A Simpler Approach To Expanding Banking Access

While the cannabis community anxiously awaits what feels like Congress’ hundredth attempt to pass the SAFE Banking Act, there is one simple step that can be taken today to improve access to banking services for certain industry participants: revisiting the three-tiered structure of banks’ compliance programs.

The background here is a bit convoluted, but on Valentine’s Day in 2014 the Financial Crimes Enforcement Network — the branch of the U.S. Department of the Treasury responsible for enforcing compliance with the Bank Secrecy Act — established guidance to assist financial institutions in meeting their legal requirements when providing banking services to marijuana-related businesses, also known as MRBs. The FinCEN guidance was based in part on the earlier Cole Memo established during the Obama administration. Notwithstanding the fact that the Cole Memo was famously revoked by then-Attorney General Jeff Sessions in January 2018, the FinCEN guidance remains in place to this day.

The industry’s response to the FinCEN guidance, however, was lukewarm. Although FinCEN’s intention was to “enhance the availability of financial services,” cannabis businesses largely remained shut out of the banking system.

Then came the “three tiers.” This approach, thoughtfully detailed in a 2016 ACAMS Today Magazine article by CRB Monitor’s Steven Kemmerling (and later updated in 2020), attempted to categorize MRBs into three categories. To crudely summarize, Tier 1 MRBs were plant-touching entities for whom “actual or expected revenue is derived from the cultivation, production, testing, or sale of cannabis”; Tier 2 MRBs “are specifically focused on providing products and services to Tier 1 MRBs and the marijuana industry in general”; and Tier 3 MRBs are “specific businesses known to serve Tier 1 MRBs” but are not specially focused on it. Kemmerling’s noble intention for creating these classifications was to expand access to banking services by providing financial institutions with a framework to create their own standard operating procedures.

The reality, though, is that banks’ reliance on this approach has, at times, had the opposite effect as cannabis markets have matured. As one Cato Institute report put it, “existing policy does not ban financial services for the cannabis industry. Rather there are just too many legal risks and compliance costs, so most financial institutions stay away.”

These “legal risks and compliance costs,” for businesses falling under Tier 2 or 3, however, may not actually exist.

According to FinCEN, there is only one true category of MRB: businesses that “manufacture,” “distribute” or “dispense” marijuana, as such terms are defined in the Controlled Substances Act. FinCEN does not consider other types of cannabis industry participants to be “marijuana-related businesses” at all. A plain reading of the guidance, then, would seem to categorically exclude businesses that would fall under Tier 2 or 3.

So does that mean we nix the “three tiers” approach entirely?

Well … maybe.

The problem, as is often the case with legal guidance, lies in the footnotes. In this case the cryptically worded Footnote 7, which states that “a financial institution could be providing services to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business) … where services are being provided indirectly, the financial institution may file [suspicious activity reports] based on existing regulations and guidance … Whether the financial institution decides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances. In making this decision, the institution should consider the Cole Memo priorities, to the extent applicable.”

The confusion caused by this footnote, and financial institutions’ reaction to the FinCEN guidance generally, resulted in unintended effects which — although unintentional — were exacerbated by the Tier 2 and 3 concepts. As a bipartisan group of U.S. senators put it in a December 2016 letter to the acting director of FinCEN, “locking lawyers, landlords, plumbers, electricians, security companies, and the like out of the nation’s banking and finance systems serves no one’s interest.”

Instead of classifying businesses indirectly servicing the cannabis industry as Tier 2 or Tier 3, and withholding banking services as a result, financial institutions should instead base their decision-making on whether such businesses would trigger suspicious activity report filing obligations under regulations and guidance existing prior to February 2014. Namely, the decision should solely turn on whether there exists “a known or suspected violation of Federal law or a suspicious transaction related to a money laundering activity or a violation of the Bank Secrecy Act.” Merely indirectly supporting cannabis businesses should not trigger this requirement given FinCEN’s clear intention for the guidance to apply to businesses directly “manufacturing,” “distributing” or “dispensing” marijuana.

While certain business entities would clearly fall within this category — such as direct affiliates of plant-touching entities organized solely for 280E purposes — there’s no reason that lawyers, landlords, plumbers, electricians, security companies and other ancillary businesses are still getting their bank accounts shutdown.

While the endless wait for SAFE Banking continues, a common sense reread of the FinCEN guidance could deliver some short-term relief to large portions of this unbanked industry.