State uf West Virginie sige of the Abacus Gecial vile Morris dy s8n-2021 Atouuey Geral ba (05 S880140 January 11, 2018 “The Honorshle Roger Hanshaw Spevker ofthe Wesl Virginia House of Delegates Stave Capivel Building 1, Room M228 1900 Kanawha Blvd. East Charleston, WY 25305 The Hogorable Jolun Perdue ‘West Virginia State Treesurer ‘State Capitol Huilding 1, Room E145; 1904 Kanara Bly. Bast ‘Churleston, WY 25205 ‘Speaker Hanshaw and ‘Ireasurer Peru: ‘You have cach asked for un Opinion oi she Attorney General conocming legal risks the fnaial services indusiry may fave us Wes: Vargials implements its medical cmaabis live, This Opinion is issued pursuant to W. Va. Code § 533-1, which provides that the Auarmey Genera ‘shall give writen opinions and advice wpoa questions of"law, whenever reyuired to 96, 1 writing, by the treasurer... or any... state officer.” Ta the extenc this Opinion relies on facts, itis based solely on the factual assertions in your eovrespendence with the Office of the Attorney General ‘With the enagument of 2017's Metical Cannabis Act, West Virginia joined the growing majority of Stals—eurrenily 33 plus the Dist of Colurmbis, Guara, and Puerta Rien —thal have legalized murijuana for medical use, See $.H, 356. 2017 Reg, Sess. codtfied at W. Va. Code $16A-I-1, ef seg, You have each raised questions obout the intersection ofthe Medical Cannabis ‘Act with federal drug laws, spcvificaly ihe potential Tegal consequences for financial institutions ‘hal provide services to marijuand-relateé businesses, and whether the State ean take steps te smininze these concerns ‘Your leer raises the following legal question: Slate Capitol Buildag 1, Roors F-26, 19° Kanewha Boulscurd bat, Charleston, WV 25305 “Hoa, Roger Hanshaw Hoa, John Pestue January 11, 2019 Page 2 Can tne Staxe safeguard financial instcwtions thos provide services 10 est utstant to the Madical Cannabis Act oon pa tality un as eporating federal fay? We conchae that, notwithst controlled substance makes i very wing West. Virginia law, onarijuama’s federal status a a diicull fir medical rarjuata businesses Us cera im a ay consist with eurrent federal lus, and that hy extension fineneial instioutivns providing services tw these emitigs may be a risk of tederal civil or cclminal liability, Nevertheless, we are aware of no ‘edecal enforcement actions for services relaced 10 the marijuana sndustry in States where medical marijuana is legal, and “safe harbors” against federal enforeement have existed for the pas several years. ‘bus, although States eantot fully mitigate the risk where financial institutions serve tho medical marina industry—and nlthough there is no guarantee the federal yovernmsat will continue ity curen newenlorcement policies Slates can help lessen The eoncems your identified hy designing rnedical cambis reputations with © goal toward helping. financial institutions comply with the existing safe hasbor provisions. Ultimatsly, however, this issue ‘nplieates federal law and eviminal startes, and any permancat fix nwst come froat the fedevall government Discussion 1. Challenges For Financial Institutions Under Federal Law Urler the federal Corte Subsuuness Act (°CSA"), marijuana isa SchoduTe Teortn Ted subsli, which means itis a erin to manufacture, disuibute. dispense, or possess marijuana for cither recreational or medical purposes. 21 U.S.C. 9§ $12(O)(1). (C) 841(A}I1), 844(a). Becanse the Supremacy’ Clause af the U.S. Constitution provides that federal La shall prevail if there is any dirget conflict between federal and state lave, marijuana possession—even “in accordance with state law" omnis @federl esime. Gonzales v Rede, 845 1-8. 1, 29 2008) Financial institutions aevordinyly fice 9 complex series of hurdles when providing wervives to businesses that operate pursuant to stae cannabis laws, Iris illegal for baaks to aid and abet cannabis husiness. See, eg. 18 US.C. §2: 21 USC. § S11. Therefore, banks and their offices: hull he Tiable Tor indiveetly pactcspating in or facilitating conduct shet federal law classifies as ‘legal. Accitionally. federal forfeiture statutes could put bank: assets trike of confiscation to the extent thoy are decamed process of n grime or otherwise associated wilh criminal conduc, Bunks providing services to eannuhis businesses could potervally be deemed in: valli of anliemamey Taundering stalules, anil un aggressive inteypretation of the Racketeer Influence & Corrupl