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Planting Season: Early Trends in Banking Cannabis

Rapid expansion of the cannabis (or marijuana) industry has significant implications for financial institutions, which must now consider whether to offer financial services to marijuana-related businesses. The regulatory landscape is far from clear on this issue, and banks need to consider the implications that their position on the issue has on operations, regardless of whether they choose to participate in this market.Rapid expansion of the cannabis (or marijuana) industry has significant implications for financial institutions, which must now consider whether to offer financial services to marijuana-related businesses. The regulatory landscape is far from clear on this issue, and banks need to consider the implications that their position on the issue has on operations, regardless of whether they choose to participate in this market.

Overview of Current Regulatory Landscape in North America

As the cannabis industry continues rapid expansion in the North American markets, Marijuana Related Businesses (MRBs) have a great need to access traditional banking services that were previously completely restricted. According to Ed Keating, the chief data officer for Cannabiz Media, a company that tracks marijuana licenses, there are 9,397 active marijuana licenses for both medicinal and recretional use in the U.S., and these licensees generated approximately $16 billion in 2017. In addition, a study conducted by BDS Analytics, a cannabis industry market trends reports company, projects that marijuana-generated revenue will grow by 150% to $40 billion by 2021. Chartered banks and credit unions (“financial institutions”) interested in providing financial services to these MRBs must consider the regulatory risks that are unique to this industry. 

United States Context

In the United States (U.S.), the Controlled Substances Act renders the medicinal and recreational use of marijuana illegal on a federal level. However, nine U.S. states (Washington, Oregon, California, Nevada, Alaska, Colorado, Massachusetts, Vermont, and Maine) and the District of Columbia have legalized the recreational use of marijuana, and 30 states have legalized its medicinal use. Although federal regulation supersedes any conflicting state laws, the Cole Memorandum (issued by the US Deparment of Justice (DOJ) on August 29, 2013) and guidance issued by the Financial Crimes Enforcement Network (FinCEN) in support of the Cole Memorandum (released on February 14, 2014) were issued to provide a “safe harbor” for financial institutions that either provide, or intend to provide, deposit and lending services to MRBs. This endorsement of state-sponsored activities alleviated the apprehension of many financial institutions, and some financial institutions established banking relationships with MRBs.  

On January 4, 2018, current Attorney General Jeff Sessions rescinded the Cole Memorandum with the intent to end the safe harbor of MRBs and financial institutions offering banking-services to MRBs that operate legally under state law, from federal prosecution. Sessions’ actions effectively reinstated the DOJ’s prosecutorial authority of marijuana-related offenses at its discretion. Although this rescission should have effectively ended the safe harbor of MRBs that were previously operating legally at the state level, the FinCEN guidance still remains in effect. According to the below information published by FinCEN, 411 U.S. financial institutions are actively operating accounts for MRBs, and are relying on the safe harbor established by the Cole Memorandum and enabled by the FinCEN Guidance.


Canadian Context

The regulatory landscape in North America also has implications for Canadian financial institutions with operationas in the U.S. On June 21, 2018, The Senate of Canada recently passed Bill C-45, commonly referred to as The Cannabis Act, to legalize recreational use of cannabis nationwide in Canada. The goal of this law is to, among other things, deter criminal activity by imposing serious criminal penalties for those operating outside the legal framework. The Cannabis Act allows the provinces to determine the method of distribution and sale, as well as regulate MRBs and ensure they maintain all licenses required to operate in the province. However, regardless of the legality of marijuana in Canada by October 17, 2018, there could potentially be issues due to the shared border and relatively open travel between the U.S. and Canada. Although each province is permitted to further restrict possession, sales and use of marijuana, financial institutions must be sensitive to the conflicts of the Canadian and U.S. legal frameworks.

NYSDFS Notice – Medical Marijuana and Industrial Hemp MRBs

Although the FinCEN Guidance was directly reliant on the authority in the Cole Memorandum, FinCEN indicated on January 19, 2018 that its Guidance was still in effect, and that financial institutions were expected to comply with its due diligence procedures, including the filing of the three marijuana-related Suspicious Activity Reports (SARs). In addition to FinCEN, financial services regulators encourage financial institutions to continue offering banking-services to MRBs.

On July 3, 2018, Governor Andrew M. Cuomo announced that New York will continue to support the development of medical marijuana and industrial hemp businesses, and the New York Department of Financial Services (“DFS”) announced that it “will not impose regulatory action on any New York State-chartered bank or credit union for establishing a banking relationship with a medical marijuana-related business that complies with Federal and State Laws.” In furtherance of New York’s economic development, the DFS also provided guidance to support the safe and sound offering of banking services to MRBs. The DFS Guidance encourages New York State financial institutions to “consider establishing banking relationships with medical [MRBs] that are operating in New York in full compliance with all applicable New York State laws and regulations, including the New York Compassionate Care Act, and the applicable regulations and requirements of the New York State Department of Health.”

