MARIJUANA: A Joint Presentation. Utah Bankers Association Fall Compliance Conference October 29, 2015

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1 MARIJUANA: A Joint Presentation Utah Bankers Association Fall Compliance Conference October 29, 2015

2 Introduction UBA theme The Magic of Compliance Legalized marijuana has trapped the banking industry in the middle of the Controlled Substance Act (CSA) and legitimate business owners.

3 Legal & Regulatory Environment Discussion Topics: Background Federal vs. State law(s) DOJ Cole Memos (8/29/13 & 2/14/14) FinCEN Guidance (2/14/14) Congressional Backlash State Guidance to FIs

4 Background 420 event growth from underground protests to sanctioned multiday festivals. Amendment 64 (CO) passed November 2012 with a 51% margin. Business community largely opposed was spent establishing the regulatory structure Effective January 2014, CO became the 1 st state to legalize recreational MJ sales. Reaction? The sky is falling! Effective July 2014, WA became the 2 nd state to legalize recreational MJ sales. Reaction? Wow. Congressional efforts by CO & WA to remove marijuana from the CSA have not been successful (thus far). Effective October 1, 2015 OR became the 3 rd state to legalize recreational MJ sales. Reaction? Meh.

5 Background CO MJ Sales 1 (2014) Med. MJ (55%): $386 million Rec. MJ (45%): $313 million Total Sales: $699 million CO MJ Sales 2 (2016) Med. MJ: $550 million Rec. MJ: $450 million Total Sales: $1 billion Tax Rev. (9%): $63 million Lic. & Fees (2%): $13 million 1 Colorado Department of Revenue Tax Revenue: $94 million Licenses & Fees: $20 million 2 Projected Total economic impact is greater, as these figures don t include sales of retail products tied to MJ (pipes, bongs) or tourist spending (hotels, restaurants) CO is trying to figure out what to do with all the MJ revenue!

6 Congressional Backlash

7 Federal vs. State Law (Continued)

8 State Law(s) So Who s Next? State Status Massachusetts Proposed legislation expected in 2016 California Proposed legislation expected in 2016 Missouri 2014 effort failed, may try again in 2016 Hawaii 2015 effort failed, may try again in 2016 Maine 2014 effort failed, may try again in 2016 Nevada Proposed legislation expected in 2016 Arizona 1 Proposed legislation introduced, PENDING 1 Modeled after CO law

9 State Law(s) Cannabidoil (CBD) Alabama Florida Georgia Utah Kentucky Mississippi Missouri Iowa Idaho States North Carolina South Carolina Oklahoma Tennessee Texas Virginia Wisconsin New York Utah: On Mar. 25, 2014, Utah Gov. Gary Herbert signed HB 105 into law, making Utah the first state to legalize CBD oil. On Mar. 11, Utah's Senate unanimously passed the bill, sponsored by Republican Rep. Gage Froerer, which instructs the state's Department of Agriculture to grow low-thc industrial hemp for the purpose of producing cannabis oil. Known as the "Plants Extracts Amendment," the bill allows Utah residents to acquire the medicine in Colorado and bring it back to Utah.

10 Cole Memo(s) Key Points August 29, 2013 DOJ is committed to enforcement of CSA Cites 8 DOJ priority factors for investigation and enforcement Preventing distribution of MJ to minors Preventing revenue of MJ sales from going to criminal enterprises, gangs, or cartels Preventing the diversion of MJ from state(s) where it is legal to states where it is not Preventing state-authorized MJ activity from being used as a cover or pretext for trafficking other illegal drugs or illicit activity Preventing violence and firearms in the cultivation and distribution of MJ Preventing drugged driving and other adverse public health issues related to MJ Preventing the growing of MJ on public lands Preventing MJ possession or use on federal property DOJ will generally defer to state and local LE for MJ controls & enforcement to ensure public health/safety Disclaimer: Finally, nothing herein precludes investigation or prosecution, even in the absence of any of the factors listed above, in particular circumstances where investigation and prosecution otherwise serves an important federal interest. February 14, 2014 Emphasized illegality of MJ-related conduct: Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under money laundering statutes, unlicensed money transmitter statute, and the BSA. Re-stated previous 8 DOJ priority factors A FI may be subject to prosecution if: FI assists MJ-related conduct knowing that it is related to the 8 DOJ priority factors it is subject to prosecution. FI is willfully blind to its duties under the BSA (customer due diligence, transaction monitoring, SAR filing, etc.).

11 FinCEN Guidance Key Points February 14, 2014 Guidance is intended to enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses. Summarizes the CSA and re-states the 8 DOJ investigative priority factors outlined in the August 29, 2013 Cole Memo States that FI decisions to provide financial services to MRBs should be risk-based and that thorough customer due diligence is a critical aspect of the decision. CDD expectations include: Verifying state licenses and registration Reviewing the license application (and related docs) provided to the state Requesting from state licensing and enforcement authorities information about the business and related parties Develop an understanding of normal expected activity for the business including the types of products sold (e.g. med vs. rec) Ongoing monitoring of public information for adverse media about the business or related entities Ongoing monitoring of transactions and red flags for SAR reporting purposes Updating CDD information periodically commensurate with the risk SAR filing requirements FIs providing services to MRBs must monitor and file SARs consistent with existing BSA requirements. Mandates three new MJ SAR filing descriptors: Marijuana Limited SARs for MRBs that does NOT implicate one of the 8 DOJ priority factors outlined in the Cole Memo. SARs must include the term MARIJUANA LIMITED in the SAR narrative. Marijuana Priority SARs for MRBs that implicate one of the 8 DOJ priority factors. SARs must include the term MARIJUANA PRIORITY in the SAR narrative. Marijuana Termination SARs for MRBs that the FI is terminating its relationship because it cannot manage the risk. SARs must include the term MARIJUANA TERMINATION in the SAR narrative. In these cases and when known, FinCEN urges the FI to contact the new FI via 314(b) and warn of the potential MJ-related activity. Guidance includes red flags for SAR monitoring CTR Impact FIs must file CTRs MRBs are not eligible for exemption

