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Weeding Out the Bad Actors: The Dangers of Marijuana Banking

Weeding Out the Bad Actors: The Dangers of Marijuana Banking

Posted by Michael Berman on Apr 20, 2022 4:20:00 AM
Michael Berman

Entering into a new business is risky—and bankers will tell you that not every business is worth the risk. There are some ideas that are so high risk and fraught with unknowns that finding a way to make them workable is to attempt the impossible. 

Many financial institutions feel that way about banking companies involved in the marijuana industry (aka cannabis banking). They see companies producing and selling an illegal drug with a long history of attracting criminal elements and foreign actors. Even those who enter into the business legally represent a particularly nervy type of entrepreneur—those comfortable selling a federally illegal drug.  

Is it possible for there to be enough controls to mitigate the high risk of cannabis banking?  Let’s take a closer look at the risks. 

The Risks of Cannabis Banking 

About 750 banks and credit unions provide banking services to marijuana-related businesses, according to the Financial Crimes Enforcement Network (FinCEN), which tracks the number through suspicious activity report (SARs) filings and publishes the results in its Marijuana Banking Update 

If the fact that FinCEN is the agency responsible for tracking marijuana banking isn’t enough of a red flag, here are others to consider. 

The federal government labels marijuana an illegal drug. Over 30 states have passed laws legalizing medical and/or recreation marijuana, but that doesn’t change the fact that federal law defines marijuana as a Schedule I substance under the Controlled Substances Act. That means it’s an illegal drug. Financial institutions that provide banking services to cannabis businesses and cannabis-related businesses put themselves at risk for violating anti-money laundering laws.  

While the federal government hasn’t used its authority to enforce this law and go after businesses operating legally under state law, it could do so at any time. 

The gap between state and federal law also poses risks when transporting proceeds from marijuana businesses across state lines. Police in California and Kansas have pulled over armored vehicles that do business with dispensaries and have seized the cash under civil forfeiture laws, where police are allowed to seize proceeds from people suspected of criminal activity. One Kansas lawsuit says police have seized over $1.2 million in this manner.  

It’s a cash-heavy business that is at a high risk for money laundering. None of the major credit card companies, including Visa, Mastercard, Discover, and American Express, will process marijuana transactions. As a result, marijuana businesses are cash-heavy businesses, which makes them an attractive business for money launderers and other criminals. They are also at a high risk of robbery.   

Marijuana businesses continue to attract criminal elements. States where cannabis is legal still struggle with illegal drug operations. Drug traffickers gather marijuana supplies from both illicit and state-approved marijuana markets, notes the Drug Enforcement Agency (DEA) in a 2018 report.  

“Many polycrime and polydrug organizations are involved in domestic marijuana production, often establishing large-scale illicit grow operations in states that have legalized marijuana,” notes the DEA.  

In Maine a man plead guilty to illegally cultivating and selling marijuana after financing illegal marijuana growing and distribution companies. While recreational and medical marijuana is legal in Maine, his company sold to non-caregivers and for distribution beyond Maine.  

Authorities say the man “laundered drug proceeds through a complex corporate structure. He lied to his financial institution about the nature of his business and the source of funds that flowed through his accounts.” He also filed false tax returns, failing to pay $400,000 in taxes, and bribed police and prosecutors to keep quiet.  

Marijuana businesses continue to attract foreign criminal enterprises. Marijuana is illegal in many other countries and foreign criminal enterprises see opportunities in states where marijuana is legal.  

In Oklahoma, where medical marijuana is legal and marijuana businesses have been loosely regulated, the Oklahoma Bureau of Narcotics (OBN) says that 25 percent of the state’s 8,500 medical marijuana grow licenses are run by criminal organizations from places like China, Russia, and Mexico. 

An OBN spokesman says that Oklahoma’s “cheaper licenses, cheaper land and looser laws” when it comes to marijuana has attracted “internationally owned and illegally operating cannabis businesses,” some of which are connected to other illegal activities like human trafficking. 

Other growers, unfamiliar with the state’s rules, are operating illegally without a license. 

The laws can be hazy. Regulation moves slowly and can be unclear. For instance, in Virginia you can grow plants for personal use, but you can’t legally buy seeds or cutting to grow until January 1, 2024. Where are people buying these products? 

Perhaps they buy marijuana seeds and cutting legally in other states and transporting them across state lines, but other growers are buying them illegally from the black market. As Politico put it, “slow-moving regulators having trouble building a legal regime fast enough to contain a high-demand product that already has a large existing criminal network to supply it.”  

Or, as one executive in the cannabis banking industry told The Wall Street Journal, “The largest compliance risk in cannabis right now really comes from a product that is produced in an environment that looks and feels like a lawful regulated cannabis production environment, but that is really perhaps run by a criminal enterprise that is funneling product to places where it is not supposed to go.” 

Weighing the Risk of Banking Marijuana 

Many of the risks of banking marijuana businesses are beyond the control of banks or credit unions. They have no say over federal or state laws or how the police enforce them.  

While they do have the ability (and responsibility) to engage in customer due diligence (CDD) to know who their customers are and ensure they are legally compliant businesses, it’s not an easy task. Ownership can be murky, even when it comes to regular business customers—a point the industry has been arguing for years. It’s even harder when the true owners of a business don’t want to be known. 

Even marijuana businesses with clear ownership present challenges. Where are they getting their supply? Are they selling to legitimate customers or criminal enterprises? Do they even know? 

Marijuana banking is getting a lot of buzz, but it’s just too big of a risk for most financial institutions. In an industry where compliance and following the letter of the law is paramount, banking marijuana businesses in this environment simply doesn’t align with bank and credit union risk appetites. No one wants to see their institution go up in smoke.    

 

 

Related: Creating Reliable Risk Assessments

Topics: Risk Management, Cluster: Risk Management

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