It was less than six years ago that Washington and Colorado became the first states to legalize cannabis for recreational use. While a total of nine states and Washington, D.C., have legalized recreational cannabis, and 30 states have legalized it for medical purposes, cannabis companies still operate in a legal grey area because cannabis remains illegal under Federal law. Federal law classifies cannabis as a Schedule 1 drug, meaning it has “currently no accepted medical use”. Treating cannabis no differently than heroin, the Federal government has entrusted the Treasury Department with the authority and responsibility to monitor bank activity to make sure that activities which are illegal under Federal law are not utilizing the banking channels and functions that are normally available.
Financial Crimes Enforcement Network (“FinCEN”).
FinCEN is a bureau of the U.S. Department of the Treasury. The Director of FinCEN is appointed by the Secretary of the Treasury and reports to the Treasury Under-Secretary for Terrorism and Financial Intelligence. FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
FinCEN carries out its mission by receiving and maintaining financial transactions data; analyzing and disseminating that data for law enforcement purposes; and building global cooperation with counterpart organizations in other countries and with international bodies.
FinCEN exercises regulatory functions primarily under the Currency and Financial Transactions Reporting Act of 1970, as amended by Title III of the USA PATRIOT Act of 2001. Under this authority the Secretary of the Treasury is to issue regulations requiring banks and other financial institutions to take a number of precautions against financial crime, including the establishment of AML programs and the filing of reports that have been determined to have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings, and certain intelligence and counter-terrorism matters. This authority has been delegated to FinCEN.
The basic concept underlying FinCEN’s core activities is “follow the money.” As FinCEN believes that the primary motive of criminals is financial gain, and they leave financial trails as they try to launder the proceeds of crimes or attempt to spend their ill-gotten profits. FinCEN shares the information it receives and analyzes with other law enforcement agencies to investigate and hold accountable a broad range of criminals, including perpetrators of fraud, tax evaders, and narcotics traffickers. More recently, the techniques used to follow money trails also have been applied to investigating and disrupting terrorist groups, which often depend on financial and other support networks.
Bank Secrecy Act – Reporting Of Cash Payments.
Since 1970, the Bank Secrecy Act (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the BSA requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.
Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. However, this should not undermine the importance that the proper facilities and procedures be set up to maintain an adequate system of books and records which even in an environment of running a business without a traditional bank is possible.
Suspicious Activity Reports.
In 1996 the Suspicious Activity Reporting System (SARS) was created so that financial institutions can report about suspicious or potentially suspicious activity. Unlike IRS Form 8300 (discussed above) such reports do not have any minimum dollar threshold. The financial institutions are not required to inform a transaction party of the filing of such report to FinCEN. Likewise, the fact that a report gets filed with FinCEN does not mean that a mandatory investigation or other inquiry will be made.
Why Banks Are Reluctant To Deal With Cannabis Businesses.
Under the Obama administration, then-Deputy Attorney General James Cole issued a memo, known as the Cole Memorandum, that clarified the Justice Department’s stance on cannabis. The memo, from August 29, 2013, asserted that, for the most part, the Justice Department would not enforce the cannabis ban in states that had legalized it. Following that spirit, in February 2014 the Treasury Department issued its own guidance through FinCEN on how banks could provide services to the cannabis industry without violating the BSA. As long as banks complied with this guidance, they could avoid the threat of federal prosecution and make themselves available to provide banking and financial services to cannabis businesses.
But under the Trump administration, the Justice Department led by Attorney General Jeff Sessions has rescinded the Cole memo, calling marijuana “a dangerous drug” and asserting that “marijuana activity is a serious crime.” The Treasury Department led by Treasury Secretary Steve Mnuchin has yet to revoke the FINCEN guidance which although that guidance referenced the Cole memo multiple times, the guidance still remains a part of the framework by which banks and other financial institutions can make themselves available to do business with the cannabis industry.
Today’s Banking Challenges.
Even as more states legalize cannabis, a tiny fraction of banks and alternative financial institutions are willing to work with cannabis companies. These companies are not well-known and most do not advertise their services to the world. But having access to a Board Certified Tax Attorney-CPA with specialized knowledge in the cannabis industry and more than 30 years of experience in advising businesses in tax compliance and planning, accounting systems and cash management can help you meet your challenges to minimize your taxes and conduct business in a manner that avoids prosecution by the Federal authorities and meets State & Local laws and regulations to ensure your cannabis business remains operational. Don’t delay call us today!
