January 31, 2023

Volume XIII, Number 31


January 30, 2023

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The Medical Marijuana Industry and AML: Opportunities and Risks

New York State Encourages Banking for State-Licensed Medical Marijuana Businesses – Whereas a Maine Company Runs Into Trouble, Despite State Law Legalizing Medical Marijuana

To state the obvious, growing and dispensing marijuana is still illegal under federal law.  As a result, being involved in even a state-licensed marijuana business can be risky. Moreover, obtaining financial services for such a business is sometimes impossible, primarily due to the federal anti-money laundering (“AML”) obligations posed upon financial institutions by the Bank Secrecy Act (as we have blogged).

This post discusses two recent developments related to state-licensed medical marijuana operations, which serve as contrasting bookends to the spectrum of potential risks and opportunities presented by such businesses.  On the risk-end of the spectrum, we discuss the recent difficulties encountered by a Maine business, and how dubious the seeming safe harbor of state legalization of marijuana can be in some cases. On the opportunity-end of the spectrum, we discuss recent guidance issued by the New York Department of Financial Services, which has declared its support and encouragement of state-chartered banks and credit unions to offer banking services to medical marijuana related businesses licensed by New York State.The fact that a state has legalized medical uses of marijuana is the beginning of a risk analysis regarding participation in the marijuana industry, not the end of such an analysis.  At least in the eyes of federal law enforcement, state licensing of marijuana activity can attract individuals allegedly seeking to use the seeming legitimacy of a state program as cover for engaging in more traditional drug distribution activities. Such individuals can undermine and endanger the efforts of more compliance-oriented businesses.

A Maine company growing medical marijuana recently came under fire for the alleged association of its owner, Kevin Dean, with an individual named Brian Bilodeau. According to the Bangor Daily News, Bilodeau, who currently is facing illegal firearm possession and marijuana trafficking charges in federal district court in Maine, was a business associate of Dean, who ran a licensed growing operation under Maine’s Medical Marijuana program.

Dean’s association with Bilodeau has left him open to allegations of both non-compliance with Maine’s medical marijuana laws and federal money laundering, as well as drug trafficking. Some of Dean’s properties are now subject to civil federal forfeiture and his business is under investigation by federal officials, according to this recent federal civil forfeiture complaint. Dean also allegedly lost a $8.3 million deal from a Canadian firm to buy his marijuana growing business.

Of course, any form of marijuana growing and distribution is illegal under federal law — and related financial transactions presumably represent federal money laundering violations — regardless of any state legalization.  But this cautionary tale from Maine illustrates how alleged non-compliance with state law can provide the opportunity and motivation for federal law enforcement officials to pounce.  Prosecution by federal officials, especially for money laundering, is one of the top concerns for marijuana-related businesses and the financial institutions that serve them. The prior, seemingly stable federal prosecution policy which offered some protections to the burgeoning state marijuana industries was suddenly upended in January 2018 when the Department of Justice (“DOJ”) withdrew the 2013 so-called Cole Memoabout which we have blogged. Now, it is unclear how the federal government will treat marijuana businesses that are legal under state law.  Further, if actual compliance by a business with state law is debatable, or if the business is being misused for other alleged crimes, that crack may invite unwelcome federal attention.  Although federal law enforcement theoretically could pursue almost any state licensed marijuana business or financing activity, the reality is that it will tend to focus its limited resources on the most inviting targets.

NYDFS Guidance for Offering Financial Services to the Medical Marijuana Industry

Recently, New York tried to quell some of those concerns for its legal marijuana industry, and identify New York as a state friendly to financial services for marijuana related businesses. On July 3, 2018, the New York State Department of Financial Services (“NYDFS”) published guidance to “clarify the regulatory landscape and encourage” New York, state-chartered banks and credit unions to “offer banking services” to “marijuana related businesses licensed by New York state.” Generally, New York passed laws from 2015 to 2017 which now allow for registered entities to produce and dispense medical marijuana, and for pilot projects conducting industrial hemp research in New York.

The NYDFS guidance is straightforward and practical. New York has advised its state-chartered banks and credit unions to continue to follow the guidance published in 2014 by the Financial Crimes Enforcement Network (“FinCEN”).

Although this guidance presents stringent requirements, like contacting state regulators to determine the status of licensees and reviewing the business’ marijuana licensing application, it allows financial institutions to enter into formal banking relationships without free of federal reprisals. NYDFS has reasoned that it guidance is necessary not just to deal with the uncertainty of federal law, but for another purpose as well. New York is concerned that the exclusive use of cash makes employees and owners, who sometimes carry thousands of dollars in cash, likely victims of violent crime.

New York marijuana-related businesses, the state, and its banks stand to benefit from this guidance. Encouraging formal banking relationships will lower the risk of violent crimes and theft, legitimize marijuana-related businesses, and allow owners to open bank accounts for their businesses—instead of using personal accounts or opening accounts through third-parties. It also stands to benefit the state, making it simpler to track funds to be taxed and bringing more marijuana-related business to the state. Finally, banks stand to benefit as they will be able to open new lines of business with marijuana-related companies without concern that New York will try to shut them down. New York could quickly become the premier banking hub for marijuana-related businesses.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 228

About this Author

Andrew N. D’Aversa, attorney, Ballard Spahr Law FIrm, Philidelphia

Andrew N. D’Aversa is a litigation associate in the Philidelphia, Pennsylvania office of Ballard Spahr Law Firm.