Federal Law and Policy

Subscribe to Federal Law and Policy

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has released updated quarterly statistics showing a continuing increase in the number of depository institutions that actively bank U.S. marijuana businesses. As of March 31, 2018, a total of 411 banks and credit unions provided services to marijuana-related businesses, up from 365 one year ago. FinCEN’s data reflects a slight decrease following the Attorney General’s announcement in January 2018 that he was rescinding the Cole Memorandum, but the numbers quickly went back up, ending the quarter at their second-highest level since December 31, 2017. FinCEN’s data is based upon Suspicious Activity Reports (SARs) required to be filed by financial institutions on activity involving a marijuana-related business.

In guidance issued in February 2014, FinCEN required financial institutions providing services to marijuana businesses to file the following types of SARs depending upon the type of services being provided:

  • A “Marijuana Limited” filing, which means that the financial institution’s due diligence indicates that the marijuana-related business does not raise any of the red flags as defined in the Cole Memo and is compliant with the appropriate state’s regulations regarding marijuana businesses. In this category, the financial institution is providing banking services to the marijuana-related business.
  • A “Marijuana Priority” filing, which means the financial institution’s due diligence indicates that the marijuana-related business may raise one or more of the red flags as defined in the Cole Memo or may not be fully compliant with the appropriate state’s regulations regarding marijuana-related businesses. In this category, the financial institution is providing banking services to the marijuana-related business while further investigation is being conducted.
  • A “Marijuana Termination” filing, which means the financial institution decided to terminate its relationship with the marijuana related business for one or more of the following reasons:

– The financial institution’s due diligence indicates that the marijuana-related business raises one or more of the red flags as defined in the Cole Memo.

– The marijuana-related business is not fully compliant with the appropriate state’s regulations.

– The financial institution has decided not to have marijuana-related customers for business reasons.

Following the Attorney General’s announcement in January 2018, FinCEN announced that its 2014 guidance would remain in place. And FinCEN’s latest publication of marijuana-banking statistics contains this important note:

Note: The SAR reporting structure laid out in the 2014 guidance remains in place. FinCEN will continue to work closely with law enforcement and the financial sector to combat illicit finance, and we will notify the financial sector of any changes to FinCEN’s SAR reporting expectations.

As of April 12, 2018, FinCEN has received 51,391 SARs involving marijuana-related businesses since issuance of FinCEN’s February 2014 guidance. The vast majority of those SARs – nearly 38,000 – were “Marijuana Limited” filings, indicating that the financial institution was providing ongoing banking services to the marijuana business in question. FinCEN has received approximately 3,800 “Marijuana Priority” SARs, and over 12,000 “Marijuana Termination” SARs, during the same time period.

An analysis of FinCEN’s SAR filing data continues to show a generally positive and encouraging trend for marijuana businesses, notwithstanding the Justice Department’s policy reversal on marijuana enforcement. For the first three quarters of 2018, the number of “Marijuana Limited” SAR filings increased every month by an average of 1,401 filings. In comparison, the number of “Marijuana Priority” and “Marijuana Termination” SAR filings increased by an average of only 480 and 173, respectively.

Few things are as bi-partisan as constructing a snazzy acronym for federal legislation, and Senators Elizabeth Warren (D-MA) and Cory Gardner (R-CO) did not disappoint with the “Strengthening the Tenth Amendment Through Entrusting States Act”  (“STATES Act”). As its name suggest, the goal of the STATES Act is to protect regulated cannabis businesses and users in states where cannabis has been legalized by amending the Controlled Substances Act.

U.S. Capitol Building
Copyright: mesutdogan / 123RF

The Controlled Substances Act, 21 U.S.C. §§ 801, et seq. (“CSA”) is the federal law that makes the manufacture, distribution, and use of marijuana illegal, and is the main source for the dichotomy between state and federal law concerning cannabis. The proposed legislation seeks to amend the CSA by adding several sections which would essentially exempt state-sanctioned marijuana from the CSA. While the STATES Act would not legalize cannabis on a nationwide level, it would and give states the freedom to legalize cannabis or keep it illegal.

