Our bank’s Marijuana-Related Business (MRB) policy permits us to do business only with “indirect,” rather than “direct,” MRBs. A customer that was recently approved for a craft grower license is seeking financing to purchase a commercial property for their cultivation center. The customer has two LLCs — one to acquire the commercial property and one to operate the cultivation center. If we were to provide financing to the commercial property LLC, we would include the cultivation center’s rent payments as part of the commercial property LLC’s cashflow, and we would maintain a commercial deposit relationship with them. Would this relationship with the commercial property LLC be considered banking a direct MRB?

Generally, commercial landlords that lease property to MRBs are considered indirect MRBs, but we recommend reviewing your MRB policy to determine whether an indirect MRB that shares common ownership with a direct MRB should be treated as a direct MRB for purposes of your internal policy. If your policy is silent on this point and you choose to do business with the commercial property LLC, we recommend giving careful consideration to how you will proceed if it defaults on the purchase loan and continually monitoring the cultivation center LLC.

The FinCEN Guidance on banking MRBs does not expressly define “direct MRBs” but indicates that such businesses generally are directly involved in growing, distributing, or dispensing marijuana. Likewise, the guidance does not expressly define “indirect MRBs” but recognizes that many banks provide financial services to customers who themselves provide goods or services to direct MRBs, such as “a commercial landlord that leases property to a marijuana-related business.” According to the FinCEN Guidance, whether a bank wishes to accept deposits from and provide other financial services to an indirect MRB is a risk-based business decision. If a bank knowingly does so, it generally should look to the rules for filing standard suspicious activity reports (SARs), as opposed to the three types of marijuana-specific SARs required by the FinCEN Guidance for direct MRBs.

The FinCEN Guidance also states that in assessing the risk of providing services to an MRB, a bank should conduct customer due diligence that includes, among other tasks, “ongoing monitoring of publicly available sources for adverse information about the business and related parties.” Due to the entities’ common ownership, we believe the cultivation center LLC would be a “related party” of the commercial property LLC that requires continual monitoring.

Additionally, we note that while licensed “Adult Use Cultivation Centers” are legal under Illinois law, it remains illegal under the federal Controlled Substances Act to manufacture, distribute or dispense marijuana. The federal law also provides that anyone who “aids, abets, counsels, commands, induces or procures its commission” is punishable as if they were a principal to the crime. The fact that federal entities such as FinCEN and the U.S. Department of Justice have published guidance on maintaining banking relationships with MRBs does not change the underlying federal law, which continues to treat marijuana as an illegal controlled substance.

Further, the federal “Crack House Statute” makes it illegal under federal law to knowingly lease or rent a property for the purpose of “manufacturing, distributing, or using any controlled substance,” or to manage or control a property “as an owner, lessee, agent, employee, occupant, or mortgagee” and to “knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.”

Regarding your remedies should the commercial property LLC default on the loan, we caution against enforcing any assignment of rents clause in your loan agreement and accepting any rents from the cultivation center LLC. We believe this would be a violation of the Crack House Statute, which indiscriminately forbids mortgagees from profiting from a property that it manages or controls and is used for the purpose of manufacturing or distributing a controlled substance.

For resources related to our guidance, please see:

FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (“The Controlled Substances Act (‘CSA’) makes it illegal under federal law to manufacture, distribute, or dispense marijuana. . . . Notwithstanding the federal ban, as of the date of this guidance, 20 states and the District of Columbia have legalized certain marijuana-related activity.”)

FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (“Similarly, a financial institution could be providing services to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between 'Marijuana Limited' and 'Marijuana Priority.' Whether the financial institution decides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances. In making this decision, the institution should consider the Cole Memo priorities, to the extent applicable.)

FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (Outlining three marijuana-specific SARs for marijuana-related business customers and when to file them)

FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (“In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) 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 served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.”)

Cannabis Regulation and Tax Act, 410 ILCS 705/1-10 (“‘Adult Use Cultivation Center License’ means a license issued by the Department of Agriculture that permits a person to act as a cultivation center under this Act and any administrative rule made in furtherance of this Act.’”)

Controlled Substances Act, 21 USC 841(a)(1) (“Unlawful acts. Except as authorized by this subchapter, it shall be unlawful for any person knowingly or intentionally — (1) to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance; . . . .”); 21 USC 802(6) (A controlled substance is “a drug or other substance, or immediate precursor, included in schedule I, II, . . .”); 21 USC 812(c)(c)(10) (Schedule I drugs include marijuana.); 18 USC 2(a) (“Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.”)

Crack House Statute, 21 USC 856(a) (“Except as authorized by this title, it shall be unlawful to— (1) knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance; (2) manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.”)

FinCEN SAR Rules, 31 CFR 1020.320(a)(2) (“A transaction requires reporting under the terms of this section if it is conducted or attempted by, at, or through the bank, it involves or aggregates at least $5,000 in funds or other assets, and the bank knows, suspects, or has reason to suspect that (i) The transaction involves funds derived from illegal activities . . . as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation; . . . ”)

FFIEC BSA/AML Manual, Suspicious Activity Reporting (“FinCEN’s guidelines have suggested that banks should report continuing suspicious activity by filing a report at least every 90 calendar days. Subsequent guidance permits banks with SAR requirements to file SARs for continuing activity after a 90 day review with the filing deadline being 120 calendar days after the date of the previously related SAR filing. Banks may also file SARs on continuing activity earlier than the 120 day deadline if the bank believes the activity warrants earlier review by law enforcement.”)