Will Massachusetts Lenders do Business with Marijuana Businesses? Compliance risks with this
An issue heating up Board rooms across the state of Massachusetts is to what extent community lenders will do business with retail marijuana dispensaries. Legal under state law as of January 1, 2018. Still illegal under Federal law. Riddled with compliance risks, with a debatable benefit. What is your take?
Will your institution provide financial services to marijuana businesses?
The Business Landscape
I imagine there will have to be a need for funding. What small business owner can afford to open a new retail branch operation without a loan? Where will these funds come from if not local depositories? Will we turn our nose and drive these people towards hard money lenders? (one wonders what types of hard money lenders would be attracted to such business opportunities).
If this is forced into being a cash business, will your institution at least accept deposits from these businesses?
Complicating factors -
What if an existing customer owns several traditional businesses and also wants to open a retail marijuana dispensary?
What if you finance a strip mall with designated space for a retail marijuana dispensary?
If we agree to enter this line of business, will our existing customer base react poorly - leading to reputational hazards?
And note this might vary by location. Why not look up the percentage of voters in your assessment area that voted for/against legalization?
Understanding the Compliance Risks & Burden
Before you enter this line of business, you'll need to be familiar with two documents: the most recent FinCEN guidance and the 2013 Department of Justice Memo.
Starting with the DOJ Memo, it states that the Federal government remains committed to fighting marijuana prohibitions in all states, which it recognizes as a serious crime that finances large-scale criminal enterprises, gangs, and cartels. Very importantly, this also gives a list of "hot button" specific issues where the DOJ will focus enforcement.
Turning to the FinCEN guidance, this is basically a statement that Federal regulators approve of doing business with marijuana-related businesses so long as institutions follow very strict new guidelines.
Let's go through some of those requirements:
Customer Due Diligence (done on each customer prior to doing business with them):
Verify whether the business has appropriate State licenses and is registered.
Review the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana- related business.
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 any of the red flags described in this guidance; and
Refresh information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
Consider whether the business violates one of the specific items listed in the DOJ Memo (e.g., sales to minors or use of violence).
2. Filing Suspicious Activity Reports
If you do business with marijuana dispensaries, get ready to file a lot of SARs. Since we have to report all funds derived from "illegal activity," and since selling marijuana is still a Federal crime, an institution will need to report all transactions involving funds from these businesses.
But! There are special categories of SARs designed to make this less burdensome:
Marijuana Limited - Used whenever normal business occurs with a marijuana business that is consistent with state law and does not trigger any of the DOJ specific items. Use this whenever you're only filing this because of the Federal prohibition.
Marijuana Priority - Used whenever something occurs that is not consistent with state law or something that triggers one of the DOJ specific items.
Marijuana Termination - Use whenever something occurs that is so serious that it leads the Bank to terminate the relationship.
The Moral Issue
On one hand, you may personally disagree with legalization. Or you just might not want your commercial lenders becoming experts in this particular business. On the other hand, you can bet the IRS will be collecting taxes on the income produced from this - why can't we?
In Other News
Thoughts on Trump's appointment to the CFPB "landing team?"
We're rolling out a regulatory support hotline - currently available to some clients and now available on request. Users simply e-mail the question in to Compliance-Questions@scapartnering.com and one of us will respond within 48 hours.
No surprise here, but the CFPB has appealed the PHH decision. If interested, the text of their appeal is here.
Keeping with today's theme ... remember the story out of Amherst where state police and the National Guard used a $60,000 grant and low-flying surveillance helicopter to seize a marijuana plant from an 81-year-old grandmother? She wasn't home at the time, and her son turned over the illegal plant. She was none too pleased, "I had been nursing that baby through a drought, and I was pretty pissed to tell you the truth."
HAPPY THANKSGIVING TO ALL
May your stuffing be tasty. May your turkey be plump.
May your potatoes'n gravy have nary a lump.
May your yams be delicious. May your pies take the prize.
May your Thanksgiving dinner stay off of your thighs.
Have a blessed Thanksgiving!
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