Community Banking and Marijuana Decriminalization

by Terence Cawley, Liability Claims Manager, ABA Insurance Services

Eleven states and the District of Columbia have legalized marijuana for adult recreational use in small quantities, while the Controlled Substances Act (the “CSA”), a federal law, continues to treat marijuana as a controlled substance that is “dangerous” and illegal to possess.1 On November 6, 2018, Michigan voters passed a measure for Michigan to join this group. Thirty-three states, as well as the District of Columbia, Guam and Puerto Rico, have enacted laws that decriminalize medical marijuana. Most observers think that only comprehensive federal legislation (maybe in combination with eventual case law decided by the Supreme Court of the United States) will begin to resolve these tensions and contradictions, for better or worse.

Substantial sales revenues are being generated in states that have passed such decriminalization measures. Taxable sales revenue generated in Colorado alone in 2017 from medical and recreational cannabis, edibles and concentrate products was approximately $1.5 billion. The opening up of state-by-state marketplaces for medical and in some states recreational marijuana is so lucrative that it has been dubbed the “Green Rush.” The marijuana-related businesses (“MRB’s”) in these states need to receive suitable banking services. Forbes Magazine reports that an increasing number of community banks are willing to establish these banking relationships. However, many banks are unwilling to do so, preferring to let the dust settle.

Why do so many banks hesitate?
For such banks, there are simply too many uncertainties. Even though a state may permit and regulate the manufacture, distribution, possession or dispensation of marijuana, the CSA, in addition to criminalizing these same acts, also punishes those who assist or facilitate the commission of one of these crimes. Bankers understandably are concerned that a prosecutor, litigant or bank regulator might take a harsh view of the provision of banking services to a firm that appears to be in regular violation of the CSA. This is a classic federalism issue. An idea as old as our Republic, federalism is concerned with the Constitution’s handling of a conflict between a federal law and a state law, or one between the laws of several states. To date, the U.S. Supreme Court has not been asked to apply federalism principles to the conflict between the CSA and a state law that decriminalizes marijuana.

The Cole Memos and FinCen’s position paper provide some guidance
During the Obama Administration, the U.S. Department of Justice (“DOJ”) published two well-known position statements to indicate the extent of the Obama-era deference to those individual states, and to highlight when it might choose not to defer to them. These papers, known as “The Cole Memos,” provided some reassurance to community bankers that coveted “Green Rush” companies as prospective customers, and reminded banks that they must have and maintain a vigilant compliance program to detect any abuses if they did so.

The Cole Memos, and a related position paper prepared by FinCEN, directed the banks to file copious numbers of SAR’s—including whenever a banking relationship was established with a marijuana-related business. These position statements laid out other useful advice to banks interested in offering banking services to MRB’s in states where medical and/or recreational marijuana has been decriminalized and regulated. The Memos reserved the right to take any action, including prosecution of financial institutions, if it was deemed necessary to protect and promote the purposes of the CSA, the Bank Secrecy Act, and the Money Laundering Control Act.

2018: The Cole Memos are rescinded
For a time, banks that provided services to marijuana-related businesses (or those that were considering doing so) pointed to the Cole Memoranda and the FinCEN guidance as some support for the view that a bank might reasonably proceed to offer services to participants in this industry. Even greater uncertainty occurred when the Cole Memoranda were rescinded as of January 4, 2018, by action of then-U.S. Attorney General Jeff Sessions. Former AG Sessions had made clear his disapproval of the position of the Obama Administration’s policy on enforcement of the CSA. The rescission of the Cole Memoranda caused greater concern for MRB’s and the community banks that have entered this banking niche or are considering it.

Medical Marijuana Receives Some Protection
With regard, at least to medical marijuana, action by Congress provided a measure of reassurance. In December 2014, as part of an Omnibus spending bill passed by Congress, an amendment that has been known as the Rohrabacher-Blumenauer amendment has restricted the U.S. DOJ from using funds to “prevent … [the] States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

Decriminalization of Marijuana Continues as a Hot Topic in both the media and politics
The topic of decriminalization of marijuana continues to gain considerable attention in the national news media, and these developments reflect ongoing political movement. For instance, a bipartisan bill was introduced in the Senate that would have purported to authorize the states to enact their own marijuana laws without federal interference. Reportedly, federal prosecutors have yet to bring federal CSA charges against an MRB that is in apparent conformity with a state legalization regime, according to the Wall Street Journal. (S. Gurman & N. Andrews, “Jeff Sessions Struggles to Get Planned Marijuana Crackdown Going,” June 10, 2018, Wall Street Journal.) Instead, anecdotal reporting on DOJ activity suggests that, whatever former AG Sessions intended by his rescinding of the Cole Memoranda, the DOJ has used its limited resources to target marijuana operations that flaunt federal law, such as “businesses” that are surreptitiously growing marijuana on federal lands, or criminal gangs that sell marijuana along with other drugs.

What should banks consider and understand before establishing business-relationships with MRBs?
Banks looking to develop a marijuana-related business segment have some work to do before diving in. This will involve:

  • getting legal advice,
  • having an open discussion with regulators, and
  • looking closely at the bank’s compliance and risk management functions.

In addition, banks should examine their insurance programs with this business segment in mind. Coverage should be discussed with the bank’s agent or broker, the bank’s attorney, and not least, with the bank’s insurers.

Insurance coverage and considerations
While each unique insurance claim must be analyzed for coverage on its own facts, and while variations commonly exist in policy language, a few basic statements can be made about likely coverage outcomes in our bank insurance program.

First, banks should know that in our program there is no specific “marijuana” exclusion on any of our program’s typical liability policy forms. In fact, for a claim that otherwise satisfies the usual coverage requirements for a liability policy, our program’s broad form company liability insurance policy provides indemnity for the insured’s Defense Costs to defend the “marijuana-related claim.”

In fact, we have paid indemnity dollars for Defense Costs to a bank that was named as a defendant in a marijuana-related lawsuit. This federal lawsuit accused the bank of participating in a RICO conspiracy, along with a medical marijuana dispensary. The suit was brought by “NIMBY” plaintiffs that disputed the legitimacy of the state law decriminalization and regulatory scheme for medical marijuana. (The plaintiffs eventually dropped the bank from their lawsuit.)

We must point out that while indemnity exists to defend the claim, no coverage would exist for a penalty or fine of any type, whether related to “marijuana” or otherwise.

In addition, a final non-appealable judgment against an insured finding that the insured had committed “any fraudulent, dishonest or criminal act” or engaged in “any willful violation of any civil or criminal statute, regulation or law” could trigger a fraud/violation of law exclusion usually contained in our program’s liability policies.

Banks interested in serving customers in the marijuana-related business niche have interesting challenges. Banks must manage the ever-evolving legal and business landscape. Banks must carefully manage the regulatory relationship, and satisfy expectations of regulators regarding compliance and risk management. Banks will need to think through the specific (and unfamiliar) needs of these customers, and at times, they will have to adapt traditional bank services to meet these needs. Finally, banks must also maintain an awareness of the role that an insurance program can play in addressing these related challenges.

1. As of November, 2018.

About the Author

Terence Cawley is a Liability Claims Manager with ABA Insurance Services. He is certified by the Ohio State Bar Association as a specialist in insurance coverage law. Prior to joining the ABA insurance program, Terry practiced law with several law firms in Cleveland, Ohio, concentrating on commercial litigation and insurance matters. He can be reached at or 216-220-1331. Recognized for underwriting and claims handling expertise, ABA Insurance Services, is a member of Great American Insurance Group, providing D&O, bond, and cyber insurance to banks countrywide. A liability insurance program for small business and nonprofits is also available.