States are pushing to allow or encourage banking services to be provided to marijuana-related businesses, with efforts spreading from California to New York.
In response to an announcement by New York Gov. Andrew Cuomo, New York’s Department of Financial Services (DFS) published guidance to encourage state-chartered banks and credit unions to consider establishing relationships with marijuana-related businesses, while a bill that would allow the formation of state-chartered banks and credit unions expressly authorized to service participants in the cannabis industry advanced in the California Assembly.
What happened
The burgeoning industry around state efforts to legalize recreational and medicinal marijuana for adults poses a conundrum for financial institutions. While banks would love to tap into the growing market, concerns remain about how to reconcile such activities given that the possession and sale of marijuana remains illegal under the federal Controlled Substances Act (CSA).
Efforts were made under the prior administration to alleviate the situation, with guidance from the Financial Crimes Enforcement Network (FinCEN) on how to work with marijuana-related businesses while still complying with the due diligence and reporting requirements of the Bank Secrecy Act (BSA), as well as from a hands-off federal policy advocated, under certain conditions, by the Department of Justice (DOJ) in the Cole Memo.
However, the DOJ approach changed with the release of a one-page memorandum from current Attorney General Jeff Sessions in January 2018.
Despite that, states are taking action in an attempt to ease the situation. In New York, Gov. Andrew Cuomo announced that the state would support the development of medical marijuana and industrial hemp businesses in New York by supporting the safe and sound provision of banking services for these businesses. In response, DFS Superintendent Maria T. Vullo released a memorandum in early July “intended to clarify the regulatory landscape and encourage New York State-chartered banks and credit unions to offer banking services to cannabis businesses in New York. Institutions prepared to apply sound practices of customer due diligence and transaction monitoring, in accordance with established principles and procedures, should consider to commence providing financial services.”
The ability to establish banking relationships is “an urgent issue” facing the legal cannabis industry, Vullo wrote, creating a public safety issue because the businesses are operating solely with cash.
Reviewing the legal requirements for businesses to receive licenses related to medical marijuana and industrial hemp in New York, the DFS emphasized the legal cannabis industry in the state is highly regulated and the companies are subject to strict controls. With this in mind, financial institutions should consider establishing relationships with licensed businesses that are operating in full compliance with all applicable state laws and regulations.
“While the rescission of the Cole Memo may indicate the viewpoint of federal government officials, the Department is not aware of any actual changes in the priorities of the four U.S. Attorneys serving in the State of New York,” Vullo wrote. “Nor does it change the fact that many states, including New York, have legalized medical marijuana. And it does not change the position of banking regulatory agencies that, generally, the decision to open, close, or decline a particular account or relationship is made by a bank or credit union based on its particular business objectives, its evaluation of the risks associated with offering products and services, and its ability to manage such risks.”
The memo concluded: “The Department further provides guidance that it will not impose any regulatory action on any New York State chartered bank or credit union solely for establishing a banking relationship with a medical marijuana-related business that operates a compliance business in New York, as long as the New York State chartered bank or credit union complies with the requirements of the 2014 FinCEN guidance, the guidance and priorities set forth in the Cole Memo, and subject to the institution’s own evaluation of the risks associated with offering products and services and its ability and systems to effectively manage those risks – as our institutions do with regard to all their banking relationships.”
California has taken a different approach. Earlier this year, state lawmakers introduced a bill that would allow the state banking department to charter limited-purpose banks and credit unions expressly authorized to provide banking services to members of the cannabis industry to enable them to pay taxes, rent, vendor expenses and payroll.
Passed by the California Senate in May, Senate Bill 930 is working its way through Assembly committees. In June, the Banking and Finance Committee unanimously approved the measure, while the Professions Committee passed the bill by a vote of 13 to 2, advancing it to the Committee on Appropriations before a vote by the full Assembly.
To read the DFS guidance, click here.
To read SB 930, click here.
Why it matters
Despite continuing uncertainty related to federal enforcement efforts, some states are working to facilitate the ability of participants in the cannabis industry to obtain financial services. “DFS stands ready to work with our chartered institutions to assist them in moving forward towards helping New York’s medical marijuana and industrial hemp businesses operate in a safe and sound manner,” DFS Superintendent Vullo said in a statement about the guidance. If enacted, California’s legislation could prove to be a trendsetter, possibly encouraging other states to consider similar action.