Legal marijuana businesses are expanding at an astonishing rate, even though their dubious legal status makes banks and many other institutions reluctant to do business with them. Federal legislation would help clarify some of the issues surrounding the industry, but it has little chance of being enacted before the 2020 election.

“Marijuana is this drug that is in a no-man’s land, where people are saying it’s bad for you, it can get you high, but it can also help you beat cancer,” said attorney Fruqan Mouzon, chairman of the cannabis practice group at McElroy, Deutsch, Mulvaney & Carpenter LLP. Mouzon moderated a panel discussion at NJBIA’s Nov. 6 seminar, “What’s in the New Marijuana Legislation,” whose panelists included former U.S. Attorney for New Jersey Paul Fishman and New Jersey Bankers Association Government Affairs Director Michael Affuso.

So what is it that makes banking and legal weed so incompatible? The panel pointed out three key problems.

  1. To service marijuana businesses, banks must decide to violate the law.

Taking deposits from illegal activities of any kind can violate federal anti-money laundering laws. So even though medicinal marijuana is legal in New Jersey, it’s still illegal under federal law, which means federal bank regulators could cite financial institutions for servicing those businesses.

Before a bank even begins taking marijuana businesses as customers, its board of directors must approve a resolution authorizing it. In other words, the bank’s board has to vote to violate federal law. A publicly traded bank would also have to make an SEC filing, he said, which includes certifying that your business doesn’t violate the law, which is technically not true.

Affuso explained that this is a lot to ask of an institution that deals with regulations so granular that they dictate where a phone number can appear on a loan application.

“It just doesn’t work,” Affuso said. “And remember, (marijuana) is not their business; this is a piece of their business.”

  1. Suspicious Activity Reports.

Fishman noted that every bank is required to file a Suspicious Activity Report (SAR) any time one of their customers engages in a transaction that could indicate illegal activity.

“There are thousands and thousands and thousands of them filed every day,” Fishman said. “If your bank has a marijuana client, every single transaction your customer engages in is a violation of federal law.”

Hence, every financial transaction a marijuana business engages in should, technically, get a SAR, Fishman said.

“That’s not so great if you’re the customer, and, by the way, it’s an enormous administrative burden for the bank,” Fishman said.

  1. Enforcing the Law

Of course, a lot of banks are servicing marijuana businesses, and not just medicinal marijuana. So far, federal regulators and law enforcement have not been aggressive in prosecuting banks dealing with legitimate marijuana businesses, but legally, nothing can stop them.

Fishman, who is now a private-practice attorney with Arnold and Porter, said federal prosecutors do not have the resources to investigate and prosecute literally every violation within their jurisdiction, anyway. So U.S. attorneys are naturally reluctant to prosecute an industry legalized at the state level simply because they have more urgent cases, he suggested.

The pending federal SAFE Act is designed to address the legal issues around banking and legal marijuana, but it is unlikely to pass the Senate, where both the majority leader and the chairman of the Senate Banking Committee oppose it. An appropriations act also prohibits prosecutors from using resources to prosecute legal medical marijuana cases, but there is nothing in the statute to protect recreational use.

Affuso added that bank regulators in New Jersey and those in Washington are also not always in agreement. The risk, he said, is getting a substantial regulatory order from federal regulators.