History may view 2018 as a pivotal year for marijuana legalization. Although the year started with then U.S. Attorney General Jeff Sessions creating a haze over the industry and legalization supporters when he rescinded Obama-era guidelines that protected state marijuana laws, it ended with proponents of legalization notching a number of victories, including the possibility of federal descheduling. This possibility raises a number of financial and regulatory issues that will likely need to be addressed should the trend towards legalization continue, making now the perfect time to take stock and prepare for the year to come. 

Medical marijuana is now legal in 33 states, while recreational marijuana is legal in 10 plus the District of Columbia, and bipartisan support for legalization is growing. An October 2018 Gallup poll found 71 percent of Democrats and 51 percent of Republicans support legalization. In November 2018, three “red” states—Missouri, Oklahoma, and Utah—legalized medical marijuana, and Michigan became the first midwestern state to legalize it for adult recreational purposes. New York, New Jersey, and Illinois may be next to legalize adult-use marijuana. In New York, Governor Cuomo campaigned heavily on its legalization, as did J.B. Pritzker in Illinois, who immediately upon being sworn in called for the debate to shift from “how” to “when.” New Jersey Governor Phil Murphy has said legalizing marijuana is high priority for him in 2019. 

Financial and Regulatory Implications of Legalization

In April 2018, Senators Elizabeth Warren (D-MA) and Cory Gardner (R-CO) co-sponsored the STATES Act, which would give anyone following state marijuana laws a reprieve from federal consequences, meaning that marijuana businesses might finally be able to conduct noncash transaction, take tax deductions, and, most notably, obtain bank accounts. If the STATES Act (or similar legislation) is signed into law, banks and other financial institutions will likely face carefully crafted regulations that mandate rigorous know-your-customer (KYC) initiatives designed to weed out bad actors and minimize money laundering and fraud. While larger financial institutions may have the financial wherewithal to handle the increased demands, smaller financial institutions may find it more difficult to undertake the required scrutiny, and therefore may not be able to responsibly provide financial services to the marijuana industry.

In October 2018, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the U.S. Department of Treasury’s Financial Crimes Enforcement Network acknowledged the struggle that smaller financial institutions have faced and issued a joint statement detailing how smaller financial institutions can now share resources to improve their anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance. While such collaborative arrangements may help ease the burden of many of the small and midsized banks that are likely to work with the marijuana industry, it also raises issues—such as confidentiality of data, misalignment of risk profiles, and a lack of qualified resources—that must be addressed in a thoughtful and measured manner to minimize risk and create opportunities for both industry and financial institutions. 

To mitigate that risk, many small and midsized financial institutions are turning to outsourced financial intelligence units (FIUs) to address the risk of money laundering or fraud. These allow smaller local and regional financial institutions to gain access to benefits usually afforded to larger institutions without excessive capital outlays. Such benefits can include technology, leveraging of analytics, ability to easily scale with growth in transactional volumes, ease of monitoring, and an early warning system, which allow smaller financial institutions to operate in a less risky environment. Institutions using outsourced FIUs are able to redeploy resources used for compliance to other operational or risk areas, which may decrease overall risk for banks. In the case of providing banking services to the marijuana industry, this could remove a barrier to entry for many of the local and regional banks that are hoping to service this industry.

To the Prepared Goes the Advantage

As Congress takes up its legislative priorities for 2019, marijuana legalization could be a bipartisan priority. Democrats Dianne Feinstein, Chuck Schumer, and Joe Kennedy, who have historically voiced their opposition to legalization, publicly changed their stance last year. Then Senate Majority Leader Mitch McConnell actively supported hemp legalization through the 2018 Farm Bill, naming himself to the conference committee charged with reconciling the Senate version of the bill, which contained the hemp language, with the House bill, which did not. President Trump signed the bipartisan bill into law in December, essentially legalizing every part of the marijuana plant except THC.

Given the shifting national landscape, banks and financial institutions should begin preparing for the onslaught of regulation and money that will flow into the financial system if those in the marijuana industry are able to bank their money. Those who are prepared with rigorous AML programs, whether in-house or accessed through an outsourced FIU offering like ours, will be well positioned to take advantage of the budding marijuana industry.