States’ legalization of marijuana sales fails to address legal quandary for banks

Although Colorado and Washington became the first states to legalize the recreational use and sale of marijuana with the passage of ballot measures on Tuesday, financial institutions across the country should continue to refuse to do business with marijuana businesses, anti-money laundering experts said.

“If financial institutions are federally licensed or insured, they must comply with federal regulations, and those regulations are clear about conducting financial transactions with money generated by the sale of narcotics,” said Jim Dowling, a former Internal Revenue Service special agent who also acted as an anti-money laundering advisor to the Office of National Drug Control Policy. 

While the Justice Department is not publicly discussing the issue, former officials say the new laws in Colorado and Washington do not make marijuana proceeds any less risky for financial institutions to handle than did so-called medical marijuana laws that have been around for more than a decade.

California was the first state to legalize so-called medical marijuana in 1996. With the addition of Massachusetts, which passed a medical marijuana ballot initiative on Tuesday, 18 states, and the District of Columbia, now have such laws on their books.

A study by financial-analysis firm See Change Strategy said the medical marijuana business would be worth $1.7 billion in 2011 and was growing.

The federal government does not recognize states’ authority to legalize marijuana under any circumstances, however, and has targeted some medical marijuana businesses for violations of the 40-year-old Controlled Substances Act, which classifies the drug a Schedule 1 narcotic, meaning it is considered addictive and with no medical value.

To date, under President Barack Obama federal authorities have focused enforcement efforts on large commercial medical marijuana operations that generate significant sums of money. In some cases, federal money-laundering and forfeiture laws have been brought to bear against such businesses.

DEA warns banks

The U.S. Drug Enforcement Administration (DEA) began warning banks and credit card companies away from medical marijuana businesses four years ago, and many, if not all, have responded by closing the businesses’ accounts. Even small regional banks that once publicly embraced the industry have abandoned it.

Medical marijuana businesses have been forced to pose as traditional medical clinics to open bank accounts or clandestinely misuse existing personal or business accounts, sources have told Compliance Complete.

The Justice Department on Wednesday said its marijuana enforcement policies remained unchanged.

“We are reviewing the ballot initiatives and have no additional comment at this time,” its public statement said.

A Justice Department spokeswoman did not respond to a Compliance Complete request for additional comment related to banking activity.

Threat of aggressive enforcement in California

To date, U.S. attorneys offices in states with medical marijuana laws have had a large degree of autonomy in determining when to bring criminal prosecutions for marijuana-related infractions of the Controlled Substances Act.

In 2010, Californians considered legalizing the recreational use of marijuana via Proposition 19, also known as “The Regulate, Control and Tax Cannabis Act of 2010″.

While the measure ultimately failed, prior to the vote U.S. Attorney General Eric Holder vowed to aggressively prosecute “organizations that possess, manufacture or distribute marijuana for recreational use” in a letter to former heads of the DEA who had expressed concern.

On Wednesday former federal law enforcement officials said the Justice Department, and individual U.S. attorneys offices, are going to have to clarify their intentions with regard to enforcing the federal marijuana ban in Colorado and Washington.

The recreational marijuana measures in both states will allow marijuana to be sold at state-licensed stores.

However, former Justice Department officials said that financial institutions, even those in Colorado and Washington State, must avoid doing business with such stores just as they have avoided medical marijuana businesses or risk possible criminal or civil penalties and accompanying reputational damage.

In fact, once the states have begun their licensing processes, financial institutions may need to update their due diligence on existing business customers by ensuring they are not on lists of state-licensed marijuana stores, the sources said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus (http://accelus.thomsonreuters.com/) . Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter at: http://twitter.com/GRC_Accelus )