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Banking and Billions

What do the new guidelines for cannabis and the financial industry mean?

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The Treasury Department issued a love letter on Valentine's Day that could change the financial landscape of the cannabis industry—unless it doesn't.

The seven-page memo from the department's Financial Crimes Enforcement Network lays out guidelines aimed at helping banks deal with state-legal cannabis businesses. It basically reiterates the 2011 "Cole memo" from Deputy Attorney General James C. Cole, which makes legal cannabis businesses a low federal enforcement and prosecution priority, and then adds guidance for banks.

The latest memo suggests banking prosecutors follow guidelines in the Cole memo when considering marijuana-related violations of banking laws. It largely allows banks to do what dispensaries are doing—help generate billions of dollars of economic activity without getting arrested. The memo could be important, if prosecutors do what it says and banks believe it.

Banks are forbidden from doing business with illegal enterprises. Because everything dispensaries do is illegal under federal law—and the feds require a bank to file a report when it "knows, suspects, or has reason to suspect" that a transaction, among other things, "lacks a lawful purpose"—that makes every banking transaction with a dispensary reportable as illegal activity. Banks are required to file these reports.

But with these new guidelines, Treasury created a bit of a loophole. Banks can now file a suspicious activity report labeled Marijuana Limited, indicating that the suspicious activity was simply a cannabis business working within state law and that no other suspicious activity is suspected. No financial information is required with this report. It lets prosecutors know that the bank's customer is apparently legit.

The new memo urges due diligence in dealing with cannabis businesses, including verifying state licenses, knowing the daily work of dispensaries (i.e., recreational or medical?), what they are selling and who they are selling to. It suggests banks check public records, such as police, jail and civil and criminal court records, of people associated with dispensaries.

It lists a bunch of red flags that hint at attempts to skirt the law, while acknowledging that these red flags don't prove anything.

Red flags include unreasonably high revenue, revenue wildly higher than competitors' revenues, cash deposits in excess of what is being reported for taxes, lots of big cash deposits all of a sudden and rapid movement of funds in and out of accounts. Banks should ask dispensaries to prove there is a legitimate source for any significant outside investments, the memo says.

Red flags extend to the dispensary owners, not just the businesses. So if a bank finds that a cannabis business owner has a record of violence or other crimes, especially marijuana crimes, it could mean see ya' for the account.

Ultimately, most of this is good news. I'm all for banks using due diligence when it comes to dealing with the cannabis businesses, and I'm all for checking out the folks who run them. If they find people ducking the law, bust them.

At least two banking analysts told major media outlets last week that they don't think the guidelines will change much of anything. They don't think banks want to deal with cannabis. Banks have bigger fish to fry, the analysts said. But I suspect a lot of banks will disagree. The memo urges them to consider their "business objectives" when deciding whether to work with cannabis businesses. Banks are trying to make money, and this is money. Certainly some banks will lighten up on cannabis, and millions of dollars will flow.

Yes, please.

But when thousands of dispensaries are exposed to the light of financial investigation, I think some of their banks will file Marijuana Priority reports, offering details not included in the Marijuana Limited ones. Then they'll watch and wait and monitor, as the memo urges. Later they'll file Marijuana Termination reports explaining exactly why they closed the accounts. Prosecutors will take notice, and dispensaries will probably get busted because of these guidelines. Unfortunately that will give ammunition to cannabis haters, and cannabis will get another black eye or two.

But lest we forget, the banks themselves have had a few black eyes lately ... and you're still giving them your money. ;)

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