Special thanks to the assistance of associate Molly Rao
in preparing this advisory.
The October 27, 2017 indictments of Paul Manafort and Richard Gates have put money laundering in the spotlight. Much of the press coverage and commentary on the indictments focused on the charge of money laundering conspiracy and the little understood concept of “promotional” money laundering. While the common conception of money laundering is one of taking crime proceeds and engaging in transactions to disguise their nature or source, the Manafort indictment served as a reminder of the broad array of transactions encompassed by the federal money laundering laws and the severity of the penalties for violating them. This is of particular concern for those who invest in, or otherwise financially support, marijuana-related businesses (“MRBs”), given that the use, possession, and distribution of marijuana remain illegal at the federal level. This advisory provides guidance based on my experience as a former federal prosecutor on both understanding the varieties of money laundering charges and navigating the opportunities and perils of the MRB landscape.
How Is This Money Laundering?
One of the money laundering charges in the Manafort indictment captures all money that moves in or out of the United States with the intent to promote certain types of criminal activity, referred to as “specified unlawful activity.” (18 U.S.C. §1956(a)(2)(A).) The money laundering laws provide that “specified unlawful activities” include all manner of frauds, false statements, bribery, trafficking in stolen property, drug crimes, foreign corrupt practices, and even fraud against foreign banks and governments. What this means is that any money—even “clean” money—that moves into or out of the United States in order to promote a specified unlawful activity is money laundering. This is sometimes referred to as “international promotional money laundering.” A classic example is a foreign cartel that sends clean money into the United States for the purpose of providing funds to expand its U.S.-based drug business. The statute, however, also applies to money crossing the border to fund simple frauds and numerous other activities that are illegal under federal law, such as the possession, use, or sale of marijuana.
Further, once the crime (a “specified unlawful activity”) is committed, transactions involving proceeds of the crime constitute further incidents of money laundering. This (among other things) is what the Government has alleged against Manafort: that he moved money internationally to promote his activities as an unregistered foreign agent, earned money as an unregistered foreign agent, and then engaged in further transactions to hide the nature and source of the money.
Moreover, where either the crime or the defendant has a certain connection to the United States, nearly any transaction of crime proceeds greater than $10,000 qualifies as money laundering, regardless of the intent for engaging in the transaction. (18 U.S.C. §1957.) Under this so-called “spending statute,” spending more than $10,000 of proceeds on a car or jewelry is money laundering. Put simply, the money laundering laws are broad, and once money has been used or is intended to be used in an unlawful activity, it falls within the scope of the money laundering statutes. For example, by knowingly transacting in crime proceeds, one can be laundering money even without any intent to conceal or disguise the nature or source of those proceeds. This is known as the “spending” statute. (18 U.S.C. § 1957.)
The Government’s Increasing Focus on Money Laundering
Prosecuting money laundering is also an increasing priority for the Government, as I witnessed during my time as an Assistant U.S. Attorney for the Southern District of New York (“SDNY”). In recent years, the SDNY renamed its Asset Forfeiture Unit as the Money Laundering and Forfeiture Unit to highlight the importance of money laundering cases to the U.S. Attorney’s Office. Money laundering charges can add significant criminal exposure in otherwise low-penalty white collar cases, as the maximum term of imprisonment for most money laundering crimes is twenty years. In addition, the property subject to forfeiture includes all property involved in the money laundering, and any property traceable to such property. This is demonstrated by the forfeiture allegation in the Manafort indictment, which lists four high-end properties and a life insurance policy. In deciding which property is “involved in” money laundering, the government takes a broad perspective, including property “commingled” with the proceeds of crime. For example, clean money in a bank account into which crime proceeds are deposited may also be forfeited on the theory that the clean money is used to facilitate the money laundering by concealing or disguising the crime proceeds.
Money Laundering and Transacting with Marijuana-Related Businesses
The breadth of the money laundering statutes are of special concern to those who provide financial services to MRBs or are considering providing such services in the future. Even if legal under state law, the use, possession, and sale of marijuana remains illegal at the federal level. The risk is that those who provide financial services to MRBs—even MRBs that are properly licensed and compliant with state law—can fall within the purview of federal money laundering statutes. For instance, money that moves internationally from an investor or financial institution that provides a construction loan to an open air shopping mall, knowing that the mall will contain a state-licensed marijuana dispensary, falls within the scope of federal money laundering laws. And any U.S.-based person knowingly transacting in marijuana proceeds totaling $10,000 or more, regardless of intent, likewise falls the spending statute, 18 U.S.C. § 1957.
This is potentially troubling if “marijuana proceeds” include not just the proceeds earned by a “direct contact” MRB, (i.e.
, the MRB that actually touches the marijuana, such as a cultivator, processor, or dispensary) but proceeds earned by ancillary businesses. For instance, ancillary MRBs would include those that provide supporting equipment specifically for marijuana cultivation and processing, or, even more removed, those that provide supporting services (such as security, cleaning, or even accounting services) for a variety of businesses, including direct contact marijuana businesses.
