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Confronting the Banking Dilemma for State-Licensed Marijuana Businesses in the United States
By Tenzin GGT & Richard M. Pollak
Pictured left to right: Tenzin GGT and Richard Pollack.
This article analyzes the conflict between federal and state marijuana laws, and its impact on the inability of state-legal marijuana businesses to obtain traditional and fundamental types of banking services from federally insured banks. This article is divided into three parts: (i) an explanation of the conflict of state and federal marijuana laws; (ii) the effect of the conflicting laws on the decision of banking institutions to provide services to state-licensed marijuana businesses; and (iii) congressional and judicial attempts to resolve the conflict between state and federal marijuana laws.
This is the first article in a three-part installment about the banking dilemma for state-licensed marijuana businesses in the United States.
Part I. Identifying The Conflict between Federal and State Marijuana Laws
Despite the 33 states and the District of Columbia having enacted laws to legalize or decriminalize the use of marijuana, marijuana and the underlying chemical compound found in marijuana, tetrohydrocannobinol (“THC”) continues to be classified as a Schedule 1 controlled substance under federal law. This conflict between federal and state laws has created an ethical and legal nightmare for banking institutions and the state-legal marijuana businesses. The fact that the state-legal marijuana industry is primarily a cash business has exacerbated the problem for businesses that are forced to safeguard sometimes millions of dollars at a time due to their inability to obtain a bank account.
Before the Controlled Substance Act, there was The Marihuana Tax Act of 1937
The Marihuana Tax Act of 1937 (the “Tax Act”) was the first federal legislation that was passed in the United States aimed at regulating the cannabis industry by requiring any person who “imports, manufactures, produces, compounds, sells, deals in, dispenses, prescribes, administers, or gives away” marijuana to register with the IRS and/or remit a “special tax” on or before July 1st of each year. Although one of the reasons driving Congress to introduce the Tax Act was to discourage the “widespread undesirable use of marihuana by smokers and drug addicts,” it was largely seen as a way to raise federal revenue from the taxation of marijuana sales.
The Tax Act established a special occupation tax for registered parties and a transfer tax for the sale of marijuana. The annual occupation tax rate varied on whether a person or entity registered with the IRS as an importer, producer, physician, researcher, or miller. Anyone outside those categories that dealt with marijuana was subject to an annual occupation tax of $3.
Sales of marijuana were required to be recorded on written order forms, which included the name and address of the transferee. The transferor and transferee were required to keep a copy of the order form for two years and to provide any federal or state officer access to the form upon request. Sales of marijuana by registered persons were subject to a transfer tax of $1 per ounce and $100 per ounce for non-registered persons. Finally, anyone who was convicted of violating the Tax Act was subject to a civil fine of no more than $2,000 and/or imprisonment of more than five years.
The Leary Decision: An End to an Era of Federal Regulation of Marijuana
Ironically, during the time that the Tax Act was in effect, marijuana possession was a crime in all 50 states, although some states like New York and Texas provided exceptions to certain classified groups like researchers, state-licensed manufacturers and wholesalers. After 32 years since the Tax Act had taken effect, the Supreme Court decided in the 1969 case of Leary v. United States that the Tax Act was unconstitutional because compliance with the transfer tax provisions (i.e. registration of sales of marijuana) violated the Fifth Amendment right from self-incrimination.
The Leary case was the first time the Supreme Court had the occasion to contemplate the conflict between state and federal marijuana laws existing at that time. It all started when Dr. Timothy Leary and his family were on a trip to Mexico for vacation. On their return home, customs officers stopped them at the Mexican-Texas border and found a few smoked marijuana joints in their car. Dr. Leary was arrested and charged with violating the Tax Act for failing to pay the transfer tax as a transferee of marijuana.
Dr. Leary contended that compliance with the Tax Act would require him to provide his name and address on a written order form and convey that he was in possession of marijuana, and therefore exposed him to the “real and appreciable” risk of self-incrimination under state laws, where possession of any quantity of marijuana was a crime. The Supreme Court agreed with Dr. Leary and reversed the judgment of conviction against him.
The Controlled Substances Act of 1970 and its Effect on the Marijuana Industry
Immediately after the Leary decision, Congress passed the Controlled Substances Act of 1970 (the “CSA”), effectively repealing the Tax Act. Under the CSA, drugs are classified into five “schedules” based on a ranking system of their medicinal properties and potential for abuse. To be included as a Schedule 1 drug, a controlled substances must have (i) the highest potential for abuse, (ii) have no accepted medicinal use, and (iii) there must be a lack of accepted safety for the use of the drug/substance under medical supervision. Congress determined that marijuana deserved to be listed as a Schedule 1 drug, making it legally akin to the likes of LSD, heroin, and morphine.
The CSA makes it unlawful for any person to manufacture, possess, dispense and distribute a controlled substance without the express permission of the Attorney General. That means marijuana businesses, operating only under the legal authority of state laws, are violating the CSA every day when they manufacture and distribute marijuana to consumers.
