DBO Issues New Questionnaire to Assist Banks’ Marijuana Pilot Programs

DBO Issues New Questionnaire to Assist Banks’ Marijuana Pilot Programs

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Customers, corporations, and regulators continue their ongoing concern regarding the statutory void between the marijuana industry and banking services.

Many cannabis-related businesses operate largely on cash transactions, which presents a considerable public safety issue. Following the implementation of Proposition 64, legal cannabis operations have spread across California; however, the majority of these entities have been unable to receive much-needed financial services as banks remain concerned about compliance with federal statutes. The cannabis industry is between state and federal regulations. 

Despite lingering concerns, an increasing number of state-chartered financial institutions are working to offer banking services to the cannabis industry. To help alleviate the inevitable compliance hurdles that accompany doing business with the marijuana industry, the California Department of Business Oversight (“DBO”) is developing banking guidelines, starting with a comprehensive survey. The questionnaire is part of the DBO’s ongoing efforts to assist financial institutions in providing services to the California cannabis industry and helping banks and credit unions conduct more precise risk analysis. The DBO also provides survey information from licensed marijuana businesses as a resource for financial institutions as they continue to develop marijuana-specific banking programs.

The survey focuses on banks’ marijuana program governance and compliance with the federal Bank Secrecy Act (“BSA”), with particular emphasis on the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) regulations on marijuana financial transactions. The questionnaire mirrors the FinCEN framework and highlights priorities and possible warning signs outlined by FinCEN. FinCEN was rolled out in 2014 and includes federal law enforcement objectives pulled from comparable guidelines established by the U.S. Department of Justice via the Cole Memo (a memorandum from the Department of Justice regarding federal prosecution of marijuana-related offenses).

To provide more clarity, the Conference of State Bank Supervisors (“CSBS”) recently issued a document in August of 2019 to assist financial institution examiners with reviews of banks that may provide services to the marijuana industry. The DBO advises state-chartered financial institutions to review both the questionnaire and the CSBS guidelines when evaluating potential banking relationships with the California cannabis industry.

The DBO has announced it will not seek regulatory actions against state-chartered financial institutions for providing banking services to state-licensed marijuana businesses; however, the DBO mandates that all banks remain fully compliant with FinCEN’s BSA regulations, to include the FinCEN objectives outlined in the Cole Memo, and identify, analyze, and mitigate any risks accordingly. The DBO has made it clear it is ready and willing to assist licensed businesses with consultations to ensure proper development of marijuana banking programs.

The DBO’s Marijuana Related Business (“MRB”) compliance questionnaire is organized into five main sections:

1. Program Governance:

Questions primarily concerned with risk mitigation and oversight, including but not limited to: whether a comprehensive risk assessment of the business line exists; whether a legal review of applicable federal and state laws has been conducted; how third-party intermediaries are monitored, and; how risks are identified and mitigated.

2. File Review:

Focuses on the documentation framework of potential marijuana banking programs, including due diligence questions related to licensing issues, business operations, and periodic review of industry-specific developments.

3. Account Testing/Identification of FinCEN Red Flags:

Assist in the early identification and resolution of potential red flags that may create future regulatory problems. The FinCEN red flags are focused, for example, on: whether any licensed cannabis related business member receives significantly more revenue than expected under applicable state limits; deposits more cash than correlates with the amount of marijuana-related revenue the business reports for tax purposes, and; other indicators of suspicious behavior indicative of illegal business operations.

4. Cole Memo Priorities:

Although the Cole Memo was rescinded in 2018, the DBO’s questionnaire retains eight of its priorities, including whether the bank monitors for: distribution of marijuana to minors; revenue being funneled to criminal operations; diversion of product from states with different cannabis laws; using cannabis as a pretext to market other drugs; the use of firearms in the distribution chain; the occurrence of impaired driving; growing of marijuana on public lands, and; use of cannabis on federal property.

5. FinCEN Filings

Closely related to section four, this set of inquiries focuses on whether a bank reasonably believes, based on its due diligence, that the financial services to a cannabis member does not violate one of the aforementioned Cole Memo priorities.

All Eyes on Washington: Safe Banking Act Awaits Senate Vote

The DBO’s questionnaire provides a stopgap measure while the development of federal legislation continues. The Secure and Fair Enforcement Banking Act (the “Safe Banking Act”), would allow the cannabis industry access to banking and financial services while marijuana remains a controlled substance under federal law. The Safe Banking Act passed the House in late September by a vote of 321 to 103 and the Senate is expected to vote in the near future.

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