Does this mean that institutions should steer clear of all of these potential customers? Not necessarily. In light of the opportunities presented by the market, financial institutions are increasingly taking on MRBs.
Moreover states, such as California, have proactively sought to find a solution to problems created by “unbankable” MRBs. For example, officials from the California Governor’s Office met with representatives of 65 banks and credit unions in late 2017 about creating a network of financial institutions that would accept funds from MRBs in a way that would guarantee federal banking regulators that the cannabis industry money is subjected to special tracking, oversight and transparency.
However, given the perils of entering the MRB landscape, an understanding of federal guidance and priorities, and a robust compliance program, are essential for maximizing opportunity while minimizing risk.
Guidance for Financial Service Providers
While institutions should proceed with caution in this area, by properly vetting the primary marijuana business as well as any ancillary supporting MRB that is the prospective client, and ensuring a robust compliance program, an institution can obtain a reasonable level of comfort that it will not find itself the target of law enforcement. Note that currently, under the Rohrabacher-Farr amendment (also known as the Rohrabacher-Blumenauer amendment), which remains in effect until December 22, 2017, the U.S. Department of Justice (“DOJ”) is prohibited from spending funds to interfere with the implementation of state medical cannabis laws, or from prosecuting medical marijuana businesses compliant with state law. The amendment must be renewed each year, and notwithstanding a previous request to Congress from U.S. Attorney General Jeff Sessions not to restrict DOJ’s discretion to fund particular prosecutions, the amendment appears to have broad support. But even if it fails to pass, law enforcement will still look to the priorities previously set forth by DOJ (and summarized below), priorities that also provide guidance for those providing products or services to MRBs in conducting their due diligence.
In vetting the primary marijuana business (that is, the business directly growing, processing, or selling marijuana), the initial inquiry must be whether the MRB implicates the priorities set forth in the August 29, 2013 memo issued by DAAG Attorney General James M. Cole, referred to commonly as the “Cole Memo.”
The Cole Memo reiterated that DOJ was committed to enforcing the federal narcotics laws, and that the sale, possession and distribution of marijuana was still illegal under federal law. At the same time, the Cole Memo stated that use of limited federal investigative resources would be focused on the most significant threats, that is, those to public safety, public health, and other law enforcement interests. Toward that end, the Cole Memo identified eight priorities for law enforcement action:
- Preventing the distribution of marijuana to minors;
- Preventing the revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands; and
- Preventing marijuana possession or use on federal property.
Whether an institution is considering providing services to a primary MRB or an ancillary MRB, it should vet the direct contact MRB and decline any relationship with one implicating one of the Cole Memo priorities or otherwise violate the law of the state in which it operates. Next, it should conduct additional due diligence in accordance with the Financial Crimes Enforcement Network (“FinCEN”) memo on February 14, 2014.
The FinCEN memo identifies seven elements of due diligence it expects financial institutions to take:
- Verifying with the appropriate state authorities whether the business is duly licensed and registered;
- Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- Requesting from state licensing and enforcement authorities available information about the business and related parties;
- Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be serviced (e.g., medical versus recreational customers);
- Ongoing monitoring of publicly available sources for adverse information about the business and related parties;
- Ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and
- Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
Additionally, FinCEN requires a financial institution to file a Suspicious Activity Report (“SAR”) if it knows or has reason to suspect that a transaction attempted through the institution involves funds derived from a MRB. Assuming the institution has no reason to suspect that the MRB has implicated one of the Cole Memo priorities or runs afoul of state law, it need file only a “Marijuana Limited” SAR, the contents of which are set forth in the FinCEN memo. Finally, the memo sets forth various red flags that institutions should be attuned to and that may indicate that an MRB runs afoul of state law or implicates a Cole Memo priority.
In essence, the key factors for complying with FinCEN guidance and protecting the institution are to know the immediate customer (if an ancillary MRB) as well as the primary or direct marijuana business, have a well-trained staff, robust compliance program and risk assessment process, engage in regular updates on customer due diligence and file timely and correct SARs. The risk to those who are engage with MRBs ancillary businesses, particularly those, such as security firms as others, who service businesses other than MRBs, is clearly much lower, but thorough diligence of the primary MRB is nevertheless critical. A deficiency at the primary MRB that attracts law enforcement interest is likely to attract (at a minimum) inquiries from law enforcement directed to the ancillary businesses. Therefore, diligence at each point in the relationship chain and an understanding of federal guidance and priorities will protect financial service providers against unwanted attention from regulators and law enforcement.
Attorneys in Kelley Drye’s White Collar, Investigations and Compliance
practice group are monitoring developments in the area of money laundering and MRBs and advising clients with respect to the obligations and opportunities they create. Clients with interests in the areas discussed above should feel free to contact the author or any other Kelley Drye attorney they work with to discuss whether and how the money laundering laws impact their business.