Compliance Haze Surrounds Legal Pot

January 14, 2014 at 7:57 am 1 comment

We’ve come a long way, for better or for worse. I won’t venture an opinion one way or the other in this blog since a Presidential candidate felt the need to explain that he puffed but did not inhale pot in his college days.

By announcing in his State-of-the-State address that New York would allow 20 hospitals to distribute marijuana for the medical treatment of chronically ill individuals, Governor Cuomo put the state among 21 others and the District of Columbia that authorize the legal use of marijuana. The degree of legalization varies widely across these states, with New York’s restrictive medical model contrasting with Washington State and the aptly nicknamed Mile-High State where voters approved referenda legalizing the sale and possession of cannabis, thereby insuring the most mellow tailgating parties before their respective championship games in the history of the NFL.

The odd thing is that, even though the states have been busy legalizing pot, as recently as 2005 the U.S. Supreme Court affirmed that the cultivation and use of the drug, even for personal use, could be and was banned under federal law. So what, you say, what does the regulation of the Wacky Weed have to do with credit unions? Quite a bit, actually.

In fact, how to properly integrate the legal pot industry into the banking system is one of the hottest regulatory issues going. In late August, the Justice Department issued a guidance and gave Congressional testimony explaining that while federal law continues to ban the possession, distribution and cultivation of cannabis, the Department would not prosecute individuals for engaging in such activities in states where they are legal, provided that the state laws aren’t being used to circumvent core federal law enforcement priorities such as preventing the distribution of drugs to minors. In addition, the Bank Secrecy Act (BSA) imposes an obligation on credit unions and banks to both know what their customers are up to when they open an account (the CIP requirements) and report suspicious activity (SARS).

Not surprisingly, then, banks and credit unions in Colorado, Washington State and California (where receiving a medical diagnosis is about as easy as finding a neighbor with their Christmas decorations still out) are squeamish about opening accounts for businesses lawfully selling marijuana. Remember, even though pot use is legal in those states, the distinctive aroma permeating from a member with a perpetual case of the munchies running an all cash business leaves little doubt as to precisely what business the member is engaged in.

The conundrum is getting attention in high places. In a speech in November before American Bankers’ Bar Association’s Money Laundering Conference FinCEN’s Director, Jennifer Shasky Calvery, noted that she understands the need for additional guidance in this area in light of the DOJ’s policy guidance but stressed that “the issue is a complicated one given that federal law still applies in these states.”

There’s only so much that federal regulators can do as long as marijuana remains illegal under federal law. The ultimate solution is for Congress to amend either the BSA or the Controlled Substances Act. But my personal view is that this is about as likely to happen in the near future as John Boehner switching his cigarettes for joints. As a result, as more and more states legalize marijuana, more and more credit unions will have to wade in to this hazy labyrinth.

Entry filed under: General, New York State, Regulatory. Tags: , , , , .

Let The Regulatory Kabuki Dance Begin! It’s Humpday, Here’s Some News You Can Use!

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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