12 Congressional Backlash

13 Congressional Backlash (Cont.)

14 State Law(s) So Who s Next? State Status Massachusetts Proposed legislation expected in 2016 California Proposed legislation expected in 2016 Missouri 2014 effort failed, may try again in 2016 Hawaii 2015 effort failed, may try again in 2016 Maine 2014 effort failed, may try again in 2016 Nevada Proposed legislation expected in 2016 Arizona 1 Proposed legislation introduced, PENDING 1 Modeled after CO law

15 Guidance to Financial Institutions WA state letter to FIs encouraging but cautious Cites FinCEN guidance on how banks & credit unions can offer services to I-502 (WA) compliant MJ businesses Absent is any guidance on medical marijuana still a risk factor under the CSA

16 Threat Environment & Societal Impact Every new generic sounding business is a potential criminal Stocks & Investments Direct vs. Indirect exposure (e.g. edibles, suppliers) Media Case studies Red flags

17 Creative/Generic Business Names Inspired Specialty Prod Strategic Pharma Mile High Ice Cream Nectar Collector Mary Jane Group Phoenix Pharms RJ Enterprises Colo Chocolate Factory BioAquatech Herikat Inc Grow It Green

18 Stocks & Investments 60+ publicly traded stocks have appeared. Established real estate, marketing, and oil companies miraculously morphed into marijuana companies. A multibillion dollar industry run for decades by criminals & now traded on the vehicle of choice by financially savvy swindlers & hucksters.

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20 Mmmmm Cookies! Edible industry accounts for 40% of all sales. 2 recent deaths attributed to edibles. 16 children taken to ER s in last 15 months. Numerous sick dogs taken to veterinarians. State law requires child- proof packaging. However, once removed it s difficult to differentiate regular foods from those with MJ in them.

21 Unanticipated Consequences

22 Media - Overexposure CNBC news documentary Marijuana in America: Colorado Pot Rush. Green Tours to promote the industry to potential investors and entrepreneurs. Daily/weekly newspaper articles.

23 Case Studies XYZ Real Estate Co. Deposited $33,400 in cash for the owner of a MMJ dispensary Wired money out to a title company for a real estate purchase for the owner of the MMJ dispensary Receiving monthly payments from MMJ to repay loan ABC Company Opens shell company Deposits cash from a marijuana business Writes checks to owner of marijuana business to transfer the funds

24 Red Flags Unsolicited walk-in customers. Generic business name or unusual names with odd spelling. Self-employed consultant, marketing, retail. Newly formed business. Vague answers to KYC questions. Expect to deposit large amounts of cash. Cash deposits on existing customers with no previous cash history.

25 AML Program Impact & Takeaways Policy & Procedure Training Customer due diligence & screening Transaction monitoring Automated Manual SAR filing & escalation Managing MRBs and/or disengagement

26 Policy & Procedure Establish specific guidance for transaction accounts and lending requirements. Must include businesses that are directly or indirectly supporting the MJ industry. Marijuana business employees. Wholesalers distributing MJ themed products to MJ businesses. Prepare & distribute informal guidance.

27 Training Front line staff is your most effective line of defense. On-going branch training to communicate evolving methods of deception. Must understand the regulatory SAR requirements (e.g. knowledge & $5,000 limit). Provide updates on pending legislation and guidance.

28 Customer Due Diligence & Screening Ask specific questions regarding customer s line of business. Use open source data providers (e.g. GOOGLE and/or other negative news screening tools). research the business & owners (or listed agents). Zions/Vectra is verifying new businesses against state MJ registration lists & periodically running the list against our customer data base.

29 Customer Due Diligence & Screening Additional Screening Option: - Some 3 rd party vendor options have emerged for automated screening of customers against known MJ registration lists.

30 Transaction Monitoring Automated: AML cash rules set to aggregate for a week to alert for micro-structuring Structuring Intended use alerts for actual activity that does not match original estimates Manual: Review daily cash activity report for all ins/out $10,000 and over

31 SAR Filing & Escalation Must have knowledge. May invoke the $5,000 threshold on small dollar non-suspicious activity. Establish internal reporting procedures: Instruct employees to over-report Have an internal referral method available to all employees

32 Managing MRBs/Disengagement Assess risk on a case-by-case basis. Does the business directly serve the MJ industry or only providing occasional ancillary services (garbage, electrician, etc.). Does it make sense to make an exception?: Long term customers receiving lease or loan payments only Or MJ sales are small % of overall sales Exceptions should be documented and approved by senior management Exceptions (if approved) do NOT relieve the bank of its ongoing SAR filing obligations

33 Managing MRBs/Disengagement (Cont.) Train staff to not be intimidated: - As a federally regulated Bank we are unable to bank your business because it is a federal crime; or - Against bank policy

34 Summary Banking marijuana requires an Act of Congress Core issue Controlled Substance Act & BSA requirements Impacting our ability to know our customers Zions Compliance & Operations spend an hour per day on marijuana related issues

35 Summary (Continued) Currently the US Deputy Attorney General s office is simply not enforcing the CSA in instances of states with legalized medicinal or recreational MJ. This could change at any time or after the incumbent leaves office. Without Congressional re-visitation of the CSA, increasing interest in legalization will continue to put pressure on banks. A conflict of Presidential tolerance & bi-partisan Congressional opposition means that long-term outlook is unclear.

36 Questions?