Organizations Acc RICO") cooled subject these financial institutions to criminal lability as ‘participants in a criminal suterp these is thus no question sbout the status of serving roariuan-rolated bnsinessos under federal law, Unless and until fsleral law chassges, i ill be imposible to Trt all rsk a States ‘continue to enter this arena. Nevertheless lnere are several additional actoms that should als he ceomsilere nan assessment af poteatial tate solutions Hon. Roger Il Ton. fohn Pardue January 11, 2019 Page 3 Af an initial mattor, we are nol aware of uny Cedetal prosecutions or enforveinent actions aysinst entities providing financial services wo cannabis businesses in States where marijuana is legal. One reason for this lick of an enforcement track record 2s that for five yeats, U.S. Depsrement of lustice (DOI prliey provided that “the primary means of addressing maciiuana related activity” in Shales Uhl ullowed marijuana use was “cnforecment by state aad local las cenlivement und regulatory bodies" or by federal authorities. Mernorandum from James M Cole, Deputy Atuusley General, U.S, Department of Tustiee, iy ATI United Staten Altarneys (Aug 29, 2013) Cole Memorandum"). On Janusry 4, 2018. however, DOI reseinied that policy. See ‘Memoranduin fn Jefferson B, Sevsions, Aulorey General, LS. Dopartnent of Justive. to All United States Attorneys (an. 4.2018}. Yet since DOJ formally rescinded its non-enforoement policy, adlitonal Staley huve legalized marifusna for some oral purpescs, and as of last fill nearly 5U0 bunks und credit unions nationwide serve marijuana-related businesses, See US, Dep't oP Treasury, Financial Crimes Entoroement Network, Morijurax Banking Updave 2 (Oel. 2018) wrmilable a hieps:veww dincen,guv‘sitosdefuulles'shared'Marijuana_ Banking Update Seplernber 21 Sande. Regardless of future changes in federal policy, West Vifginia would not be ‘alone if it Gontimics fe implement its meilienl marijuana laws. Furthor, for the past Jbur years Congress hss independently restricted federal law ‘enforcement agencies from interfering with state-sinetioned! matical marijuams businesses Spocificlly, a tesriction in he Department of Justice's annual appropriaiion slales that “ojone of the farals” given in that law "may be used to prevent [States] Irom implementing their owe Tams hut authorize the use, distribution, possession, or citivation af medical marijuana.” Cansotidared Appropriations Ast, 2018, Pu, [. No. 115-1 5, Sec. S38 (2018). The annual Appropriations subject ro this restrisom Finance most forms of federal erimunal In enfozcement, including the Drug Tnfimeement Adininistation, the Federal Bureau of Investigetion, and the offices ofall United States Acomeys, £4, at 65-68, Although this tineing cestriction is expressed! in terms of interference: with States ‘implementing their owa laws.” tho onc fixer! agpellale euutl ta address this restriction hay interpreted it as protceting privage conduct us well. In Uadied States v. Mefntonh, $33 F.3d 1163, (6th Cit, 2016), the Ninth Circuit held that “fi the fedexal goverment prosccutes” individuals sale are operating in compliance with a Stas laws, thon the federal governmsat “las prcvented the state from ving practical effect to its law providing for nor-prosecution of individuals who engage in the permited conduct” dat 1176-77, Ta he sure, Medntush involve detinulants wha prexlueed and sold marijuana directly, id at 1168-89, but igs rationale would also very likely protect Financial institutions that sorve mautieal marijuana businesses. These services would also be ‘sanduet permiticd By the Stale Medival Marijuana Laws” thac “fully complly' with such Las, Jd at 1177, and proscouting a henlc would impede the “practieal effect” of sale lw jus! (he same 8 prosecuting a medieal marijuana business directly. ‘The DOJ appropriations cestrietion thus provides expansive priteetion lar entities operating consisrent vith state meival marfjuaraTaws. Tchas also been renewed annually since it First went into cffeet in Devumber 2014, wwe, e.g. Consolidated and Further Consiuing Apptopristions Ast, 2015, Puls. L. No 113-235, 128 Stat, 2134. 