I get multiple calls each week – how can you help me – a licensed dispensary – obtain a workable banking relationship?
The answer I give is really a question. A series of questions about the business that is calling me and few ever can answer the simplest question.
The simple questions are:
- Regardless of what you sell, explain how your business works to me.
- Are you licensed?
- Who formed your dispensary?
- Do you have a lease?
- How about a simple one paragraph business plan?
- Have you ever been in any type of business?
If you can’t answer these questions to me, lord knows, a bank won’t want to take your money as a depositor. That would be almost true regardless of the fact you propose to be in the medical marijuana business but the marijuana part takes it up a notch. You must be even more organized. This is not the 60s and you must begin to talk and act like a real business person.
Federal Law makes banking as a “marijuana-preneur” really hard.
Here is why: It is plain and simple, Marijuana is still a Class 1 drug and possession and distribution violate Federal law. State law, like in California, differs from Federal law and that only makes things more complex and confusing. For example, how on earth can you maintain a bank account? Nothing here is intended as advice to circumvent state of federal law. Caveat Emptor. But if you prepare a Business Profile based on the concerns of the Federal enforcement agencies, your likelihood of developing a workable relationship with a bank, improves drastically.
- Prepare yourself: Create a Business Profile
- Business Plan: Using the Cole Memo and SAR Due Diligence Items as your Table of Contents
- What assets do you have? Build a simple balance sheet
- Business licenses
- Organizational Documents
- Background on Members of LLC
- Credit Reports and Credit background
- Know the Cole Memo (Prosecution Guidelines):
- Know the Federal Government’s Priorities for Prosecuting Marijuana Activity (things to avoid)
- The “Cole Memo priorities” include:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property
[More on the Cole Memo: “The Cole Memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that DOJ is committed to enforcement of the CSA consistent with those determinations.” See Fin Cen Directive)]
3. Suspicious Activity Reports: Even if you find a bank that you can work with, they will most likely have to file a SAR. But you should go in prepared to answer these question in advance.
- Note: “This FinCEN guidance clarifies how financial institutions can provide services to marijuana related businesses consistent with their BSA obligations. In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution.”
- Due Diligence Items You Must Address:
- verifying with the appropriate state authorities whether the business is duly licensed and registered;
- reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- requesting from state licensing and enforcement authorities available information about the business and related parties;
- developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
- ongoing monitoring of publicly available sources for adverse information about the business and related parties;
- ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and
- refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
- “Marijuana Limited” SAR Filings: This is the reality
- To quote the above FinCen Notice: “A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” SAR.”
- Red Flags: If your business exhibits any of these, change your business:
- A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law.
- Relevant indicia could include:
- The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates.
- The business receives substantially more revenue than its local competitors or than might be expected given the population demographics.
- The business is depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for federal and state tax purposes.
- The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law, as opposed to revenue derived from (i) the sale of other illicit drugs, (ii) the sale of marijuana not in compliance with state law, or (iii) other illegal activity.
- The business makes cash deposits or withdrawals over a short period of time that are excessive relative to local competitors or the expected activity of the business.
- Deposits apparently structured to avoid Currency Transaction Report (“CTR”) requirements.
- Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals.
- Deposits by third parties with no apparent connection to the account holder.
- Excessive commingling of funds with the personal account of the business’s owner(s) or manager(s), or with accounts of seemingly unrelated businesses.
- Individuals conducting transactions for the business appear to be acting on behalf of other, undisclosed parties of interest.
- Financial statements provided by the business to the financial institution are inconsistent with actual account activity.
- A surge in activity by third parties offering goods or services to marijuana-related businesses, such as equipment suppliers or shipping servicers.
- The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law.
- The business is unable to demonstrate the legitimate source of significant outside investments.
- A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.
- Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.
- The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws or regulations.
- A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries.
- The owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located.
- A marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property.
- A marijuana-related business’s proximity to a school is not compliant with state law.
- A marijuana-related business purporting to be a “non-profit” is engaged in commercial activity inconsistent with that classification, or is making excessive payments to its manager(s) or employee(s).
To speak further about having us help you develop your Business Plan to help you determine compliance with the Cole Memo, the FinCen and the SAR and Red Flags, please give me a call 310-570-2399