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Issues to Consider When Financial Institutions Provide Banking for Cannabis Related Businesses in Illinois

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Issues to Consider When Financial Institutions Provide Banking for Cannabis Related Businesses in Illinois

Since January 1, 2020, the Illinois Cannabis Regulation & Tax Act has legalized the production, sale, transport and consumption of recreational cannabis.[1] The Illinois Cannabis Regulation and Tax Act also legalized banking for Cannabis Related Businesses (CRB’s) in Illinois, stating that financial institutions assisting CRB’s, such as banks or credit unions, are exempt from state criminal laws.[2]

Unfortunately, federal criminal laws on cannabis conflict with Illinois’ Cannabis Regulation & Tax Act— possession, sale and distribution of cannabis remain a federal crime under the Controlled Substances Act.[3] Even worse, banks who have CRBs as clients, could find themselves in technical violation of federal money laundering and/or wire fraud statutes for assisting the cannabis industry.[4]

However, fear of retribution from the federal government should not cause banks to write off having CRB’s as client. The U.S. Department of Treasury has issued guidances and regulations that help protect cannabis banking in states with legalized marijuana.[5] U.S. Attorneys have yet to exercise their discretion to prosecute CRB’s legally operating under state law.[6] For further discussion of particular federal regulations over cannabis industry banking, please click here.

There are financial institutions that have CRB’s without any issues from federal or state authorities. However, in order to successfully work with CRB’s, a financial institution must comply with numerous federal and state regulations. A financial institution should consider the costs associated with having CRB’s as clients and, if needed, apply for funding from the Illinois State Treasurer’s Community Invest program to facilitate banking with CRB’s.

Here are some of the issues that a financial institution must consider when working with a CRB:

  1. Review and Monitor Licensing, Operations and Financial Records of CRB’s

Compliance with federal banking regulation requires that all state laws and regulations are followed by both a financial institution and their CRB clients.[7] This cannot be overstated enough. Whenever a CRB violates Illinois laws regulating cannabis, then that CRB is also raising the specter of intervention from federal regulators, including federal prosecutors at the U.S. Department of Justice.

Thus, it is incumbent upon financial institutions to review state license applications, cash flow and tax filings of CRB’s, regularly monitor their activities, and develop a thorough understanding of their products. Under the Illinois Cannabis Regulation & Tax Act, a financial institution may request any of the following from a client that is a CRB:

        (1) Whether a cannabis business establishment with
which the financial institution is doing or is considering doing business holds a license under this Act or the Compassionate Use of Medical Cannabis Program Act;
        (2) The name of any other business or individual
affiliate with the cannabis business establishment;
        (3) A copy of the application, and any supporting
documentation submitted with the application, for a license or a permit submitted on behalf of the proposed cannabis business establishment;
        (4) If applicable, data relating to sales and the
volume of product sold by the cannabis business establishment;
        (5) Any past or pending violation by the person of
this Act, the Compassionate Use of Medical Cannabis Program Act, or the rules adopted under these Acts where applicable; and
        (6) Any penalty imposed upon the person for violating
this Act, the Compassionate Use of Medical Cannabis Program Act, or the rules adopted under these Acts.[8]
 

Any of the above-requested information must be kept confidential by a financial institution, unless (1) requested by a federal or state regulator, (2) the client, (3) the client’s trustees or agents in order to comply with a government investigation, (4) third-parties examining financial records to comply with a federal or state law, or (5) a third party performing work for a financial institution who has signed a confidentiality agreement covering information from CRB clients.[9] A third party performing work for a financial institution with access to a financial institution’s information on a CRB should be under a confidentiality agreement for such information.[10]

  1. Develop an Understanding of State Regulations and Cannabis Taxes

Illinois agencies overseeing CRB’s may issue or change rules that affect the cannabis industry.[11]  State regulations will differ for CRB’s based on whether the CRB falls into one of the following categories under the Cannabis Regulation and Tax Act:

  • Dispensaries[12]
  • Cultivation Centers[13]
  • Craft Grower[14]
  • Infuser Organization[15]
  • Transporting Organization[16]

Dispensaries receive licensing from and are overseen by the Illinois Department of Financial and Professional Regulation (“IDFPR”).[17] The IDFPR may request information from dispensaries, conduct investigations, examine premises, and suspend or revoke dispensary licenses.[18]  Cultivation centers, craft growers, infuser organizations and transporting organizations are licensed and overseen by the Illinois Department of Agriculture.[19]

All CRB’s are subject to regulation from the Illinois State Police, Illinois Department of Revenue and Illinois Department of Public Health.[20] The Illinois State Police is required to conduct background checks and receive fingerprints from all principals, owners and agents of a CRB.[21]