2217, Sox, S&8 (2014), ancl that Hon, Roger Henshaw Hon. John Perdue January 11, 2019 Prge ‘rend may well confines. Nevertheless, there is ua guzruniee that Congioss will keep including the restriction in fulure appropriations bills. And iit remaves the restriction, the consequeves could be significant: There would likely be no rotioactive proueutinm for conduct that oveurred ‘while the restriction was in ellact. DOT would have disecetion us prasecite eoncuet extending Dk in time, through the full imitations period under the CSA. Mehutash, 843 F.l at 1179.2.8 ‘With respect to financiel institutions, spevitically, federal eegulutins have similarly promulgated “safe harbor” policies that while nal permunent—corrently protec! entities i States ‘where miarjuama ley, One of the most inppowtant laws affecting financial servives institutions in this xmtest is the Bank Secrecy Aut (“TSA”), As all transsctions involving medical marjuana ar legal under fedcral law, financial instituions rust report them in acseidance with the BSA'S aat-money laundering requirements. Whether chartered under federal or stato law, all bunks and credit anions ‘thus report “suspicious transactions” to the US. Deparment of the Treasury" Finacial Crimes Enforcement Network CFinCEN"). 31 CIR. §§ 1NH.100d), 1020.320,8). “Suspicious transactions” include those that “iovalve[| fads decived fn ileyal activities” or thal have no “business or apparent lawful pumpose.” fi, § 1020.320(0)2\0), (ii), FinCEN applies this requirement to every transastion conducted by a “enauuans-telated busines less ot the legal status of marijuana inthe State where the Inmauction cecum. See U.S. Dep't of the Treasury FinCEN, BSA Bynectations Requrding Marijuana-Related Businesses 1, FIN-2014-GDD1 (Heb. 14 2014), available at bxtps::twww.tinoen gnvisiten defaulitles/guidanicesTIN-2014-GOOL pdf UTBCEN Guidanse"), FinCEN hus alsa: promulgated unofficial gnidsace clatilying *how financial insliutions can provide services Io macijuam-related businesses consistent with their BSA obligations" — ‘which effectively provides a sate harbor for banks serving marijuana-elural businesses. FiaCen Guidanes at 2.” This guidance incorporates the enforesmtent priorities divewssed in che Cole Memorandum thst was in effeet before DO! reseinded that policy carly last yur; although the ‘rosser DOT poliey no longer conteols, FinCEN’s piston is thal the “reporting structure laid out in the 2014 guidance remains in place.” Sev US. Dep't of the Treasury, FiACEN, Marijana Bunking Update 4 (Oct. 2018), avestable at hitys:*ewrw tineen.yovisites!defeulvtles'shanl Matijuana Banking Update Seplember 2018,pIf, Under this guidance, u finwneial institition mary satisfy its duty der federal tae tw file “suspicions aetivity reports” SARS) by filing a special "Marijunma Limited SAB.” FinCEN Guidance at 3-4. ‘This report requires the financial institution w provide only the identifying information of the wurijwma-related business, and to state that °uo additional suspicinus activity bas been identiied” id, A bank may file the Marijuana Limited SAR whenever il “ressmably helieves, based on its eustomer due diligence’ that « marijuana business does aot violue stale law or ene of the core priorities DOI identified in the Cale Memorandum: avoiding “the distribution of marijuana to minors." preventing “revene fun the sale of marijuana from yoing to criminal enterprises.” smd minimzing *vinkenee and the use of fitearms in the culivstion and distebutian ot maziiuani.” Cole Memorandum at 1-2 on, Roger [lanshiaw Hon, Jobn Pexéue Jamuaey 11,2019 Page 3 1M, by comtast, certain “red flags” are pecseat, then ths financial instiution must lew more extensive “Masiiuans Priatity SAR.” FinCEN Guidance at 4. Red flags include a business's inability “to produce satisfactory documentation or evidence to demonstrate that it is diy licensed and operating consistently with state laws Snggulive information, sch as criminal recor” thom “frloview of publicly available sourees and dutabuses about the business [or] ils ovaersy"3 and information showing that the business or “other related partes are, ot have boon, subject f0 aa. cenforeement action hy the state or local authorities eespinsinle for administering, or enforcing rmurjuiiarelated laws or regulations.” dat 3-6, Nevertheless, wherever theve red Maps are absent, financial anstiutions are able to submit the strsmnlined fora, ‘Many cntitios within the financial survives industry are alzeady set up to comply with the HinCEN Guidance, FinCEN reccives marijuans-related SARs from filers in all SO States. U.S. Dep't of tho Trensury, Fin ranking Update 2 July 1, 2018), available at hepssiwwe.linsen govsilesdefaulilew shared SrP<20Q%2OMI208ialsll, And