Insights: Article

The Legal Quagmire of Banking Marijuana

By Adam Montgomery

August 30, 2017

Article VI, Clause 2 of the United States Constitution establishes the Constitution, and all federal laws thereof, as “the supreme law of the land.” Also known as “the Supremacy Clause,” these few words defined our national governmental system; authorizing the states to govern local issues when the federal government is either silent or has no expressed power to act. In short, should a state law conflict with federal law, the latter would win out in the end. 

As of July of this year, 28 states will have legalized medical marijuana. Eight of those states have legalized the recreational use of marijuana. However, the federal government still classifies marijuana as a Schedule I drug under the Controlled Substances Act (CSA). Applying the legal principle of the Constitution’s “Supremacy Clause,” these 28 state laws would be deemed unconstitutional, if they were ever challenged in court. So far, there has been no such challenge.

With more than half of states legalizing the medical use of marijuana, federally-insured banks are faced with the legal question: can we bank a marijuana business?

Justice Department Priorities

During the Obama Administration, the Department of Justice authored a series of legal memoranda to provide guidance for the prosecution of drug-related offenses. In the Cole Memos, Deputy United States Attorney General James M. Cole reaffirmed the Justice Department’s commitment to the enforcement of the CSA, but also referenced the need to utilize department resources “in the most effective, consistent, and rational way.”

To affect this position, Cole outlined eight priorities the department would emphasize in enforcement actions:

  • Prevent the distribution of marijuana to minors
  • Prevent revenue from the sale of marijuana from going to criminal enterprises
  • Prevent the diversion of marijuana from states where it is legal under state law to those states where it is not
  • Prevent state-authorized marijuana activity from acting as a front for other illegal drug trafficking
  • Prevent the use of firearms and violence in the cultivation and distribution
  • Prevent drugged driving
  • Prevent growing marijuana on public lands
  • Prevent marijuana possession and use on federal property

Future Unclear

In February 2014, the Justice Department and the Financial Crimes Enforcement Network (FinCEN) each issued a memorandum, affirming the Cole Memo’s eight priorities do not supersede anti-money laundering statutes or the Bank Secrecy Act.

As marijuana businesses and banks continue to watch for signs from the Trump Administration, it is unclear how or if the Cole Memos will continue to guide the Justice Department’s prosecutorial discretion under the direction of Attorney General Jeff Sessions, a staunch opponent of marijuana.

A Risk-Based Approach

Despite this, the Compassionate Access, Research Expansion, and Respect States (CARERS) Act of 2017 was re-introduced in the U.S. Senate in June. Interestingly, the act would empower the states to continue to govern the use of marijuana, but unlike its previous version, this bill provides no protections for federally-insured financial institutions.

With little precedence to guide financial institutions, it is important to stress the decision to bank marijuana is completely risk-based. The Cole Memos and FinCEN have given some guidance, but if legally challenged, the CSA would and must reign “supreme.”

Editor’s note: Legislation and enforcement of laws regarding marijuana are a continually developing topic. Information in this article was accurate as of print time. 

Latest Insights

September 19, 2018
The IRS has started sending out Letter 5699 asking businesses to verify if they should have filed Forms 1094/1095-C. These forms are required for all ALEs.
September 18, 2018
As the largest tax reform legislation in the past 30 years becomes reality, it is important to stay up-to-date on planning opportunities and how reform may impact you and your business. Our Tax Reform: Practical Insights examples aim to break down…
September 18, 2018
Get ahead of tax season with the Eide Bailly Tax Planning Guide. A supplemental strategy guide to help guide year-end and make the tax laws work for you.
September 18, 2018
The SCOTUS Wayfair decision has prompted a new focus on state and local tax compliance. The decision to register, report, and comply is important.
September 17, 2018
When an IRS Letter 226J is received, it is important to respond timely and with accurate information to eliminate, abate or reduce IRS calculated penalties
September 17, 2018
Firm News
Tom Goekeler, partner at Eide Bailly LLP, has been named chief practice officer of the South Central region, which currently covers our Oklahoma and Texas offices.
September 17, 2018
The recent US Supreme Court decision that overturned Quill in the South Dakota v Wayfair case has many states making or considering law changes related to sales tax compliance for out-of-state sellers.
September 12, 2018
The Tax Cuts and Jobs Act, signed December 22, 2017, significantly impacted inbound tax planning. Non-U.S. taxpayers doing business in the U.S. will need to consider the new tax laws.
September 12, 2018
Applications have made a huge impact on our lives, allowing us to keep track of the complexities of our day-to-day and save for our futures. But it’s important to understand where we are laying our trust.