Legalized Marijuana Guidance Leaves Some Banks Dazed and Confused

Last week, the Financial Crimes Enforcement Network ("FinCEN") issued new guidance in response to several states passing legislation to legalize marijuana for medical purposes, and in some states, for recreational purposes as well. This has left many financial institutions scratching their heads as to how to comply with the Bank Secrecy Act ("BSA"), which requires institutions to conduct due diligence on their customers (Customer Identification Programs), and to report suspicious activity that may be indicative of criminal activity (Suspicious Activity Reports). According to a recent USA Today online posting, 20 states plus the District of Columbia have enacted laws that allow people to use medical marijuana with a doctor's recommendation. Two states – Colorado and Washington – have legalized marijuana for recreational use as well.

Two key aspects of BSA compliance are the customer identification program ("CIP") and suspicious activity reporting ("SAR"). All banks must have a written CIP, see, e.g., 12 C.F.R. § 21.21 (for national banks), and are required to implement a written CIP that is appropriate for the institutions' size and type of business, and that includes certain minimum requirements. The CIP is intended to enable an institution to form a reasonable belief that it knows the true identity of each customer. The CIP must include account opening procedures, and reasonable and practical risk-based procedures for verifying the identity of each customer. If an institution cannot verify the identity of its customer, or concludes that its customer is attempting to open an account at the institution in order to further criminal activity, then the institution should decline to open the account.

The second key aspect of BSA compliance is SAR reporting. Banks are required by federal regulations to file a SAR report on: (a) criminal violations involving insider abuse in any amount; (b) criminal violations aggregating $5,000 or more when the suspect can be identified; (c) criminal violations aggregating $25,000 or more regardless of a potential suspect; and (d) transactions conducted or attempted by, at, or through the bank (or an affiliate) and aggregating $5,000 or more, if the bank or affiliate knows, suspects, or has reason to suspect that the transaction: (i) may involve potential money laundering or other illegal activity (e.g., terrorism financing), (ii) is designed to evade the BSA or its implementing regulations, or (iii) has no business or apparent lawful purpose, or is not the type of transaction that the particular customer would normally be expected to engage in, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction. See, e.g., 12 C.F.R. § 21.11 (national banks).

Under federal law, narcotics and controlled substances are generally prosecuted under the Controlled Substances Act...