Drug Test

Caution is key for banks eyeing the marijuana business .Do new laws permitting the growth and sale of marijuana in some states create opportunities for banks? The answer from experts for now seems to be "maybe" and perhaps only time will shed more light on the question..Navigating the landscape of marijuana laws isn't easy. While the U.S. Treasury's Financial Crimes Network and the U.S. Department of Justice have published some guidance, state lawmakers and regulators have been mostly mum..Colorado, Montana, Michigan, Minnesota and Illinois have legalized the production and distribution of marijuana. They are licensing manufacturers which need loans and a safe place to deposit their money. Yet, state regulators and lawmakers are offering no guidance for bankers who might be in a position to offer services to the growing marijuana industry..A house divided.Illinois and Minnesota are newcomers to the marijuana scene, having passed enabling laws in 2013 and 2014, respectively. Banks in these states join banks from Colorado (2000), Montana (2004) and Michigan (2008) in the limbo created by disparity between state and federal law. Marijuana may be regulated, licensed and taxed under state law, but according to Uncle Sam it is on the same controlled substance list as drugs like heroin and methamphetamine..The U.S. Constitution gives federal law precedence over state laws, and even state constitutions. "A state can't adopt any law in violation of federal statute," said Don Childears, president and CEO of the Colorado Bankers Association. "State law is no protection either for manufacturers or for a bank that serves them when it comes to the feds," said Childears, who has a degree from the University of Denver College of Law..Childears noted significant penalties for breaking federal law. For example, anyone who promotes marijuana activity, conducts a financial transaction involving proceeds of marijuana activity, or even conducts a financial transaction for property used to conduct marijuana activity, can be subject to sizeable fines and/or imprisonment. Federal laws also say that a bank can be punished if it "aids, abets, counsels, commands, induces or procures" marijuana and related business activities..Protected by a bureaucratic bubble.The country has 23 states with laws allowing production and distribution of marijuana as of the end of 2014. Only two states — Colorado and Washington — allow sale for recreational purposes. Most states limit medicinal use of the drug to severe illnesses such as cancer, epilepsy or Crohn's disease..With the prohibition of federal law manufacturers only continue to operate because current leadership at FinCen and the DoJ are doing what they can to support states' laws..FinCen, for example, issued guidance in February 2014 called Bank Secrecy Act Expectations Regarding Marijuana-Related Businesses (FIN-2014-G001) to help facilitate marijuana banking. "In light of recent state initiatives to legalize certain marijuana-related activity … this guidance should enhance the availability of financial services for, and transparency of, marijuana-related businesses," FinCen said in the guidance..Yet, despite FinCen's and DoJ's efforts to create breathing room for marijuana, their guidance is vague and even menacing for banks. In effect, FinCen's guidance instructs banks to know a marijuana customers' business inside and out. Banks must monitor manufacturers based on a list of 21 "red flags," the guidance says, including "depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for tax purposes" or "receiving substantially more revenue than may reasonably be expected.".In February 2014 guidance from the U.S. Department of Justice, Deputy Attorney General James Cole said the DoJ will turn a blind eye to state sanctioned marijuana unless a manufacturer's activity falls under one of the DoJ's eight priorities. In line with these priorities, FinCen's guidance instructs banks to monitor for everything from distribution of marijuana to minors, to funding of criminal enterprises, to illegal interstate transportation of marijuana, to name a few..DoJ and FinCen give no clear indication of the level of bank vigilance required to be safe from prosecution in the event a bank misses a red flag. Cole's memo, for example, says that "prosecution might be appropriate" for a bank that is "willfully blind" to its role in the violation of federal law. For banks in full compliance, Cole's memo only says prosecution "may not be appropriate" for a bank which provides services to marijuana businesses..Finding its way into community banks.The ambiguity of the phrase "willfully blind" is troublesome for bankers. If a manufacturer approaches a bank, the bank has an opportunity to review the customer's business as a part of setting up the relationship. There is no obvious way, however, for a bank to learn about the funds deposited by existing customers..The feds could consider any marijuana related deposit to be money laundering. Marijuana money will soon be pervasive. Not only will it pay the salaries and dividends of manufacturers' employees and owners, it will flow out from manufacturers into the bank accounts of every vendor which does business with them. Banks that want to remove any activity that remotely resembles money laundering will need to be diligent, if not nearly omniscient, in gathering intelligence on deposit customers..Banks also need to be aware of another kind of money laundering discovered in Colorado. Some growers are so desperate to get their cash into a bank that they pay another business to bring the cash to their bank and deposit it, Childears explained. At first, banks were able to identify the attempt by literally smelling the cash. Money from marijuana growers has a distinct odor in many cases. Then the growers began to actually wash the money in order to remove