Update: Banking Difficulties May Lead Marijuana Dispensaries to Commit Bank Fraud
As we have previously reported, despite the growing number of States that have sanctioned the use of marijuana in various forms, the federal government has continued its efforts to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, and here.). In addition to criminal prosecution for drug trafficking, state sanctioned dispensaries face additional legal barriers which make operating difficult. As we previously reported, one such barrier is the inability of marijuana dispensaries to deduct business expenses. An additional barrier dispensaries face is finding banks, credit card companies, and payment processors to process the proceeds of marijuana sales.
The Colorado Task Force Report on the Implementation of Amendment 64 (which legalized marijuana use) summarized the problems associated with banking marijuana dispensaries as follows:
Financial institutions that are federally licensed or insured are required to comply with federal regulations. Since marijuana is a controlled substance under federal law, banks must either refuse to hold accounts for legal marijuana businesses…or risk prosecution.
The Task Force’s report can be read here.
As a result of marijuana remaining a Class I substance under the Federal Controlled Substances Act, banks face increased anti-money laundering (“AML”) risks when seeking to bank even those dispensaries which are fully compliant with state law. Pursuant to the Bank Secrecy Act, 31 U.S.C. §§ 5311-5330, as part of a bank’s anti-money laundering program, banks are required to create certain reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. More specifically, 12 C.F.R. § 21.11 requires national banks to file Suspicious Activity Reports (“SAR”) when the bank knows, suspects, or has reason to suspect that a transaction involves funds from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities as part of a plan to violate or evade any law or regulation or to avoid any transaction reporting requirement under Federal law. (More information on bank AML requirements under the BSA can be found on the Office of the Comptroller of the Currency’s website.)
Because the sale of marijuana remains prohibited under federal law, banks are placed in a position where they would be required to report any banking transactions involving proceeds from marijuana dispensaries. Moreover, banks face the realistic possibility of federal criminal penalties for assisting in money laundering should they knowingly accept and process funds from dispensaries. As a result of these risks and possible penalties, banks have simply refused to allow marijuana dispensaries to maintain accounts or conduct business with them.
Banks’ refusal to allow dispensaries to maintain accounts has made it extremely difficult for dispensaries to operate. As a result, many legal marijuana businesses have resorted to all cash operations. With the bank prohibition in place, dispensaries are looking for “creative” ways to engage in banking including: 1) establishing shell companies to disguise marijuana proceeds; 2) funneling marijuana derived profits into accounts of other legitimate businesses; and 3) placing marijuana derived profits into bank accounts of family members or personal accounts.
These alternative banking methods were the subject of a recent Bloomberg article, entitled “Pot Shops Can’t Take American Express or Deposit in Banks.” In the article, Bloomberg quotes Dale Gieringer, director of the California office of the National Organization for the Reform of Marijuana Laws, as saying “[a]s long as the bank doesn’t find out, you should be safe.” A copy of Bloomberg’s article can be read here. Despite Mr. Gieringer’s contentions, each of these methods could expose dispensary owners to criminal and civil liability.
Unfortunately, Bloomberg’s article never mentions the potential criminal and civil liabilities faced by dispensary owners should they use any of the above-referenced methods to open bank accounts. Generally speaking, the use of shell companies or other accounts to mask the profits derived from the sale of marijuana could subject the owner of a dispensary to a wide variety of federal criminal penalties, including bank fraud 18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. Additionally, those who assist in such actions, for example the friend or family member who allowed for money to be transferred through his or her account, would also face similar criminal charges. Moreover, should such fraud occur, the payment processors and banks who process this money can still be held liable for money laundering and face criminal and civil fines and penalties. Each of these penalties is available regardless of whether marijuana is legal under State law. Put simply, if a company lies for the purpose of opening a bank account, the consequences are severe.
The online poker industry has already experienced just how severe the consequences can be. There, several online poker companies, such as Full Tilt Poker and PokerStars, established shell companies in order to facilitate payment of gambling winnings to their members. The companies used third party payment processors to disguise financial transactions between the companies and U.S. players so that the transactions would appear to be unrelated to online gambling. The third party payment processors would then lie to U.S. financial institutions about the source of the funds, often facilitated by the creation of nonexistent online companies and phony websites. The ultimate conclusion of that case resulted in $731 million in civil monetary penalties as well as criminal convictions for executives of the payment processing companies that facilitated the fraud. (A full recount of the online poker saga can be read in our previous reports here, here, here, here, and here).
The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. You can reach an attorney by emailing us at firstname.lastname@example.org or by calling us at 305.350.5690.
This entry was posted on Wednesday, May 15th, 2013 at 11:04 am and is filed under White Collar Defense.
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