Under the CSA, an application to register for a federal license to possess or produce marijuana is limited to enterprises or persons seeking to use marijuana for only “medical, scientific, research, and industrial purposes.” The Attorney General has the broad authority to review and grant federal licenses for marijuana production. By granting the Attorney General discretionary authority to grant federal marijuana licenses and limiting the scope for which marijuana may be legally used for, the CSA has, as a matter of law, made it a federal crime to sell or consume marijuana for recreational purposes.
The CSA also prevents marijuana businesses from using their profits to expand into foreign markets and franchising into different states. Any violation(s) of the CSA is subject to criminal and civil penalties, including the forfeiture of any property that is in connection with the unlawful sale of marijuana. Marijuana businesses operating under state authority should be, at least conceptually, concerned with the fear of losing their business assets, proceeds, and most importantly, their freedom at any time based on the penalties laid forth in the CSA.
Congress was prospectively considering the possibility that the controlled substances they had identified in the CSA may not always meet the scientific, medical, and public policy criteria for inclusion when they granted the Attorney General discretionary authority to initiate a rulemaking proceeding to add, remove, or reschedule a controlled substance from the CSA. In an interesting decision, Congress not only granted the Secretary of Health and Human Services the power to petition the Attorney General to initiate such a rulemaking proceeding, but also any “interested party”. The question of whether a marijuana business with a valid state license is an “interested party” within the meaning of the CSA will be explored later in this article.
Maryland Laws and Regulations on Marijuana
The state of Maryland’s laws on marijuana are nearly identical to the CSA, categorizing it as a Schedule 1 controlled substance and granting the Maryland Department of Health (the “MD DOH”) the authority to add, reschedule or remove a substance from a Schedule based on the same eight factors listed in the CSA. A person or entity seeking to “manufacture, distribute and dispense” marijuana must first register with the MD DOH. However, unlike the CSA, possession of less than ten grams of marijuana in Maryland is only subject to a civil penalty and punishable by a fine.
On April 14, 2014, Governor Martin O’Malley signed House Bill 881 into law, thereby making Maryland the 21st medical marijuana state in the United States and establishing the Natalie M. LaPrade Medical Marijuana Commission (the “Commission”) to regulate the state’s medical marijuana program. Under the 2014 law, medical marijuana businesses can seek registration to obtain a grower, processor, and/or dispensary license with the Commission.  The Commission limits the number of licenses that can be obtained annually in order to control the demand and supply of marijuana based on the number of patients whom have successfully registered to purchase marijuana for medicinal use. Since its inception, the Commission has granted 15 growers licenses, 13 processing licenses, and over 20 dispensary licenses to supply the state’s 70,000 residents, registered to consume marijuana as a medicinal remedy.
In an effort to ensure compliance with the state’s marijuana laws, the Commission requires all licensees to be trained in and register for the use of the Marijuana Enforcement Tracking Regulation and Compliance system (“METRC”), a digitalized platform developed by a third-party marijuana inventory tracking company that uses serialized tags with barcodes (using Radio Frequency Identification tags) to track the sale of marijuana from the moment a seed is planted to the point of sale to registered consumers. 
Although the fee arrangement for obtaining and maintaining a license to produce or sell marijuana varies, the costs are in no part nominal. The application fee for a business seeking a license as a grower, processer, and dispensary can add up to $17,000. In stark contrast, the annual licensing fee for all three types of licenses can add up to $205,000. Needless to say, without even considering operational and marketing costs, venturing into the legal marijuana business on the regulatory side alone is extremely expensive in Maryland. The exorbitant regulatory costs have stirred some controversy in the state, but “it hasn’t scared anyone away” from the “green rush.”
The Conflict between the CSA and Maryland’s Marijuana Laws
Although Maryland’s law on controlled substances is modeled off of the CSA, the state has carved out two exceptions that conflict with the CSA, including the decriminalization of the possession of less than ten grams of marijuana and the legalization of the production and sale of marijuana for medicinal purposes. Oddly, although the state has acknowledged the medicinal effects of marijuana by way of their provisioning of medicinal marijuana licenses to residents of the state, neither the Maryland state legislatures nor the MD DOH have yet to remove or reclassify marijuana as a Schedule 1 controlled substance under Maryland’s Criminal Code.
Much of the conflict between state and federal marijuana laws will be discussed in greater detail below, especially as it relates to the concerns of banking institutions in working alongside with state-licensed marijuana businesses. In legal theory, and prior to the enactment of the Rohrabacher-Farr Amendment (the “Farr Amendment”), anyone involved with the production, sale and use of medicinal marijuana in Maryland is in direct violation of the CSA.