The STATES Act has received so much attention not only because of the sweeping changes it proposes, but also because it has received tacit approval from President Trump, who was previously seen as a roadblock to cannabis legislation. That is due in part to a deal struck between Senator Gardner and the President, which ended with the following pronouncement from Gardner: “President Trump has assured me that he will support a federalism-based legislative solution to fix this states’ rights issue once and for all.”

The folks at Leafly have a great breakdown and explanation of the STATES Act, including the following bullet points on what the legislation proposes:

  • The act amends the Controlled Substances Act (CSA) so that as long as states and tribes comply with a few basic protections, its provisions no longer apply to any person acting in compliance with state or tribal laws relating to marijuana activities.
  • The act states that compliant transactions are not trafficking and do not result in proceeds of an unlawful transaction. This would go a long way towards ending the difficulties cannabis companies have in obtaining banking services.
  • The measure removes industrial hemp from the list of controlled substances under the CSA.
  • The following federal criminal provisions under the CSA continue to apply:
    • Prohibits endangering human life while manufacturing marijuana
    • Prohibits employment of persons under age 18 in drug operations
  • The act prohibits the distribution of marijuana at transportation safety facilities such as rest areas and truck stops.
  • The measure prohibits the distribution or sale of marijuana to persons under the age of 21 other than for medical purposes.

We will continue to monitor and provide updates on this important legislation, which has great implications for cannabis businesses throughout the country.

Joseph McNelis works in Fox Rothschild’s Blue Bell, PA office and focuses his practice on labor and employment matters. Joe also tracks legal developments in the cannabis industry in Pennsylvania and nationwide. Joe can be contacted at 610-397-2332 or jmcnelis@foxrothschild.com.

Jesse Harris writes:

Is a landlord who accepts rent from a cannabis dispensary tenant entitled to bankruptcy relief in a federal forum? In In re Olson, 2018 WL 989263 (B.A.P. 9th Cir. Feb. 5, 2018), the Bankruptcy Appellate Panel for the Ninth Circuit answered: maybe, maybe not, but either way, the bankruptcy court must make specific factual findings based on evidence in the record and explain its reasoning.

U.S. Court of Appeals for the Ninth Circuit building in San Francisco, CAIn Olson, a 92-year-old, legally blind landlord owned a shopping center in which a marijuana dispensary—operating legally under California law—was a tenant. Facing a foreclosure sale of her property, as well as ongoing litigation with the dispensary tenant, the debtor filed for Chapter 13 relief. The debtor continued to collect rent from the dispensary tenant, and ultimately proposed a Chapter 13 plan that included the sale of the shopping center within six months of plan confirmation. Before confirmation, however, the bankruptcy court sua sponte dismissed the bankruptcy case because the debtor was receiving “illegal proceeds” by “leasing property for an unlawful purpose under federal law, although lawful under state law.”

The debtor appealed, arguing that the bankruptcy court abused its discretion by dismissing the case. The Ninth Circuit agreed. In vacating the bankruptcy court’s order, the Bankruptcy Appellate Panel found that the bankruptcy court failed to articulate its legal basis for dismissing the case with “clarity and precision.” Specifically, the panel noted that the bankruptcy court did not make findings on its conclusion that the debtor violated the Controlled Substances Act by accepting the dispensary’s rent; that the debtor acted in bad faith; that the trustee would be administering the proceeds of an illegal business; or that the rents were to be used to fund the plan.

A concurring opinion written by Judge Maureen A. Tighe also pointed out that “[w]ith over twenty-five states allowing the medical or recreational use of marijuana, courts increasingly need to address the needs of litigants who are in compliance with state law while not excusing activity that violates federal law.” According to Judge Tighe, “the presence of marijuana near the [bankruptcy] case should not cause mandatory dismissal.”

The holding in Olson not only highlights the ongoing tension between the Controlled Substances Act and state marijuana programs, but it also emphasizes the need for landlords to carefully consider leasing property to cannabis businesses. Should those landlords eventually seek bankruptcy relief, such relief may be limited. That said, the panel in Olson appears to have equipped landlords who choose to lease property to cannabis businesses with certain bankruptcy options to avoid the “harsh penalty of dismissal,” such as rejecting the lease under Section 365 of the Bankruptcy Code.

