Clouded judgment

Sometimes I don’t know my own strength.  There was that time I stamped on a box of After Eights in frustration at not being able to peel off the easy-peel cellophane.  And now the US government has hupped-to at my command.  It was a mere three weeks ago when I suggested that it might be a good idea to issue some guidelines for banks on dealing with customers who are, well, dealing in drugs in a totally legal sense – and lo! here they are.  (Well, to be fair US Attorney General Eric Holder did announce on 23 January 2014 that his government would soon issue regulations – but even I am surprised by the speed of the response.)

So on 14 February 2014, FinCEN issued guidance clarifying CDD expectations and reporting requirements for financial institutions seeking to provide services to marijuana businesses.  Entitled “BSA Expectations Regarding Marijuana-Related Businesses“, the guidelines (in the manner beloved of Sybil Fawlty) really state the bleedin’ obvious when it comes to CDD obligations: “In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct CDD that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.”  All predictable – but time-consuming, and this alone might means that banks and others decide that marijuana businesses are just not worth the effort.

Things get really interesting when it comes to the reporting obligations: “The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity….  Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity.  Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN’s suspicious activity reporting requirements and related thresholds.”  Ah.  But then: “A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, [is otherwise OK] should file a ‘Marijuana Limited’ SAR.  The content of this SAR should be limited to the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified.  Financial institutions should use the term ‘MARIJUANA LIMITED’ in the narrative section.”

But what if you think that the marijuana business is in fact doing something wrong?  Well, then: “[You] should file a ‘Marijuana Priority’ SAR.  The content of this SAR should include comprehensive detail in accordance with existing regulations and guidance.  Details particularly relevant to law enforcement in this context include: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) details regarding the enforcement priorities the financial institution believes have been implicated; and (iv) dates, amounts, and other relevant details of financial transactions involved in the suspicious activity.  Financial institutions should use the term ‘MARIJUANA PRIORITY’ in the narrative section to help law enforcement distinguish these SARs.”

The guidelines also offer several red flags to help US financial institutions distinguish between good and bad marijuana business activity – which should make for some very entertaining AML training updates.  They may even provide product samples – I bet that would get people signing up.  But the guidelines have yet to take root (boom boom!) and US banks are still wary, as reported here by the BBC.