as of September 30 2018, a tals! of 486 financial institutions were providing services un marijuana related usinesses consistent with the FiaCon Guidance reporting framework. US. Dep'Lul the Treasury, FInCEN, Aertiuana Banking Updare 2 (Ost 1, 2018), avuilalde ai ntps:heww.fincen.gov’stesidefiulfilesshared’ Marijuana Barking Update Scotciber 2018, DAF, This system is similar o the DOT appropriation restritivm in tha it eurrenty allows entities fvoperate consis with stale medical marijuana laws, yet could he rescinded inthe future with Title warning—particularly because the FinCEN Guidane is only infocmal Anaitherarea where banks serving matijuanserelated businesses may face potential Viability is their continued eligibility for foderal deposit insurance. All dopesitory insttusions in West Virginia, whether chartered under state or federal La, must mainain federal deposit insurance. See 75 Fed, Rey, 31.382, 31.328 (lun. 4, 2010) (Under existing las. all federally chartered and ‘ost stule-churlered duposiry institutions rust have Fadecal depot iasuramee."%, W. Vit Cale $§ 31A-1-6, 31C-6-9(a) (requiring federal deposit insurance forall stoce-charted uredit unions and banks “except bauks that da not accept deposits aud offer only trust or other nondepository services"). Credit unions are insured by the National Crodit Union Association (NCUA), while hanks ae insured by the Foderal Deposit Insuranse Corporation ("FDIC"), NCUA relics on the FinCEN Gvidsuce fo detesmine whether insured credit unions ne in vorapliance with sgency regulitions, 3 continued eligibility for NCUA insuranve may rive or fall with the FinCEN “anf Tnoshor.” She Teller iow Carry Pui, Director, OMive of Exarmnation and Insurance, NCUA, to Sent Jarvis, Ditectog, Washington State Department of Financial Institutions (July 18, 2014), ‘eruiluble at hit Newer df. wa. govidocuments‘banks‘aeua-manjuans-letter pd ‘The EDIC has not spoken dinootly to this issue, Institutions insured by the EDIC eaa be ponalized for “unsale and unsound bunking practices,” 12 1L8.C. § 1818, with ponnltics ranging fom a gone and desist oer lerminalion ol surance, id. § TSTSUIWAIG), (HY), The gency has also interpreted “unsafe ad unsound banking practices” to iuclude “violations ha." although not every practice that violates federal lav is Cuocessarily unsafe or unsound in every instance or whieh considered in light af ell xclovemt fuets pertaining to Unt simation.” EDIC, R045" Mnual of Peomivarion Policies 184 in -§ une 2016), avaiable ar hps:iwww fic, Hon, Rogor Hanshsw Hon, John Peréve Tanwary 11, 2019 Page 6 povitogulatious/safety/mamual/scction!S-l,pdf. Sigiticantly, the FDIC! tas also acknowledged publicly that some KDIC-insured banks patticipare in che FinCEN Jepeuting framewark for ‘arjuana-related businesses, suggesting thatthe ageney likely doos not. at lesst under the current politieal ani leyal slimale, view provitling services ta these husinesses as a per ce disqualifying, Daniking practice, See Minules of The Meoting uf he Advivury Commitee on Danking of the FDIC Treld in the Board Room: FDIC Building, Washington, D.C. 2 (Apr ¥, 2014), aviaehte at htpssinewrw-faie-gow'cnmmunityhanking 2014 sminates.p Im short, pocause marijuana is ilegal under federal lav, providing banking serviees to ‘cuomabis businesses curries some inherent ris of federal civil or criminal action even in Stares ‘where racdieal marijuana is Iegal, The current state of federal lew and agency guidance creates sae harhor to Finncial institutions to provide these servives in States like West Vieginis, but ie polentally teroporany talure a’ these profestinss raus! he Tuclored into any assessment of enfoccement risk. IL Viability Of Potential State Responses he legal wocertsint fron fate ry a, ‘nancial instiutions serving marijuana-related businesses stems makes na exceptions for cannabis use that is fully authorized under sl las, We are aware of nv practi in other Stats thil have legalized medical marfivana, noe any legal cheary, that would allow e State 19 compleisly shield Financial institutions fom the ferential consequences af cerving entities that Federal law ceensta he ennyzed in criminal activity Where banks and other traditional financial institutions are hesitant to provide serviees to manjumns-related businesses, the alsemarive for these emities often becomes processing all teasuetions—sales. payroll, operating expenses, and taxes alike—an