Department of Justice’s Law Enforcement Priorities

A good place to begin identifying areas of potential vulnerability for cannabis related businesses is the Memorandum for All United States Attorneys: Guidance Regarding Marijuana Enforcement (August 29, 2013), issued by James M. Cole, Deputy Attorney General, U.S. Department of Justice. The Memorandum lists 8 law enforcement priorities or targets for the Department of Justice:

1. Preventing the distribution of marijuana to minors;
2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
4. Preventing state authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
8. Preventing marijuana possession or use on federal property

Department of Justice’s Interest in Marijuana and Financial Crimes

Moving further into the business sector, it is useful to look at the Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes (February 14, 2014) issued by James M. Cole, Deputy Attorney General, U.S. Department of Justice..

The import of this Memorandum is that it directly applies to the U.S. banking industry and actually puts financial institutions in the position of reporting to the Federal government if they are doing business or think they may be doing business with a cannabis related business.

Banks have filed more than 1,700 so-called “Marijuana Limited” Suspicious Activity Reports (SAR’s) since the Federal government issued guidance early last year on how financial institutions can handle dealings with cannabis businesses. (Marijuana Business Daily of April 13, 2015).

The Wall Street Journal correctly sees this as an indication that banks are in fact working with marijuana companies. The idea, however, of banks having to report on their clients’ “Suspicious Activity” related to marijuana businesses is of far greater concern as the Federal government can (will) use this information to build its own investigative data bases. It must be noted that banks are providing the Federal government reports based not on facts, but just on “suspicions.” The idea of banks reporting on their customers is a frightening example of over-reaching by the government. Bank actions related to “suspicions”, “reasonable suspicions” and “probable cause” raise Constitutional and criminal law issues that will be addressed in judicial forums around the country as banks aggressively pursue their share of the financial side of the Cannabis Industry.

The Department of the Treasury Issues Guidance to Banks

The Financial Crimes Enforcement Network (“FinCEN”) is issuing guidance to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to Marijuana-related businesses. FinCEN is issuing this guidance in light of recent state initiatives to legalize certain marijuana-related activity and related guidance by the U.S. Department of Justice (“DOJ”) concerning marijuana-related enforcement priorities. (See Guidance FIN-2014-G001 Issued: February 14, 2014 Subject: BSA Expectations Regarding Marijuana-Related Businesses).

This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. The following describes the types of detailed business information the banks will go after, and they may go into greater depth to better protect themselves:

In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes:

1. Verifying with the appropriate state authorities whether the business is duly licensed and registered;
2. Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
3. Requesting from state licensing and enforcement authorities available information about the business and related parties;
4. Developing an understanding of the normal and expected activity for the business, including the type of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
5. Ongoing monitoring of publicly available sources for adverse information about the business and related parties;
6. Monitoring for suspicious activity, including for any of the red flags described in this guidance; and
7. Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

The Treasury’s guidance states that as part of its customer due diligence, a financial institution should consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law.

Just the Tip of the Iceberg

Beyond any issues of criminality, the extent of the Federal government’s regulatory authority shouldn’t be under estimated. For example, businesses in the medical marijuana arena will have to deal with the Department of Health and Human Services and to comply with the requirements of the Health Insurance Portability and Accountability Act (HIPAA); physicians must deal with Electronic Health and Medical Record regulations; and there are increasing security requirements to protect against data breaches.

HIPAA is mentioned here because it is an example of the incredible scope of just one regulatory statute. The degree of regulation that will attach to medical marijuana activities is overwhelming by volume, degree of detail and magnitude of financial penalties.

In addition to HIPAA, legalized medical marijuana products will have to comply with the Food and Drug Administration’s (FDA) regulations setting strict standards for packaging, labeling and advertising.

But you can’t stop with just the FDA or just medical marijuana. The Federal Trade Commission (FTC) doesn’t just go after fraudulent advertising practices, it coordinates FTC actions with federal and international law enforcement agencies sharing authority over health and safety products and services, and monitors advertising and marketing of alcohol, tobacco, violent entertainment media, and food to children. There is no doubt that branding, marketing and advertising legalized marijuana businesses will be subject to regulation by the FTC to the same or even greater extent than are alcohol related businesses.

Associated Businesses

The following list from the Marijuana Business Daily is a good example of the breadth of businesses that will be involved in the Cannabis Industry. B2B interactions will be increasing exponentially with normal conflicts rising accordingly. The top investment categories are in bold.

• Accounting
• Advertising, PR and Marketing Agencies
• Banking & Payment Processing
• Consultant Services
• Hydroponics & Cultivation Products
• Industry Organizations & Nonprofits
• Insurance Providers
• Lawyers & Legal Resources
• Marijuana-Infused Products and Edibles Providers
• Media/Publications/Information
• Packaging & Supplies
• Paraphernalia (Headshop Goods) – Wholesale & Retail
• Private Equity & Investment Resources
• Professional Training and Education
• Security Services and Equipment
• Software, Point-Of-Sale & Marijuana Business Technology
• Testing & Lab Services
• Other Marijuana-Related Businesses

To be continued in Part 3...