will do that to you.
Kelly22
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Kelly22,
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1/14/2014 | 2:00:00 PM
re: How Legal Pot Makes Compliance More Complex for Banks
I saw that as well - it'll be interesting to watch this unfold.
Becca L
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Becca L,
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1/13/2014 | 10:04:41 PM
re: How Legal Pot Makes Compliance More Complex for Banks
Faith in humanity and the authority of common sense is being chipped at daily.
Jonathan_Camhi
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Jonathan_Camhi,
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1/13/2014 | 9:58:32 PM
re: How Legal Pot Makes Compliance More Complex for Banks
I think whether things loosen will really depend on what happens at the federal level. Will regulators, or worse the Justice Department, push back on letting things loosen up? Will the regulators actually formulate a plan to allow these merchants to get bank accounts legally? Unfortunately not a lot gets done at the federal level right now, so it's hard to be optimistic.
Jonathan_Camhi
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Jonathan_Camhi,
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1/13/2014 | 9:53:55 PM
re: How Legal Pot Makes Compliance More Complex for Banks
As someone who used to do some court reporting, I can tell you that you'd probably be amazed what can through the courts.
Becca L
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Becca L,
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1/13/2014 | 3:10:45 PM
re: How Legal Pot Makes Compliance More Complex for Banks
Managing all of that cash must be incredibly time consuming, especially when you think of all the profits made on the first day! What a time suck. I also imagine all the ATMs within 5 square miles were cleared out!

It grinds my gears that HSBC was fined $1.9 billion for laundering money for a Mexican drug cartel, and banks are potentially facing charges up to $500,000 per transaction with Colorado's legalized marijuana shopsG㬠Somehow the severity of clearing 3,800+ civilized transactions is not on par with assisting a violent drug cartel. Surely these charges would not make it through the courts..?
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