As of March, 2016, cannabis is legally sold in 23 states and the District of Columbia, either for recreational or medical use. Illinois became one of these states in 2013, when the Compassionate Use of Medical Cannabis Pilot Program Act, 410 ILCS 130/1 et seq, (CUA) was signed into law. The CUA permits licensed cultivation centers to grow cannabis for sale to licensed dispensaries, which may then sell the product to registered qualifying patients. Currently, 18 cultivation centers and 33 dispensary locations are open or approved to be open in Illinois, with more set to open in the future. Illinois Department of Agriculture, Medical Cannabis Pilot Program (last visited July 20, 2016), Illinois Department of Financial and Professional Regulation, Licensed Medical Cannabis Dispensaries (last visited July 20, 2016). There has been well over $2 million estimated in sales in Illinois since legal cannabis sales began on November 9, 2015. Nationally, cannabis sales exceeded $5.4 billion in 2015.

Despite the significant amount of cash flow, many cannabis businesses are unable to open and maintain bank accounts and deposit funds into an account due to current federal laws. Most notably, the product is still illegal under the federal Controlled Substances Act. Because of cannabis’ federally illegal status, the transfer of funds from the sale of cannabis could be considered money laundering. The Bank Secrecy Act, 31 U.S.C. 5311 et seq, requires banks to undertake some due diligence in identifying and reporting potential money laundering activity. For example, a bank must file suspicious activity reports (SAR) if the bank knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity. Due to the administrative burden and potential liability these laws impose on banks holding funds from cannabis businesses, among other considerations, banks are hesitant to accommodate the industry. U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) reported in 2015 that 266 of the 6,200 financial depositary institutions nationwide have open accounts with cannabis-related businesses.

Former U.S. Deputy Attorney General James Cole issued a memorandum (Cole Memorandum) on the federal priorities related to cannabis enforcement in 2013. The Cole Memorandum indicated cannabis businesses in states that have legalized cannabis are less likely to be a threat to the federal priorities under the Controlled Substances Act if these states have implemented effective regulatory and enforcement programs to manage cannabis distribution and the cannabis businesses were complying with such regulatory and enforcement programs.

Subsequently, FinCEN issued guidelines for financial institutions on cannabis businesses in 2014. FinCEN related that, since the sale of cannabis is prohibited under federal law, the SAR filing requirement applies to all cannabis business accounts. Additionally, banks must complete Currency Transaction Reports and Form 8300 (Report of Cash Payment over $10,000 Received in a Trade or Business) for cannabis business accounts without exception. FinCEN also emphasized the need for banks to conduct due diligence on cannabis businesses requesting and maintaining a bank account. The take-away from the Cole Memorandum and FinCEN guidance: banks can serve cannabis businesses in legalized states as long as they follow these strict anti-money laundering procedures including due diligence.

In an effort to solve the cannabis industry’s banking problem, some have explored creating their own financial institution specifically for the cannabis industry. A prime example of such a financial institution is the Fourth Corner Credit Union. When the Fourth Corner Credit Union was denied an account with the Federal Reserve System it filed suit against the Federal Reserve Bank of Kansas City. The Federal District Court of Colorado recently dismissed the suit, holding that, despite the Cole Memorandum and FinCEN guidance, the federal laws regarding the illegality of the product outweighed any directive on priorities in law enforcement.

This presents an interesting opportunity for smaller, regional financial institutions to take on these potentially lucrative accounts. For example, several state-chartered credit unions in Washington have elected to accept a number of cannabis business accounts. In Oregon, another state-chartered credit union was in the news for taking on about 50 cannabis business accounts. That credit union created requirements for its cannabis businesses to pass to maintain accounts with the credit union. All of these credit unions reported working closely with state and federal regulators to maintain transparency.

Financial institutions can enter into this industry. But is clear that compliance is of the utmost importance in creating and maintaining a successful relationship between cannabis business owners and financial institutions. Monitoring these accounts requires much attention and expense from these banks. At the same time, cannabis business owners are willing to comply with these extensive requirements because they need these accounts. Cannabis business owners must cooperate with their banks to ensure a long term successful relationship for both parties. The businesses must provide the banking institution with up to date documentation of their certification to open an account, and continue to notify the institution of any changes made with regard to their certification. Cannabis businesses must first and foremost ensure complete compliance with the CUA and its regulations. Financial institutions must identify due diligence standards and implement processes to ensure satisfaction of all reporting requirements. Due to the associated issues, cannabis businesses and financial institutions alike should confer with counsel as to what each side’s compliance plan should look like.