Thursday, November 13, 2014

Fun with FinCEN: Regulating the Unlawful

I am currently doing some research for an upcoming program on regulating payment networks. Financial institutions have been assigned duties under the Bank Secrecy Act to know their customers and to monitor and report suspicious financial behavior.  Unlike a neighborhood watch association, in which membership is voluntary, these institutions are effectively being deputized by the government to perform gatekeeping and monitoring functions.  And if they don’t do their jobs property, they could be kicked out of the neighborhood!

Snooping banks may threaten our liberty, I suppose.  But perhaps this form of monitoring is less intrusive than having the government watching you directly.  (Hey, wait a minute, they may be doing that, too!)  And neutralizing threats from criminals and terrorist organizations likely enhances our wellbeing more than a snooping banker.  Frankly, I don’t worry about these privacy concerns so much.  In fact, I have told my banker that he knows more about me than my doctor and probably even my priest.  (Maybe that means I am going to confession too infrequently.)  

The current state of legal  conflict regarding the possession and distribution of marijuana presents some additional dilemmas for financial institutions and others who deal with persons or entities engaged in such distribution.  While laws have  been change to removed criminal sanctions in some states and localities, federal law continues to criminalize this activity.  The Controlled Substances Act, coupled with other laws such as those involving aiding and abetting criminal activity, mean that marijuana continues its status as a dangerous controlled substance that creates a risk for civil and criminal penalties not only to those who distribute, but also to those who aid them. 

So, what’s a bank to do when approached by a customer who is connected to marijuana distribution in a state that has effectively legalized this activity under state law?  The most risk averse advice would be to turn him away and/or turn him in.  Guidance issued early this year by the Financial Crimes Enforcement Network (FinCen) and by the U.S. Department of Justice (DOJ) leave the financial services industry in a bit of a quandary if they want to do business with a person or entity engaging in legal activities from the perspective of state law, but illegal activities under federal law.    On one hand, FinCEN has provided guidance regarding how a bank may comply with ongoing reporting obligations under the Bank Secrecy Act.  On the other hand, the DOJ has also announced that all the laws that could be applied to such a banking relationship with a known distributor of marijuana continue to be on the books.  However, it has also announed that the DOJ will likely to exercise prosecutorial discretion in enforcing these laws assuming the customer is not doing things that trigger enforcement priorities, like distributing the drugs to other states, to minors, around school zones, or as a ruse to support other criminal activities.  And the banks are supposed to conduct due diligence to be sure the customer is not doing these things.   

If I was a banker (or like Kramer, who once testified that he always wanted to be a banker), I would not like these competing signals one bit. They expect too much of bankers, who are great people and all, but not clairvoyant.  Bankers should be good at taking deposits and evaluating credit risks when they make loans.  It seems a stretch to assume they are also proficient at evaluating whether (a) a customer engaging in legal activity under state law is also engaged in illegal activities, and (b) whether the DOJ will continue to exercise discretion not to prosecute them for providing services to such a customer.  The former kind of discernment could perhaps be learned, but the latter is admittedly an exercise in predicting the unknowable. (Even Secretary Rumsfeld knew better than to try this.  This candor is surely missed.)

FinCen has come up with some interesting “red flags” to alert bankers to concerns with their customers, and here is my favorite:  “A customer seeks to conceal or disguise involvement in marijuana-related business activity.  For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.” 

Of course, a red flag is not equivalent to a problem.  Your client may be a consulting firm that promotes Willie Nelson concerts.  And what exactly do they mean by “cash that smells like marijuana”?  Is that a figure of speech?  Or should the bank employees be trained by attending a Willie Nelson concert?  I am not quite sure these regulators or the DOJ have thought this through, not to mention the folks who voted for greater access to a drug with a known propensity to make its users stupider.  But that is another story.

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