Q: The bank is considering approval for a loan request where one of the guarantors has a significant amount of equity holdings in a business which produces cannabis. There is no expectation that any of the loan proceeds will be used use or co-mingled with those of the enterprise involved in cannabis production. However, management remains concerned with entering into transactions with individuals connected with cannabis, in any way. Is there any guidance as to how much distancing the bank should maintain in a situation like this?
A: While there is not express guidance in this area, FinCEN resources addressing the filing of Suspicious Activity Reports for cannabis related activities may be instructed here. FinCEN frequently cites the “Cole Memo,” for priorities and activities that trigger the “Marijuana SAR” filing requirements. The Cole Memo was subsequently rescinded by the Sessions Memo; however, the priorities expressed therein remain instructive in evaluating the bank’s approach here, from a risk perspective. While these are not the only considerations to review in your question, that may provide a good starting point. Generally, parties who do not directly touch cannabis present a lower risk to the bank, mainly arising from the points under the Cole Memo. However, such parties remain associated with the cannabis industry, which leaves this decision up to the bank’s risk-based approach. Parties who traditionally present a lower risk in these circumstances include researchers, marketing industry, information providers, and to a certain extent, medical professionals, among others. In the context of an investor, the bank should investigate the level of their involvement with the business and also evaluate that as well as the business in light of the Cole Memo priorities. A purely passive investor who gives funds but does not participate in any management of the business should not by itself give rise to the typical cannabis related concerns. However, if there is reason to believe that the business triggers any of the Cole Memo priorities, our recommendation would be to steer clear. Despite being rescinded, the priorities set forth in the Memo provide insight into the type of conduct the federal government would generally sanction. This generally includes enterprises potentially distributing cannabis to children, trafficking, or violating laws by engaging in the cannabis business other than possession under federal law. None of the above is a bright line determination. However, the bank is not categorically prohibited from associating with a grantor in the context of your question. The bank should review the circumstance in light of the above and the bank’s existing cannabis policy, which may require revision if the bank will make exceptions to such a policy. There is not much value in a policy that is not followed and that does not adequately represent the bank’s practices. In light of the priorities set forth in the Cole Memo, the bank may reasonably consider entering into such a transaction if the only remaining concern is that a guarantor purely invests in a business related to cannabis; and this loan is otherwise within the bank’s policy.
Cole Memo – https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf
Sessions Memo – https://www.justice.gov/opa/press-release/file/1022196/download
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