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Up in Smoke II – What’s happening in Banking?

Banking

by Rickard Jorgensen, FCII, ARM, ACIArb

Although not directly connected to the practice of accounting it is useful to know what is happening in other industries. In this case in particular, we are talking about the highly controversial cannabis business.

Big Tobacco and the brewing industry are watching with great interest developments at the Department of Justice waiting for the opportunity to enter the cannabis business.  Go here for the story.

In the article, Navigating the Hazy Status of Marijuana Banking, written by Hilary V. Bricken, the current status of banking laws is discussed.

Under the previous Obama administration, then-acting U.S. Deputy Attorney General James M. Cole issued an enforcement memorandum (2013 Cole Memo) to address the conflict between State and Federal laws. The memo outlined the Department of Justice’s toleration of States with robust regulations but will continue to work to prevent criminal and illegal activity, distribution of cannabis to minors, drugged driving and the growing or use of cannabis on public lands.  A further memo was issued on February of 2014 extending the toleration to financial institutions that provide services to the Cannabis industry.

Subsequently the Financial Crimes Enforcement Network (FinCEN), an agency within the Department of Treasury, addressed the issue of cannabis business banking accounts with guidelines.  Banks must also file Suspicious Activity Reports (SARs) at least quarterly with FinCEN. Red flags include:

  • anonymous out-of-state or international investors or financiers;
  • an inability to trace money flow to investors, owners, and/or vendors; failing to secure a state and/or local license to operate;
  • owners and/or financiers who have significant criminal histories;
  • the business’s failure to report income and/or pay taxes to the state or the federal government;
  • the business’s violation of state operational laws and rules;
  • and the failure to timely renew state and/or local operational licenses.

Since these guidelines were published, the DOJ has remained silent on the conflict of State versus Federal enforcement.  In fact, on December 2, 2016, California’s then-acting State Treasurer, John Chiang, wrote to President Trump seeking increased guidance on California cannabis and banking. Previously, the Obama administration’s Department of Treasury defended its cannabis banking guidelines to Congress on the grounds of public safety and increased transparency.  There was no response.

Treasury Secretary Steven Mnunchin has not offered any further guidance and it is difficult to know whether he supports or opposes the cannabis banking status quo or whether he considers it a priority. In the meantime, banking uncertainty for cannabis businesses remains.

The Treasury Department guidelines, however, were built entirely on the Cole memo guidance — minus the Cole Memo, those guidelines remain technically in effect, but extremely uncertain and likely facing a rewrite.  And that, according to experts, will push banks that are even thinking about sticking a toe in the market to retreat.

In addition, in January 2018, the Attorney General Jeff Sessions issued a memo that described a “return to the rule of law.” But federal officials could not answer whether people selling or using marijuana – in certain states where it’s considered legal – would now be more at risk of prosecution.   The memo indicated that marijuana guidance issued by the previous administration – which did not challenge state laws as long as marijuana sales did not conflict with federal law enforcement policies – was unnecessary.

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For more information: see the August 31st, 2018 Edition article of Accounting Todahere.

Obviously, CPAs are not subject to the same stringent guidelines as those imposed upon Financial Institutions and should look to their state boards of accountancy to determine if providing services to businesses in the marijuana industry is permissible. Go here.

For a complete list of states that permit the use of Medical Marijuana it is available here.

But with the uncertainty of the silence of the Treasury Department and Session’s “return to the rule of law” continues to cast a question mark over the legality of the industry and the services provided by CPAs.

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com