New sentencing guidelines signal consequences for banking marijuana firms

The U.S. Justice Department’s plan to pursue harsher sentences against drug traffickers and other narcotics related activity should prompt financial institutions to reassess the risks posed by providing services to state authorized cannabis businesses, say sources.

In guidelines published Friday, Attorney General Jeff Sessions directs federal prosecutors to pursue criminal charges against the “most serious, readily provable” offenses, or those that carry the heftiest standard penalties, such as mandatory minimum sentences.

The memo does not elaborate on how federal prosecutors should tackle marijuana-linked activity in the 29 states and the District of Columbia where cannabis has been legalized for medical or recreational purposes, but in a recent speech to New York police officers, Sessions pledged to tackle large-scale marijuana dealers.

“If you are a drug trafficker, we will not look the other way. We will not be willfully blind to your conduct,” he said last Friday. “We are talking about a kilogram of heroin—that is 10,000 doses, five kilograms of cocaine and 1,000 kilograms of marijuana. These are not low-level offenders. These are drug dealers. And you’re going to prison.”

The new guidelines align with previous indications that Sessions intends to depart from the “smart on crime” approach adopted in August 2013 by the Justice Department under then-President Barack Obama.

A memorandum issued that month by then-Attorney General Eric Holder directed prosecutors to always
consider available alternatives to criminal charges, and to focus their limited resources on pursuing only actions that serve a “substantial federal interest.”

In a second memorandum, then-Deputy Attorney General James Cole specifically instructed prosecutors to refrain from pursuing cases against federally banned, marijuana-related misconduct that does not involve minors, inter-state operations implicating at least one state where the substance remains illegal, or infiltration of cannabis businesses by criminal organizations, among other eight priorities.

The memos preceded guidance from the U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, that instructed banks to file one of three types of suspicious activity reports when dealing with marijuana vendors but did not explicitly recommend closing or refraining from opening related accounts.

The new charging and sentencing guidelines authorize federal prosecutors to withhold charges where
exceptions may be warranted, though such a decision now requires the approval of senior officials within the Justice Department.

Until at least last year, the department had not developed a system to adequately monitor whether relevant state authorities were complying with the Cole memo’s priorities, the Government Accountability Office concluded in a 45-page report in February 2016.

Bao Nguyen, a former examiner with the Financial Industry Regulatory Authority, said the guidelines do not in and of themselves portend a “tidal wave” of new prosecutions against state-authorized marijuana businesses, nor terminate the precepts of the Cole memo.

They instead set the legal foundation for the federal government, whenever it wishes, to return to fully enforcing against all violations of the Controlled Substances Act, which classifies marijuana as a schedule one drug alongside heroin and LSD, Nguyen, now director of risk advisory services at Kaufman Rossin in Boca Raton, Florida said.

Financial institutions that choose to accept deposits and process transfers of funds derived from violations of the 1970 law technically expose themselves to federal charges of money laundering.

“We need grownups in charge in Washington to say marijuana is not the kind of thing that ought to be legalized, it ought not to be minimized. It is in fact a very real danger,” then-Senator Sessions said at an April 2016 hearing.

According to Alison Jimenez, president of Dynamic Securities Analytics in Florida, in light of the new guidelines, financial institutions should reevaluate their “risk tolerance” for marijuana-related businesses, or MRBS, identify and report any undeclared vendors on their client roster, and, perhaps most importantly, “be on the lookout” for transfers of marijuana-related proceeds from states where it is legal to states where it is not.

“AG Sessions’ charging policy instructs prosecutors to pursue the most serious offenses, which in turn increases the risk to financial institutions and their employees involved in transactions related to MRBs,” Jimenez said.

Broad public support for legal marijuana, the cannabis industry’s creation of tens of thousands of jobs, pending legislation to remove cannabis from the banned substances list and the prohibition contained in the current federal budget for the Justice Department to use federal funds to prosecute state-approved marijuana activities are among several factors that may hinder federal attempts to tighten the screws against vendors and their banks.

But the threat of enhanced federal enforcement of criminal statutes may have already dissuaded financial institutions still on the fence vis-à-vis marijuana from moving forward with plans to serve MRBs, according to Barry Grissom, former U.S. attorney for the district of Kansas.

“What I’m hearing right now is that people are a lot more cautious and are sitting back, waiting to see what Sessions does,” Grissom, now a Kansas City-based attorney with Polsinelli said. “If it turns out that he is not going to countermand the Cole memo, then I think things will go back to normal, but if he says marijuana is the equivalent of heroin and they are going to shut it all down, everything will just grind to a halt.”