cash. This eash-based npprouch avoids the issues related fo feral banking regulations discussed above, and it spears Init predominandly eash-hased syslems are somewnal common seross the country a3 no State has resalved the issue ul weve lo traditianal hanking in this ures, Nevertheless, leaving monjuana- related businesses to operate on a cash basis in the absence of traitiomal hanking options cat create soparate concerns for both the businesses themselves and for the State. Operating entirely cr prodominanely in cash ercates logistical bottlenecks, 4s peyrall and tax paymenss must be calculate sul dispersed mumunlly rather than elewronically. Holding largo quantities of cash fr Tong periods a tine can expose businesses lo security risks. TLis also harder for States to monitor ‘ompligace with state laws and lax obligations without traditional banking recards, Accordingly, the majority of Staves that have legalized mnodieal ur recreation! marijuana focus on removing as many hurdles as possible to encourage banks (@ provide servives (a marijuana-related businesses, This mast often takes the fim of designing regulations that make easier 1p demonstrate where marijusm-relatel businesses are in vormplianee with ste law, and Greedy help Danks serving Gee businesses comply will Ue TinCEN Ciines, Filing a aijuana-telated SAR under the FinCEN Guidance requires banks u verily tha their elisnts comply with state law. FinCEN Goidance 5-6, ‘Therefore, regulsvory systema tat mukeit wasier Hon, Roger Hanshaw Hoa. Jot Perdue January 11,2019 Page 7 (o obtain relevant intoximativn about marijuana businesses can help rechiee the administrative bburdens for fnoneial instiutfons that ofle:servives to thesc entities. For example. Rhode Island requires all urijuuna-relared businesses to purlieipaic in a centralized *seed-to-sse” tecking system, This syvtem monitors ull sales of marijuana, us well as eomnplimace with “ispensing, Limits." *invertory supaly tricking,” “testritions on third party supply,” and “all vesting compliance.” 28-80.5 RL Code R.§ 14(A). In Maryland, banks use dily logs ftom a similar ~seedl-to-salo” system in ardor to streamline the SAR fling prowess, See Aaron Greasy, JTow @ Maryland Rank is Quietly Solving rhe Marlin intusice. Cash Problem (au. 2, 2018), naifahte a? hepsfwrww.svashingtompost com lace md-polities-aow-2-mauyland-bunkeis quietly solving the-mrijuana-industrys-Lash-roblens'2018!01,02:4631 7088-ehie-1 1e7-bhel. 9etb2e274924 siory-himl. Similarly, Washington “has helped banks und exedic unions monitor marijutna-iclated eastomers by colleviing and publishing extensive dala on monthly sale cand legal violations to the Tiquor amd cannabis vonttol board's website,” Suphie Quinton, #by Is ing Pasier Kor Marijuana Companies To Open Bank Accomts (Det. 6, 2011), available as brcps:mww: huffingtonpost.comentnywhy-its-getting-easicr-for-snumijuana-companies-t0_Us__ 502801 SdedbUed6foSeebhh7. West Virgina could considera similar apton te help hanks comply ‘sith the FinCEN Guidanoe's reporting safe harbor A similar option that a number of States have considered isa “elussl-loop” system, which Sreumvents aadisional banking methovs by conducting all Financial ttansections iovolka in @ ate-legalized marijuana industry through a separate, state-manngel portal. This portal could be operated direelly by a stale agency or by camfrucl with a separate enily, aad could trick, process, and record all marijuana sales. Consumers could make purchases hy Firs loading inency onto a dedit-nyle cant, and providers cauld receive payment through deposits lo thele account ot the portsl. ‘This type of system could also assess and collect slate taxes. then plave that momey in the State's 2c wie fund. See 26 CPR, § 1.61-L4{a) (explaining that, for tax pauper, even {iMleysl pains constiture gross income") Although a hunulfil of Stas are considering some version of a closed-loop system, it ‘appears that this option bias nal been implemented in smy States to dale, urther, 1 the extent the g0al ofa elnsed-loop system is lo avaid the problem of mdittoual banks being unwilling to serve Imaxijuana-telaled businesses, st allers at best only a purtil solution, Because tumey mm eventually leave the system, the banking laws and regulations discussed above swuld be implicated atthe point 2 marijuana busines withdraws sevesue fot the closel-lagp systers und twies to deposit it with e tradlional financial