1. Bank CRE Lending and Marijuana Related Businesses
The Green is still Gray for Banks

2. Definition of Marijuana Related Business (MRB)
An MRB is a business receiving compensation from or participating in any way in the growth, manufacture, distribution, dispensing, or sale of marijuana. There are two types of MRBs: 1. Direct MRB – A business that physically touches the plant/product in some way. This is known in the cannabis industry as any business involved in the seed to sale process. 2. Indirect MRB – A business that accepts marijuana cash proceeds as payment for their products/services. This business type is not involved in the seed to sale process. Examples include, but are not limited to, commercial building owners that rent to marijuana dispensaries or irrigation supply stores selling to marijuana growers. It is naïve for any financial institution to believe they do not bank MRBs. As the marijuana industry continues to grow in California and marijuana-related cash trickles through the economy, it is likely that every bank will eventually, at least unknowingly, process MRB transactions. It is important for each Bank to define its risk tolerances and set up a best practice Due Diligence Program to deal with MRBs in a risk-based manner.

3. Challenges to Banking MRBs
Drug Enforcement Agency defines Marijuana as an illegal, Schedule I drug and substance with no currently accepted medical use and a high potential for abuse.
US Department of Justice under the Obama Administration issued the Cole Memo on 8/29/13 to provide guidance on marijuana enforcement. Compliance with guidance is difficult.
Financial Crimes Enforcement Network (FinCEN) Guidance. Bank’s must know all business aspects of an MRB customer. The effort required to gather, maintain, routinely monitor, and report information on MRBs is cost prohibitive.
Regulatory Agency Public Stance – Federal Deposit Insurance Corp and California State Department of Business Oversite. Regulators follow federal rules.
Unknown Political Climate at Federal Level. The current administration is less liberal than the previous administration.

4. DEA Schedule I Drugs and Substances
Heroin
LSD
Ecstasy
Peyote
Quaalude
Marijuana
Bath Salts

5. 2013 Cole Memo on Medicinal and Recreational Marijuana Federal Prosecutorial Resources Dedicated to:
Preventing the distribution of marijuana to minors
Preventing sale revenue from going to criminal enterprises, gangs and cartels
Preventing the diversion of marijuana across state lines where it is illegal
Preventing state-authorized activity from being used as a cover or pretext for trafficking other illegal drugs or activity
Preventing violence and the use of firearms in the cultivation and distribution of marijuana
Preventing drugged driving
Preventing the growing of marijuana on public lands as it presents health and public safety dangers
Preventing marijuana possession or use on federal property

6. Cole Memo Con’t
There is no Safe Harbor for banks operating in states where marijuana has been legalized, regardless of proving the federal priorities have been met. Cole memo closing paragraph - “Neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the Controlled Substances Act.”
In states where marijuana cultivation and use have been legalized, there must be effective regulatory and enforcement systems in place at the state level which mirror the federal prosecutorial priorities.
Opinion - California regulatory and enforcement systems are still in development and are yet to mirror the federal priorities.
When banking MRBs, banks must be able to validate that its customers are not in violation of the federal priorities. The cost for banks to ensure compliance with this requirement typically exceeds the value of banking MRBs, rendering the business value proposition as unprofitable.
Until federal and state laws are synced up, cultivators and sellers are still subject to federal investigation and prosecution. This jeopardizes a lender’s primary and secondary source of repayment. All cash flows and the real property collateral are at risk of seizure.

7. FinCEN Guidance- MRB tracking is labor intensive
Verifying with the appropriate state authorities whether the business is duly licensed and registered;
Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
Requesting from state licensing and enforcement authorities available information about the business and related parties;
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), including the tracking of product from seed to sale;
Ongoing monitoring of publicly available sources for adverse information about the business and related parties;  
Ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance;
Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. Higher risk = greater frequency.

8. Regulatory Stance- What’s at stake for RCB
All Banks in California answer to a state and federal regulatory authority
RCB is regulated by both the FDIC (federal) and the DBO (state)
RCB is subject to a cease and desist order if we do not comply with regulatory banking laws.
Regulators are required to uphold and examine for violations of federal laws and regulations. We prefer to stay on the right side of our regulator, as well as federal law as it exists today.

9. Federal Political Climate Today
No tweets to date from our President on this topic, however there is indication he is not a fan of state laws on marijuana.
AG Sessions has made a statement that the federal government will be taking a “more hawkish stance” with regard to illegal drug enforcement.
Regardless of the difficulty in complying with the Cole Memo, there has been a suggestion that Sessions will revoke the Cole Memo.
Based on uncertainty, RCB will not bank MRBs in the cultivation and distribution of marijuana.

10. RCB’s Marijuana Policy- A Tiered Approach
Risk I/Direct MRBs – RCB does not provide loans or deposit services to Tier I MRBs at this time. Seed to Sale Entities
Risk II/Indirect MRBs – RCB will provide deposit services only to these customers upon complete customer due diligence, approval from the Bank’s Compliance Department, and the President/CEO. Entities which specifically target products and services to Tier I MRBs, but are not involved in Seed to Sale activities.
Risk III/Indirect MRBs – RCB provides deposit and loan services to these customers after full customer due diligence. Entities not specifically focused on targeting MRBs, but have incidental revenue generated from MRBs. Typically professional service providers and real estate investors.