Key Challenges and Requirements of U.S. Regulation

Financial institutions that continue to rely on the FinCEN Guidance and provide banking-services to MRBs may increase their regulatory risk. The Cole Memorandum established safe harbor from prosecution, particularly relating to the filing of SARs, which, in essence, is a financial institution reporting to the federal government that it breached federal laws related to drug enforcement and Anti-Money Laundering (AML). By continuing to follow the FinCEN Guidance, a financial institution filing a marijuana-related SAR is essentially admitting that it is committing a crime, and the DOJ may interpret this as an admission of guilt if seeking to enforce federal laws against a financial institution.

Due to funds generated from MRBs in the U.S. markets, financial institutions that offer banking-services to MRBs may also be increasing their risk of exposure to money laundering or terrorist financing. Under the Bank Secrecy Act, even if a financial institution unknowingly facilitates money laundering or drug trafficking, neither it nor its personnel are protected from liability.

Despite the federal law criminalizing marijuana, the FinCEN Guidance allows financial institutions to provide deposit or lending services to MRBs so long as they conduct the following Customer Due-Diligence (“CDD”) measures:

  • Verify with the appropriate state authorities whether the business is duly licensed and registered;
  • Review the license application (and related documentation) submitted by the business for obtaining a state license to operate its MRB;
  • Request from state licensing and enforcement authorities, available information about the business and related parties;
  • Develop an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
  • Conduct ongoing monitoring of publicly available sources for adverse information about the business and related parties;
  • Conduct ongoing monitoring for suspicious activity, including for any of the red flags described in the FinCEN Guidance or the Cole Memorandum; 
  • Update due-diligence information on a periodic basis and commensurate with the risk; and
  • File special-purpose Suspicious Activity Reports (“SARs”) that distinguished among MRBs that:
    • Lawfully operateing in a state (requiring the filing of a “marijuana limited” SAR);
    • Arguably may not be operating in a manner compliant with state laws (requiring the filing of a “marijuana priority” SAR); and
    • The bank has concluded that a cannabis business was operating in violation of one or more red-flags identified in the Cole Memo (requiring the filing of a “marijuana termination” SAR).

In addition, the FinCEN Guidance requires financial institutions to determine whether a MRB violates state law, or implicates one of the following Cole Memorandum’s priorities:

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

If financial institutions are going to continue to offer banking-services to MRBs, they can enhance mitigation efforts by developing tailored due diligence processes for services that support the operation of an MRB, either directly (e.g., selling marijuana) or indirectly (e.g., providing a service that helps marijuana, such as agriculture real estate, horticulture equipment, etc.).

Moreover, financial institutions that do not offer banking-services to MRBs should reevaluate any correspondent banking relationships with financial institutions that do offer such services, including the due-diligence it performs on its correspondent bank’s customers. Furthermore, they should have measures to help ensure that it knows the geography, products and services and customer types in order to determine if its customers provide services to MRBs.


Though the recent rescission of the Cole Memorandum heightens the risk of federal liability for financial institutions offering banking-services to MRBs, the likelihood of U.S. federal enforcement of the Controlled Substances Act against financial institutions remains unclear. Current legalization trends, prior precedent from Congress and the Supreme Court, lack of state cooperation, the taxable revenue to be generated and the resources needed to enforce federal laws are all factors that a financial institution should consider when deciding if it should continue offering banking-services to MRBs. In addition, the legalization of recretional use of marijuana in Canada will potentially pose issues due to the shared border and relatively open travel between the U.S. and Canada.

Notwithstanding attitudes shifting in the U.S. in favor of marijuana legalization, MRBs are in a high-risk industry and the attitudes of financial institutions are still developing. Financial institutions considering extending their product and service offerings to MRB customers may consider enhancing their CDD and EDD measures so they can appropriately monitor behavior and ensure that activity stays within its risk tolerance. Sia Partners can help financial institutions to, among other services, conduct risk-assessments to identify risks associated with MRBs prior to deciding if they should offer banking-services to MRBs.


Key Takeaways

  • The marijuana industry is rapidly expanding, and is projected to be a $40 billion-dollar industry be 2021. Despite the murky regulatory waters, marijuana is expected to become legal in the U.S. in the future.
  • Due to the rescission of the Cole Memo and the high-risk nature of the marijuana industry, financial institutions must reassess their CDD and EDD procedures to help ensure that all MRB customers, direct or indirect, comply with all industry-specific requirements including maintaining appropriate licensing.
  • All financial institutions need strategy and tools in place to navigate the complicated regulatory landscape and mitigate risk.



  1. https://www.fincen.gov/sites/default/files/shared/FIN-2014-G001.pdf
  2. https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/New_York_Online_Lending_Survey_Report.pdf
  3. https://www.documentcloud.org/documents/4343764-Sessions-marijuana-memo.html
  4. http://www.parl.ca/DocumentViewer/en/42-1/bill/C-45/royal-assent
  5. http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx 
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