How should financial institutions serve businesses that sell legalized marijuana?
This was the question posed by Sens. Jeff Merkley (D-Ore.), Patty Murray (D-Wash.), Michael Bennet (D-Colo.) and Ron Wyden (D-Ore.) in a letter to the federal financial regulating agencies. Oregon, Colorado, Washington, Alaska and the District of Columbia have legalized marijuana for recreational and medicinal purposes, and an additional 19 states have legalized the medicinal use of marijuana.
Not wanting to risk violating federal laws, banks have been reluctant to provide services to marijuana-related businesses, forcing many of these businesses to operate on an all-cash basis.
“Operating on an all-cash basis for these businesses makes it difficult for them to function, as well as for states to collect tax revenue. Forcing them to operate in all cash also creates a serious public safety risk for the businesses and the neighboring community,” the senators wrote.
Financial institutions that provide services to legitimate marijuana-related businesses are required to file marijuana suspicious activity reports (SARs) with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). SARs play a central role for complying with the Bank Secrecy Act (BSA), which was passed to ensure that financial institutions have the necessary controls in place and provide the necessary notifications to law enforcement to deter and detect money laundering, terrorist financing and other criminal acts.
Despite the option of filing marijuana SARs reports, most banks and credit unions have remained reluctant to provide financial services to marijuana-related businesses because of concerns their CAMELS supervisory rating will be penalized. “CAMELS” is an acronym that represents the six factors bank supervisors use within their international bank-rating system. These factors consist of the following:
- Capital adequacy,
- Asset quality,
- Management quality,
- Earnings,
- Liquidity, and
- Sensitivity to market risk.
The system is meant to help federal regulators identify the financial institutions that need attention. Each factor is assigned a score of one (strongest) to five (weakest).
The senators asked the federal agencies to collaborate with FinCEN and issue a joint guidance governing how financial institutions effectively can serve marijuana-related businesses.
“[W]ith clearer guidance offered by all of their regulators, financial institutions will be more likely to serve these legal businesses and allow them to access our banking system without fearing repercussion,” the senators wrote, adding, “Without a joint guidance providing direction on how to operate from their prudential regulators, banks and credit unions will continue to lack the certainty they need to operate in this market.”