iasituion, California recently released & feasibility study analy/ng potential solutes to lack of access to traditional hunking sceviees for marijuana businesses tal renched the same eouclusion: Although a closod-p system “offers am initial impression of solving the problem.” “the fundamental probloi is unchanged aud unsaved” hecanse “ultimately the money needs to cross tao network Woumdaris into the teditional humks al payment processing systems. AL thus point all of che prublems the flanking indus ‘cunenfly experiencing Wil Tmt the usctilnews oF the solution.” Level 4 Westures, Inc. eal, Stave-Hahed Financial tnsicution Serving the Cannabis Industey: Feavibitity Study Report 13. summary report) (De. 24. 2018) (Teasibiity Study Reper!" Hon, Roger Hansie Hon, Fol Perdue January 11, 2019 Page § A closodeloup system also carries potontal risk and cost for the Suite itself or any eatity the State eontracts with o implement the program, One af Ihe benefits ol u closodaloup system is that i allows State to maintain close aversight of tho mastiima industry. This sopelvision can help prevent tux evasion and maoney laundering, und belp ensure that businesses and individuals involved in the distribution chain are appropriately vetted and monitemed for compliance with sate luvs, “This benefit, however, may be marginal eimyuired to those associated will inventory leucking systems similar to those muny States use. A Slate's ereation aad supervision of s closed oop system could ulsa he viewed as participation in ot faciiation of conduc! federal law considers criminal. This enhanced potential for stale Viability could he samevsae minizazed tv the extent that closei-loop system operates wholly intrastate: Although the Supreme Court has rejected a fugument thal io-state marijuana possession consisient with state lews exceeds Congres Clause powers, see Reich, 45-ULS. 1 federal authorities may’ view such a system ust noement priority than an inter-state business, A third potential solntion is sate-ron bank. «As with «closeé-toop system, the law in this trea is tntestod because this option tas moslly remained in Ghetheotereal stsge in Slutes whore ‘medical marfjuana is legal. North Dakota ia the only Scate that curroatly operates a state bank, bat it was established in 1919, well before any convems to implement a slate-legilized maieama rome, See Fox v; United Staues, 397 E24 119, 121 (Sth Cit, 196R). fac i appears dt the Tank of North Dukata may aot be involved in the meilical-matijuana industry at! (or at least does net provide publie information om this issue). Swme-porential bene‘its ofa state-run bank are ‘hotts implementing legislation eould remove the requirement to ota Federal deposit insurance, and thal there i « plausible argument it would fall outside the definition ot “Rank” for purposes of the BSA und its reporting regulations. See 31 CER. ¥ 1010.100(4) dineludling, eter afi, ‘commercial and private banks amd banks organize under stats law, bul not expressly listing banks ‘operated by a Stale), Nevertheless, stteeron bank is “Financial instiuiion” under the BSA.31 USC. 9 53124}2)08), and chus could he roquited lo fle SARs if dirveéed to da 40 by the erehary of the Treaury, 31 U.S.C. ¥ 5318(@). Hf any acuosant holder at a state-run bumk wore a wn-Lited States pervin, including @ foreign meliviual visting the Uniled States” the bane ‘sould sly be required w file SARs, 31 US.C. § 5318), CXBIGI, ‘The trade-off for these potential benelils, however, ate significant. The California feasibility study discussed above anulyzes the financial eamsequences u's state-run bane uh great dctal. “This type of finaveiat and poliey analysis is beyond the scope of this pinion loter Nevertheloss, the stuly's conclusions are relevant to the exten they explain that a bank designed lo servive the marijuana imlustry would Mkuly involve significust financial risk—speciFeally bocause oF ils concentration of services to one industry, and a legally tnicertain one at dhat—10 such en extent that it would very ikely not be able w qualify fr federal depostt insurmee or witain 4 master account frum the Federal Reserve, which is neoossary uo participate in inte-bank transfers, check-cashiny, snd other coramon banking functinms, See Feasinility Semdy Report at 3. 