Jesse M. Harris is an associate in the firm’s Financial Restructuring & Bankruptcy Department, based in its Philadelphia office.

Jack Praetzellis writes:

Sunset at Manhattan Beach and Pier in Southern California, Los Angeles.California Governor Jerry Brown signed an amendment to California Evidence Code Section 956 ominously known as the “crime-fraud exception”.  The newly-revised Code Section attempts to address the tension between state and federal law governing cannabis.

Under normal circumstances, California’s attorney-client privilege makes confidential communications among an attorney and a client exempt from disclosure.  Essentially, neither a lawyer nor a client can be compelled to testify about the substance of their communications.

The crime-fraud exception punctures the attorney-client privilege.  It provides that if a client used the services of a lawyer to commit a crime or a fraud, then the attorney-client privilege doesn’t apply.  The conflict between state and federal laws governing cannabis raises the specter of whether or not legal advice about cannabis falls into the crime-fraud exception.

Under California’s newly enacted Evidence Code Section 956(b), so long as an attorney “advises the client on conflicts with respect to federal law,” the crime-fraud exception won’t impact the attorney-client privilege where the advice is “rendered in compliance on state and local laws on medical cannabis or adult-use cannabis.”

Before celebrating, however, be mindful of Federal Rule of Evidence 501.  Where federal law governs a claim, federal courts do not apply state law privileges and therefore will not apply Evidence Code Section 956(b).  And obviously no similar special exception has been written in to federal law.

What’s the takeaway?  If you are providing or receiving advice about cannabis in California, be sure that some of the advice concerns conflicts with respect to federal law.  While it’s not guaranteed to preserve the attorney-client privilege under all circumstances (see Federal Rule of Evidence 501), it’s undoubtedly better than nothing.

Jack Praetzellis is an associate in the Litigation Department, resident in the San Francisco office.

As a follow-up to yesterday’s post regarding the status of FinCEN’s 2014 marijuana banking guidance in light of the Attorney General’s policy reversal on marijuana enforcement at the federal level, we have received written confirmation from FinCEN that its 2014 guidance remains in place.  In response to our inquiries, FinCEN provided us with the following statement:

“The SAR reporting structure laid out in the February 14, 2014 guidance remains in place.  FinCEN will continue to work closely with law enforcement and the financial sector to combat illicit finance, and we will notify the financial sector of any changes to FinCEN’s SAR reporting expectations.”

In addition, the two U.S. Senators from Colorado, Michael Bennet (D) and Cory Gardner (R), announced that they have sent a letter to FinCEN urging the agency to retain its 2014 marijuana banking guidance.  In their press release, the senators warned that “repealing the guidance could increase the amount of cash used by marijuana businesses, raising public safety issues and reducing the oversight and transparency of marijuana transactions.”  A copy of their letter is available here.

We are closely monitoring this area and will provide timely updates as to any developments.

Reuters is reporting today that the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) was caught off guard by Attorney General Jeff Sessions’ announcement last week that the Justice Department was reversing its policy regarding enforcement of federal marijuana laws.  A FinCEN spokesman said in a statement that his agency’s prior pronouncement regarding marijuana banking nevertheless “remains in place,”  referring to guidance issued in February 2014 to clarify Bank Secrecy Act expectations for financial institutions seeking to provide services to marijuana-related businesses.  That guidance described how financial institutions could provide banking services to marijuana businesses consistent with their BSA obligations despite the fact that the manufacture, distribution, and dispensing of marijuana is illegal under federal law.  And as we recently reported, 400 banks and credit unions were actively serving the marijuana industry prior to the Attorney General’s announcement.

Reuters reports that FinCEN received no advance warning of the Attorney General’s announcement, according to sources, and a Justice Department spokesman declined to comment about whether his agency had coordinated with FinCEN prior to the announcement.  The Justice Department’s policy reversal has understandably sowed confusion among financial institutions as to whether they can continue to do business with marijuana businesses, and FinCEN’s confirmation that its 2014 guidance remains in place should provide some measure of comfort to affected banks and credit unions.