the smell. "They would literally launder it once and then try laundering it again into a bank," Childears said. .In Minnesota, only two manufacturers are licensed. Otsego-based Minnesota Medical Solutions and Cottage Grove-based LeafLine Labs, founded by members of the family that run Bachman's Floral Gift and Garden Centers, although there is no formal affiliation between the companies. Illinois law permits greater distribution of marijuana than Minnesota law..The Minnesota manufacturers will each have only one combination dispensary-manufacturing facility. LeafLine plans to open dispensaries in Eagan, Hibbing, St. Cloud and St. Paul. MinnMed plans dispensaries in Minneapolis, Maple Grove, Moorhead and Rochester. The Illinois law permits many more registrations for growers — up to 22. It also allows up to 60 registrations for dispensaries. Only three growers can locate in the greater metropolitan Chicago area; the remainder is required to spread out across the state, one per state police district..Even affecting loans.Marijuana facilities in Minnesota and Illinois also pose another threat to banks. Manufacturers in states with long winter months grow their crop indoors, in commercial buildings. Dispensaries will be either free standing facilities or units of larger buildings. Inevitably, landlords will get an offer from marijuana businesses to lease their properties, perhaps the same properties already serving as collateral for a loan..After Colorado passed a medicinal marijuana law in 2000, banks realized that nothing in their loan contract prevents the borrower from renting space to a marijuana business. The problem for banks is that the premises where a federal crime is committed can be subject to civil forfeiture by federal law enforcement, making any lien on the property junior to the federal government. The standard commercial mortgage form in Colorado now contains a clause which puts the loan in default should a landlord lease to a company that violates federal law..In Minnesota, since the standard commercial mortgage form doesn't contain any language about illegal activities, neither law nor contract would prevent a landlord from agreeing to lease the property, according to Tess Rice, general counsel for the Minnesota Bankers Association. Rice said a clause similar to that used by Colorado banks would be a good idea for Minnesota banks but she had a warning. "If you put a clause that says the borrower defaults if they lease to a company that violates federal law, you will need to be ready for the examiner to ask how you're tracking that," she said..An alluring business.While the risk of federal scrutiny is a serious one, it hasn't kept all banks away. Colorado has more than a dozen banks in the business of taking deposits from marijuana businesses, according to Barbara Walker, president of the Independent Bankers of Colorado. There also are banks interested in the business in Minnesota and Illinois. With the strict federal law, bankers are not interested in making loans; the focus so far has been only on deposits..Marijuana deposit products offer banks a chance to win big in the near term because they often can charge manufacturers between $1,000 and $3,000 in fees per month for a deposit account, Walker said. And, with accounts reported to be as large as $1 million to $5 million, the money is typically in noninterest-bearing accounts..Marijuana also offers banks a chance to win big in the long term. A bank that helps manufacturers now has a chance to win their loyalty. Should federal law change, Walker surmises that the loan business will open up. A loan to a boutique grower could be in the vicinity of $500,000; larger growers can need up to $3 million to set up a facility. The city of Cottage Grove sold 24 acres of land to LeafLine Labs in December for about $3 million. LeafLine will need to spend much more on premises and equipment to get up and running..During the last eight months, federal regulators — in particular the FDIC — have begun to thaw on the issue of taking deposits from marijuana businesses, said Ernie Panasci, partner in the Denver office of the Stinson Leonard Street law firm. "I have a client who informed regulators that they are taking deposits," he said. "The FDIC won't tell you not to do it and they won't tell you to do it.".Most of the banks serving marijuana businesses are state chartered, Walker said. They only work with marijuana businesses willing to jump through all the hoops necessary to meet FinCen's guidance. "It is easier for the community bankers to know the customer well enough to satisfy FinCen," she said. "However, it is still a specialized business. Banks will need to price correctly because a staff person will need to actively monitor the company.".Jerry Cavanaugh, general counsel for the Community Bankers Association of Illinois, said banks need to prepare to take deposits with a "clear the path first" approach. "Regardless of Cole's memo, check with the local U.S. attorney office before taking any deposits. The memo is only guidance; it is the people at the local office who decide if they get out the handcuffs," he said..Cavanaugh also suggested putting the idea before the bank's federal examiner in charge. "There can be a big difference between what FDIC Chairman Martin Gruenburg says in a speech and what the examiner in Kansas City says," he said. "Check with anyone from your bond carrier to your insurance carrier to your cash carrier.".Cavanaugh said that the Illinois state regulator doesn't anticipate publishing best practices for marijuana banking. The same is true generally for other Midwest states. Legislatures have passed marijuana laws and there's been almost no word of guidance from state banking regulators. For now, as marijuana money begins spreading throughout the Midwest, banks will have to decide how to deal with it on their own.