Although it is legal for Maryland residents who have successfully registered with the Commission to purchase marijuana for medicinal purposes, a federal prosecutor can subject those registered Maryland resident to criminal and civil liabilities under the CSA and the RICO Act. Federal law enforcement agents could seize any amount of marijuana found on a Maryland resident and it would be lost to them as a result of federal forfeiture laws. However, as this article will discuss later, the enactment of the Farr Amendment has largely precluded the possibility of the federal government conducting criminal investigations against U.S. citizens who have state authorization to use marijuana for medicinal purposes.
The banking institutions that have opened their doors to state-licensed marijuana growers and distributers in Maryland, like Severn Savings Bank, are likely to be the first targets of federal prosecution and investigation. Although it may be conceptually plausible that state-licensed marijuana manufacturers and distributors in Maryland could face federal scrutiny under the CSA, the Farr Amendment currently shields them from such a possibility. However, the Farr Amendment is not within the reach of banks like Severn Bank, because they are subject to a separate set of banking laws that require them to report suspicious banking transactions and avoid engaging in criminal acts in order to keep their federal deposit insurance coverage.
While on one hand Severn Bank seeks to profit from the state-legal cannabis industry by charging expensive transactional fees, they are not oblivious to the fact that marijuana is illegal under federal law, regardless of whether it’s consumed recreationally or for medicinal purposes. The company offered the following warning to their investors on their annual 10-K disclosure report, which aptly summarizes the risks the Company has accepted in exchange for investing early in Maryland’s ‘legal’ cannabis industry:
“The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers (i.e. medical-use cannabis businesses in Maryland). The strict enforcement of Federal laws regarding medical-use cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company would have legal action taken against it by the Federal government, including imprisonment and fees.”
Although some Congressmen saw the use of marijuana in the early 20th century as ‘undesirable,’ Congress did not find a majority support for the complete prohibition of recreational marijuana use until the Supreme Court gave them occasion to in the 1970s. Not only has the public perception of recreational marijuana evolved since the enactment of the CSA, the cannabis industry at large has become a complex business that needs access to sophisticated banking and financial tools to succeed in the modern world. Part II of this article will identify some of the legal considerations that are preventing banks from providing even the most basic services to state-legal marijuana businesses.
 The Marihuana Tax Act of 1937, 75 Cong. Ch. 553, August 2, 1937, 50 Stat. 551 (Repealed).
 Hearings on H.R. 6385 before the House Committee on Ways and Means, 75th Cong., 1st Sess., 5 (1937).
 The Marihuana Tax Act of 1937, § 2(a)(1) – (5).
 Id. at § 2(a)(1)(5).
 Id. at § 6(a).
 Id. at § 6(d).
 Id. at § 7(a)(1) & (2).
 Id. at § 12.
 Leary v. United States, 89 S. Ct. 1532 (1969).
 Id. at 1534.
 Id. at 1538.
 21 U.S.C.A. § 812 (Schedules of Controlled Substances).
 Id. at § 811 (Authority & Criteria for Classification of Substances).
 Id. at § 822 (Persons Required to Register).
 Id. at § 823(a)(1) (Registration Requirements).
 Id. (registration must be consistent with the “public interest”).
 Id. at § 854 (Investment of Illicit Drug Profits).
 Id. at § 811.
 Id. at § 802(24) (defines “Secretary” to mean the Secretary of Health and Human Services).
 Id. at § 811(a).
 MD. Crim. Law §§ 5-402 & 5-202 (In General) (Control of Substance).
 MD. Crim. Law §5-301 (Registration Required).
 MD. Crim. Law § 5-601 (Possessing or Administering Controlled Dangerous Substance).
 MD. Code Ann., Health-Gen. § 13-3302(a) (West).
 Id. at § 13-3302(f)(1)(i).
 Md. Code. Ann., State Gov’t § 10.62.35.01 (Fees).
 Timothy B. Wheeler, Medical Marijuana Fees Stir Debate in Maryland, THE BALTIMORE SUN, October 11, 2014, https://www.baltimoresun.com/news/investigations/bs-md-medical-marijuana-fees-20141011-story.html.
 Alan Brochstein, Maryland Bank Continues to Aggressively Bank Cannabis Industry, NEW CANNABIS VENTURES, August 14, 2018, https://www.newcannabisventures.com/maryland-bank-continues-to-aggressively-bank-cannabis-industry/.
 Aaron Gregg, How a Maryland Bank is Quietly Solving the Marijuana Industry’s Cash Problem, THE WASHINGTON POST, January 2, 2018, https://www.washingtonpost.com/local/md-politics/how-a-maryland-bank-is-quietly-solving-the-marijuana-industrys-cash-problem/2018/01/02/a6317088-e0ec-11e7-bbd0-9dfb2e37492a_story.html
($3,000 to open an account and a monthly fee of $1,750).
 Alan Brochstein, Maryland Bank Continues to Aggressively Bank Cannabis Industry, NEW CANNABIS VENTURES, August 14, 2018.