Arkansas Banks and Marijuana

Robert T. Smith Commentary


Arkansas Banks and Marijuana

With the rollout of medical marijuana in full swing for Arkansas-based cultivators, dispensaries and patients, businesses vying to provide them with products and services remain in an uncertain position. Arkansas-based banks face a particularly difficult situation in serving marijuana-related businesses (MRBs).

Those risks are well documented. Despite state action to legalize its use, marijuana remains a controlled substance under federal law. The federal Controlled Substances Act prohibits anyone from dealing with controlled substances or funds generated from their sale. The Bank Secrecy Act requires that Suspicious Activity Reports be filed to report suspicion of illegal activity under federal law. Other federal rules require banks to report certain activities or else put themselves at risk of civil and criminal penalties. Technically, a bank providing financial services to a marijuana business could face charges of aiding and abetting money laundering and racketeering.

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In 2014, the Department of Justice issued a memorandum outlining its enforcement priorities relative to legal marijuana-related businesses. Known as the Cole Memo, the guidance says that where a bank provides services to an MRB whose activities do not implicate any of the DOJ’s enforcement priorities, then “prosecution for these offenses may not be appropriate.”

The Cole Memo was rescinded by Attorney General Jeff Sessions in 2018. William Barr, Sessions’ replacement, said in his confirmation hearing that his office would not “upset settled expectations” under the memo.

The Financial Crimes Enforcement Network, which enforces the Bank Secrecy Act, also issued a guidance letter in 2014 in conjunction with the DOJ. FinCen similarly focused on enforcement priorities and heightened reporting requirements on banks serving MRBs. Last year the U.S. Treasury Department confirmed that FinCen’s 2014 guidance would continue to be followed.

Although the DOJ and FinCen actions provided much-needed guidance, neither prohibits prosecution for violations of federal law.

Help is (potentially) on the way. In February, Congress held its first hearing on resolving the MRB conundrum more than five years after introduction of the original marijuana banking bill. The Secure & Fair Enforcement (SAFE) Banking Act would prohibit federal regulators from penalizing banks that accept deposits or otherwise provide services to MRBs that hold a state-issued license. These hearings addressed a number of concerns relative to MRBs, including difficulties of MRBs accessing deposit accounts and public safety issues inherent in cash-based businesses. On March 27, the House Financial Services Committee approved the SAFE Act legislation, with few amendments, by a vote of 45 to 15.

While the SAFE Act is not a cure-all for banks’ MRB problem — for example, it does not address the fact that marijuana is a controlled substance — it is generally supported by community banks around the country. The Independent Community Bankers Association spoke in support of the legislation at the February hearing. Although it expressed some early concerns, the American Bankers Association also supported passage of the SAFE Act, noting the obvious need for clarity given that 33 states covering 68% of the nation’s population have legalized marijuana for medical or recreational use.

A separate piece of legislation, the States Act, sponsored by Sen. Elizabeth Warren, D-Mass., would address the problem in a more direct fashion. The bill would amend the Controlled Substances Act to effectively provide a safe harbor for anyone acting in compliance with state law. A comparison of the SAFE Act and States Act, along with other proposals over the past several years, demonstrates that there is currently no consensus on the best path forward.

Banks intent on serving MRBs are left to rely on the limited and often confusing combination of official guidance from FinCen, the Department of Justice and state and federal bank regulators.

A number of our clients have expressed concerns over the Catch-22 between managing risk and continuing to address the evolving needs of their existing customer base. As the business reach of MRBs grows within the state, Arkansas banks will be faced with making tough decisions as longtime customers are either directly or indirectly doing business in this growing industry.

At least for now, this may be one of the few relatively nonpartisan issues in Washington. Both sides agree that some form of safe harbor is necessary sooner rather than later.


Email Robert T. Smith, a partner in the Little Rock office of Friday Eldredge & Clark, at RSmith@FridayFirm.com.