By John W. Vardaman, III
Since it was issued on February 14, 2014, the Department of Justice’s Cole Memo, so named for then Deputy Attorney James Cole, has been the Rosetta stone for marijuana banking.
To be sure, the Cole Memo was not the first or only federal government pronouncement concerning state-legalized marijuana generally, or marijuana banking specifically.
In 2013, DOJ issued guidance to U.S. Attorneys addressing the enforcement of federal marijuana laws under the Controlled Substances Act. And the same day the Cole Memo was issued, the Treasury Department’s Financial Crime Enforcement Network (FinCEN) released its own guidance for financial institutions to serve marijuana-related businesses (MRBs).
But when it came to the threshold questions of whether and how banks could permissibly service the still federally illegal marijuana industry, the discussion began and ended with the Cole Memo.
Goal of the Cole Memo
The Cole Memo represented DOJ’s attempt to address the growing economic and public safety problems resulting from the multi-billion-dollar marijuana industry being effectively frozen out of the financial system.
Because all moneys generated by marijuana commerce are considered criminal proceeds for purposes of federal money laundering and Bank Secrecy Act (AML/BSA) laws, even in states where marijuana has been legalized, banks were understandably reluctant to service MRBs.
In an attempt to bridge this seemingly insurmountable gap the Cole Memo offered banks the following deal: if they and their MRB customers adhered to relevant state law and did not implicate any of DOJ’s eight enumerated priority enforcement factors, such as selling marijuana to minors or diverting marijuana proceeds to gangs or cartels, they would effectively be immune from AML/BSA laws.
The stated rationale for the Cole Memo was the federal government’s traditional deference to states for enforcement of low-level, i.e., non-priority, marijuana offenses, and limited federal law enforcements resources.
Cole Memo & FinCEN guidance: Marijuana banking bookends
Given its role in AML/BSA enforcement, the Cole Memo was drafted in close coordination with FinCEN. Incorporating the same eight priority enforcement factors set forth in the Cole Memo, the FinCEN Guidance provided banks with a detailed roadmap for how to service MRBs consistent with their AML/BSA obligations.
FinCEN even took the extraordinary step of establishing a new Suspicious Activity Report (SAR) regime explicitly, and exclusively, for banks serving MRBs.
Taken together, the message of these two documents was that AML/BSA laws do not constitute a barrier for financial institutions to serve MRBs, and over time that message took hold as banks and credit unions started accepting MRB accounts.
But while the Cole Memo and FinCEN Guidance served as complementary bookends for marijuana banking, they were not necessarily considered co-equal authorities, the assumption being that the latter depended on the former and thus could not survive without it.
Jeff Sessions takes office
All of which meant that with the appointment of avowed marijuana critic Jeff Sessions as Attorney General in 2017, the state of the Cole Memo, and with it the fate of cannabis banking, were cast into significant doubt.
The question was less about whether Sessions would scrap the Cole Memo, considered a foregone conclusion, and more about how stridently anti-marijuana its replacement policy would be.
The answer came on January 4, 2018, when Sessions announced the rescission of the Cole Memo, and all other DOJ guidance that collectively amounted to a “hands off” approach to state-legalized marijuana.
Impact of the Cole Memo rescission
While this announcement caused initial consternation within the marijuana industry, and among the financial institutions serving it, a closer examination soon revealed it was not the harsh crackdown that many feared.
For starters, Sessions did not declare a policy of full, across the board enforcement of all federal marijuana laws, which would have effectively ended the state marijuana legalization experiment, let alone any semblance of marijuana banking.
Further, in deferring marijuana enforcement to the discretion of individual U.S. Attorneys, Sessions advised that such decisions be made in the context of DOJ’s “finite resources” – the very justification for non-enforcement of marijuana laws in the Cole Memo he just rescinded.
FinCEN guidance: The definitive MRB banking standard
While those elements of the Sessions announcement provided solace to the overall marijuana industry, the most important aspect for marijuana banking was the absence of any reference to the FinCEN guidance.
This despite the fact that DOJ and FinCEN worked hand in glove in drafting their respective marijuana banking guidance, and that the FinCEN Guidance relied upon, arguably depended upon, the Cole Memo.
The concern was that rescission of the Cole Memo spelled inevitable doom for the FinCEN Guidance, and with it any assurance from the federal government about the permissibility of marijuana banking.
Those concerns, however, did not give way to panic.
I am aware of only one financial institution that closed its existing MRB accounts because of the Sessions announcement. The remaining institutions already in the marijuana space, and those considering entering it, adopted a “wait-and-see” approach.
And with the passage of time two things have become clear: 1) rescission of the Cole Memo has not resulted in any change in DOJ enforcement with respect to marijuana banking; and 2) the FinCEN Guidance has become the definitive federal standard for permissible marijuana banking.
Any question about whether the FinCEN Guidance could survive as a stand-alone document in a post-Cole Memo world has been laid to rest.
So where are we now?
Ironically, rescission of the Cole Memo has brought greater stability to marijuana banking than existed before.
As discussed, that Sessions would at some point take action against legalized marijuana was never in doubt. But when that action proved to be more symbolic than substantive, it provided a level of relief to financial institutions that had feared something far more punitive.
With the cloud of uncertainty lifted and worst-case scenarios off the table, many financial institutions became more receptive to banking MRBs.
This is not mere speculation but is confirmed by FinCEN data which show a steady increase in the number of financial institutions serving MRBs (based on Marijuana SAR filings), even after repeal of the Cole Memo.
MRB banking outlook
Going forward there is every reason to believe that the environment for marijuana banking will continue to improve.
Rescission of the Cole Memo has led to the introduction of several bi-partisan proposals in Congress that include greater legal protection for banks serving MRBs, and a pledge of support from President Trump.
The FinCEN Guidance has emerged from the shadow of the Cole Memo to become the new baseline for marijuana banking and through its SAR reports is an indispensable source of information about the marijuana industry.
Meanwhile, across the country, financial institutions, bank and credit union associations, technology providers, and others have contributed to the formation of “best practices” that are becoming industry standard for marijuana banking.
All of these encouraging developments can in some ways be traced back to the rescission of the Cole Memo, potentially making for the unlikeliest hero of marijuana banking: Jeff Sessions.
About the author:
John W. Vardaman, III is EVP and General Counsel of Hypur Inc. John worked at the U.S. Department of Treasury and U.S. Department of Justice on AML/BSA policy and enforcement, and was a contributing author of the Cole Memorandum.