Generally, a CRB will need to undergo a lengthy licensing process, wherein it will have to disclose plans addressing security, recordkeeping and compliance, floor plans, and other details.[22] Applicants may be found disqualified at the discretion of agencies if an individual associated with an applicant has engaged in unlawful activity, violated cannabis laws in Illinois or elsewhere, etc.[23]

  1. Consider Applying for the 2 Year Deposit Program from the Illinois State Treasurer Under Community Invest- Cannabis Banking Services

The Illinois State Treasurer’s Office has established Community Invest – Cannabis Banking Services and is accepting applications from financial institutions who want to receive funding.[24] It is a Community Development Linked Deposit Program, wherein a financial institution can receive deposits “for the express purpose of creating and implementing or expanding a cannabis-related business banking and savings program.”[25] In applying, a financial institution must agree to the following if selected to receive deposits:

  • Maintain CRB banking and savings accounts;[26]
  • “commit to a 2-year deposit term with the Treasurer”;[27]
  • Provide a detailed business plan;[28]
  • “maintain a CRA rating of Satisfactory or above, or be a credit union that does not receive a CRA rating”;[29] and
  • “maintain an IDC Financial Publishing, Inc. (“IDC”) rating of at least 125, or receive a written exception grated by the Treasurer’s Deputy Treasurer and Chief Investment Officer.”[30]

A financial institution must report its fee schedule on accounts for CRBs and make quarterly and annual reports to the Illinois State Treasurer’s Office regarding CRB accounts, transactions and economic impact data.[31] All deposits must be collateralized at 110% in compliance with the Illinois State Treasurer’s Acceptable Collateral Listing: List of Financial Assets Qualified for Collateral to Secure Deposits and Repurchase Agreements.[32]

  1. Prepare to Address the “Chain of Custody” Dilemma in Cannabis Banking

In Illinois, cannabis banking is a cash-only enterprise. In order to monitor CRB’s, a financial institution must be able to verify and cross-reference records of cash sales and inventory purchases with funds deposited in CRB-held accounts.[33] Furthermore, a financial institution should regularly verify and regularly maintain documentation showing that deposits from CRBs were from legal cannabis sales.[34] This is a monumental task for banks—most other clients do not necessitate regular oversight of their business from their financial institution. However, software has been developed to streamline chain of custody issues in cannabis issues for financial institutions.[35]

Since cannabis is now legal in Illinois, financial institutions should consider serving CRB’s and be mindful of federal and state regulations. For more information, contact James A. Cook at jcook@mckenna-law.com.

[1] 410 ILCS 705/10-5.

[2] 410 ILCS 705/55-65(a).

[3] 21 U.S.C. Sec. 802, 812(c).

[4] 18 U.S.C. Secs. 1343 (wire fraud); 1956, 1957 (money laundering).

[5] U.S. Dept. Treasury, Financial Crimes Enforcement Network, “BSA Expectations Regarding Marijuana-Related Businesses” (Feb. 14, 2014), https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses

[6] Ross O’Brien, How the Feds Protect the Cannabis Industry and How Things Could Change, ENTREPENEUR (Jan. 23, 2020), https://www.entrepreneur.com/article/343429.

[7] U.S. Dept. Treasury, Financial Crimes Enforcement Network, “BSA Expectations Regarding Marijuana-Related Businesses” (Feb. 14, 2014), https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses

[8] 410 ILCS 705/55-65(b).

[9] 410 ILCS 705/55-65(e).

[10] Id.

[11] 410 ILCS 705/55-35.

[12] 410 ILCS 705/Art. 15.

[13] 410 ILCS 705/Art. 20.

[14] 410 ILCS 705/Art. 30.

[15] 410 ILCS 705/Art. 35.

[16] 410 ILCS 705/Art. 40.

[17] 410 ILCS 705/5-15.

[18] 410 ILCS 705/15-5.

[19] 410 ILCS 705/5-10.

[20] 410 ILCS 705/5-20, 5-25, Arts. 60, 65.

[21] 410 ILCS 705/5-20.

[22] 410 ILCS 705/15-25, 20-15, 30-15, 35-15, 40-15.

[23] 410 ILCS 705/15-30, 20-25, 30-25, 40-20.

[24] Office of the Illinois State Treasurer, Invest in Illinois, Community Invest – Cannabis Banking Services Program Application, https://illinoistreasurer.gov/Invest_in_Illinois/Community_Invest/Community_Invest_Cannabis_Banking_Services.

[25] Id.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] Id.

[33] U.S. Dept. Treasury, Financial Crimes Enforcement Network, “BSA Expectations Regarding Marijuana-Related Businesses” (Feb. 14, 2014), https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses.

[34] Id.

[35] https://www.hypur.com/marijuana-banking/.

Categories Banking and Lending Banking Services General Litigation Legal Updates



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