9. A slnte-run bank also caraot eliminate eonvers about potential ct fovfeituce actioms under federal drug law, A3 the Ce nal Vabiity ana viv lifornia Alorney Genecal put i blaaely in the Hon. Roger Hanshaw Hon, Jolin Perdue Tanuary 11, 2019 Pages cover fete accompanying the feasibility swiy. a proposal for astate-run or state-backe! line ‘nscitution designed o provide fnancsal services to cannabis-rlstod businesses... presents ahigh level of legal isk. Such an institution would violate several fedora eriminal statutes, ... sich] vary severe potential penalties. The state is not immune under federal lw.” Letter Thom Xavier Becerra, Auumey General af California, to Mark Vaxsan, General Counsel, State Treasurer’ Office (Dee. 26, 2018). ‘Thus stark analysis dows not account forthe current safe hor and lack of DOL enticement funding discussed above, hut it aecurstely reflects the rency that a Stale-run bank serving, he mijuana industry would nol he operating consistent with federal law. Cuess federal ding lav clunyes, designing an institution far he specific purpose af facilitating banking inthe marijuana industry would cary legal risk. A state-run buns thus cannot solve the underlying Feyal issues that lead to lack of traditional baaking options for marijuana businesses: it would simply transfer the risk to a new institution. And! because that instilution would he spociically ceated to aid marijuana-related businesses rater chan taking on these clients asa aeiall percentage ofthe bank's overall portfolio, a state-run bank may in fot inerease the isk of federal enreemet Finally, Colomado has approached this issue hy enseting a stae Tass that allows thr the sewcation of “cannabis eredit eo-ops.” which are not required is maintain federal deposit insurance and ure otherwise designed tn faciltste banking for marijuunu-related businesses outside uf traditional fingnial instiutions. Colo. Rev. Stat§ 11-32-106(4)(aX QB). Yet it appears thst no co-pps have heen formed under thit las, sugueshng that this option kas not proven ln he a profitable business mnie or an otherwise suceesstel solttion to Lhe pruhlem of potoatial Iederal Liability. More importanly. although this approach would rosalwe the voncer about whether Ihe so-op could continue to operate if a federal insurer ever determined that its businesses practices were unsound, it does not remave federal oversight allogether: These co-ops are lsc required t0 participate inthe foderal reserve hamking systau, see id. § 11-33-104(4)(A), sad therefore must ‘hain federal approval from the Federul Reserve Board of Governurs. Although States have frequently propssed broudler solutions to the issue of stable banking services for marijuana-relatllhusinesses it does not apgoar Het say State hin found a complece solution, ‘The most effective uption for States seeking to Thcilitite access thanking services for ‘winnuhiserelotel entices may be to design implementing regulations in a way thal makes it casior For banks to eomply with comrent federal reporting obligations —as he mnjority of States Li legilize ‘medical marijuana have done. West Virginia could consider similar approcaes ag i iniplemerts the Medical Camahis Act, with a goal toward muking it eagicr for banks w access the infomation they nced to complete SARs for federal sogulators, und lo identify “ted flags” fr enities chat are tot in fll complianve with stalelans. Orber options require weighing the potential benefits against the rise of federal enforcement. Although a lack of enforcerent fre feral authorities lias $0 Far allowed many traditional financial institutions fo provide servives tw manjuaaa-telated entities n States where eunmuis is egal for some or all purses, the supremacy ol federal drag lave makes the hesitancy some banks have shown. to enter this new market im West Vivginia understandable Thom, Roger Manshaw Hon. Jon Perdue Jaswary 11, 2019 Page Lo As the Sinte of West Virginia considers how to implemen its medical eaxmabis aw. it must carefully consider Fow tp halance the unarahiguaus federal cviminal sia implicating canahis businesses swith an equally clear, yet potentially temporary, nom cenfoccement policy that as accommodated over 10 Staies, The appronches of taese States and key issues to analyze, ate set forth inthis opioion leter. Over the long lem, however, the eoncems that motivated your requests stem ftom federal Tow, und permaent, ‘complete soluiion will rauine addinonal foderal action. Sinoerely Opwck. hone Patrick Morrisey Attorney General Lindsay Sov Solicitor Geuetal “Thamas 7. Taampman Assistant Attorney General