It is worth noting that FinCEN’s current director – Kenneth A. Blanco, who assumed the role just last month — spent the last 28 years of his career as a Justice Department prosecutor, most recently serving as Acting Assistant Attorney General of the Criminal Division.  During his tenure at the Justice Department, he was the chief of numerous sections, including the Money Laundering and Asset Recovery Section, the Narcotic and Dangerous Drug Section, and the Organized Crime and Gang Section, among others.  We have yet to see whether Mr. Blanco will implement major policy changes at FinCEN, and whether his agency maintains its marijuana banking stance, or aligns with his former agency’s policy shift, may well be one of the first major policy decisions he has to confront.

Last Thursday, Attorney General Jeff Sessions issued a policy Memo regarding Marijuana Enforcement that effectively rescinded the 2013 “Cole Memo” guidance, which endorsed a more “hands off” approach in states where marijuana had been legalized. The January 4, 2018 Memo instructed that with regard to marijuana-related enforcement actions, federal prosecutors should “follow well-established principles that govern all federal prosecutions.”

Cannabis and the law
Copyright: jirkaejc / 123RF Stock Photo

This announcement has important implications for licensed cannabis businesses across the country, and attorneys from Fox Rothschild’s Cannabis Practice Group were among the first to provide legal and practical advice for those in the industry. Links to selected publications and interviews can be found below:

AG Sessions Issues Cannabis Policy Reversal. What Does It Mean for the Industry?

First Lawyer Comments Come Through on Sessions Decision To Rescind Cole Memo (via Cannabis Law Report)

Cannabis Law Practices Brace for Impact of Sessions Memo (via Law.com)

Sessions takes aim on marijuana enforcement (via NJBIZ.com)

Bethlehem company gets green light to dispense medical marijuana (via Allentown Morning Call)

 

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has released updated statistics showing a steady increase in the number of depository institutions that actively bank U.S. marijuana businesses. As of September 30, 2017, a total of 400 banks and credit unions provided services to marijuana-related businesses, up from 334 as of December 31, 2016. FinCEN’s data is based upon Suspicious Activity Reports (SARs) required to be filed by financial institutions on activity involving a marijuana-related business.

In guidance issued in February 2014, FinCEN required financial institutions providing services to marijuana businesses to file the following types of SARs depending upon the type of services being provided:

  • A “Marijuana Limited” filing, which means that the financial institution’s due diligence indicates that the marijuana-related business does not raise any of the red flags as defined in the Cole Memo and is compliant with the appropriate state’s regulations regarding marijuana businesses. In this category, the financial institution is providing banking services to the marijuana-related business.
  • A “Marijuana Priority” filing, which means the financial institution’s due diligence indicates that the marijuana-related business may raise one or more of the red flags as defined in the Cole Memo or may not be fully compliant with the appropriate state’s regulations regarding marijuana-related businesses. In this category, the financial institution is providing banking services to the marijuana-related business while further investigation is being conducted.
  • A “Marijuana Termination” filing, which means the financial institution decided to terminate its relationship with the marijuana related business for one or more of the following reasons:

– The financial institution’s due diligence indicates that the marijuana-related business raises one or more of the red flags as defined in the Cole Memo.

– The marijuana-related business is not fully compliant with the appropriate state’s regulations.

– The financial institution has decided not to have marijuana-related customers for business reasons.

As of September 30, 2017, FinCEN has received more than 39,000 SARs involving marijuana-related businesses since issuance of the February 2014 guidance. The vast majority of those SARs – nearly 29,000 – were “Marijuana Limited” filings, indicating that the financial institution was providing ongoing banking services to the marijuana business in question. FinCEN has received approximately 2,800 “Marijuana Priority” SARs, and just over 9,400 “Marijuana Termination” SARs, during the same time period.

An analysis of FinCEN’s SAR filing data shows a positive and encouraging trend for marijuana businesses, which have typically struggled to find financial institutions willing to provide banking services. For the first three quarters of 2017, the number of “Marijuana Limited” SAR filings increased every month by an average of 1,258 filings. In comparison, the number of “Marijuana Priority” and “Marijuana Termination” SAR filings increased by an average of only 332 and 118, respectively.