Fact: the United States incarcerates its citizens at the highest rate in the developed world. Indeed—save one small chain of islands, whose entire population is just a fraction of our prison population—the United States’ incarceration rate is the highest on the planet. And nearly half of our approximately 1.75 million inmates are serving time for nonviolent and/or drug-related offenses.
That is not OK. It is especially disgraceful in instances where poverty is the only factor standing between incarceration and freedom; nowhere is that connection more salient than in the realm of pretrial detention. It seems, however, there may be a light at the end of the tunnel: bail reform—federal and state.
The federal corrections policies—those that prevailed since the birth of the Nixon era’s War on Drugs—are beginning to be dismantled. Of course, that’s hardly surprising, given Attorney General Holder’s unabashed stance on over-incarceration: “It’s clear – as we come together today – that too many Americans go to too many prisons for far too long, and for no truly good law enforcement reason. It’s clear, at a basic level, that 20th-century criminal justice solutions are not adequate to overcome our 21st-century challenges. And it is well past time to implement common sense changes that will foster safer communities from coast to coast.” But Holder is on his way out, and we cannot know whether his successor(s) will carry his torch forward.
As for the states, this election season a number of them put their approaches to victimless and/or nonviolent crime on the ballot. For example, voters in three states and 56 municipalities (including Washington, D.C.) had an opportunity to weigh in on how/where marijuana use fits into our society. The result: the majority of voters, across party lines, think it’s time for a change. Eight more states have proposed legalization ballot initiatives for 2016.
The decriminalization of low-level drug offences will, undoubtedly, have tangible effects on incarceration rates. But what of those arrested for the plethora of nonviolent—often victimless— crimes that remain on the books? At least one state is taking action…
In New Jersey—a state where just over 5,000 inmates (or 38.5% of the total jail population) are there simply because they are too poor to afford bail—the state legislature set out to address that problem with a companion bill aimed at reducing the prevalence of pre-trial detention. With its first step, the NJ legislature passed a bill requiring that each defendant be evaluated to determine his/her propensity for recidivism during release, witness intimidation, and flight: low-risk, non-violent defendants shall be released on their own recognizance; those posing a higher-risk will be released subject to certain conditions (i.e., curfews, travel restrictions, and/or electronic monitoring); those posing the greatest risk may be denied bail; and all detained defendants will be entitled to a speedy trial protection. For its second, the legislature voted unanimously to poll the people—via ballot measure—on a constitutional amendment to allow judicial discretion in the pretrial detention of those most dangerous defendants. The Question: “Do you approve amending the Constitution to allow a court to order pretrial detention of a person in a criminal case?” The Answer: Yes. Now, with this tandem effort by lawmakers and voters, the bail reform package is in full effect.
For those whose concern for just policy overcomes the allure of partisan politics, state and local ballot initiatives can offer a keen lens into the hearts and minds of the populace. Although we are reluctant to read too much into the tealeaves (that has pitfalls all its own…), it seems—underneath the partisan gridlock—a sea change may be brewing. Whether this burgeoning trend will bear sustainable fruit—that remains to be seen. In the meantime, we will continue to be encouraged by small wins in the fight for an equitable justice system where socioeconomic status is not fate determinative. Stay tuned.
Recently, the Tenth Circuit Court of Appeals considered the dividing line between free speech guarantees and the state’s authority to criminalize threat speech. In United States v. Heineman, the court held that the government must prove specific intent in true-threat cases: to obtain a conviction, prosecutors must prove not just that the defendant intended to communicate a threat, but that he intended for the recipient to feel threatened.
The underlying case was brought against Aaron Heineman, a white supremacist from Utah. Several years ago, he composed a “poem” and e-mailed it to a professor at the University of Utah. The writing addressed the professor by name and opened with the statement, “Come the time of the revolution[,] we will convene to detain you [a]nd slay you . . . .” Fearing for his safety, the professor notified authorities, who traced the e-mail back to Heineman. Heineman was charged with one count of sending an interstate threat in violation of 18 U.S.C. § 875(c).
At trial, Heineman claimed that he suffered from Asperger’s Disorder and, therefore, could not foresee that the professor would feel threatened by the poem. But the trial judge signaled that Heineman could be convicted on proof that he meant to send the communication, regardless of whether he intended a particular result.
After a bench trial, Heineman was convicted based on findings that he knowingly transmitted a communication containing a threat and that his poem was a “true threat” because it would cause a reasonable person to conclude that he intended to cause bodily injury.
On appeal, the Tenth Circuit reversed. Speaking for the court, Circuit Judge Harris Hartz explained that the district court’s “reasonable person” standard was not sufficiently protective of free-speech rights, especially given the Supreme Court’s 2003 decision in Black v. Virginia. In Black, the Court upheld Virginia’s authority to ban cross burnings carried out with the intent to intimidate, but prohibited the state from treating cross burning itself as prima facie evidence of that intent. The Court explained, “‘[T]rue threats’ encompass statements where the speaker means to communicate a serious expression of intent to commit an act of unlawful violence to a particular individual or group of individuals.” The Court continued, “Intimidation . . . is a specific type of ‘true threat’ where a speaker directs a threat to a person or group of persons with the intent of placing the victim in fear of bodily harm or death.”
The Tenth Circuit applied these definitions in Heineman’s case and concluded that, under the First Amendment, he could only be convicted of making a true threat if he intended the professor to feel threatened. In Judge Hartz’s view, when the Black Court said the speaker must “mean[ ] to communicate,” the Court was saying that the speaker must intend to communicate threatening words and to instill fear. Indeed, the plurality in Black criticized the prima facie rule precisely because it failed to distinguish between cross burning for purposes of stoking anger and resentment, on one hand, from cross burning for purposes of threatening or intimidating a victim, on the other. The former was considered protected speech, whereas the latter was proscribable as a “true threat.”
The Tenth Circuit is one of two federal appellate courts to interpret Black as requiring subjective intent. Six others have rejected that approach. One such decision has already made its way to the Supreme Court. By next summer, we should know whether the Tenth Circuit got it right.
Federal Criminal (Other)
This summer BNP Paribas, one of the five largest banks in the world, agreed to a $9 billion settlement with the U.S. Department of Justice. The settlement figure may seem nothing short of economic shock and awe; indeed it was the largest criminal penalty in U.S. history. What could justify such a staggering fine and was the DoJ too heavy-handed in its tactics against the French-based bank?
The $9 billion figure was not created out of thin air. It correlates to the value of transactions that BNPP helped to push through the U.S. financial system on behalf of Sudanese, Cuban and Iranian interests. These countries have been subject to U.S. sanctions under the U.S. International Emergency Economic Powers Act (IEEPA). The sanctions restrict, among other things, trade and investment activities involving the U.S. financial systems, including processing U.S. dollar transactions through the States. BNPP chose to ignore those sanctions. What’s worse, the Statement of Facts that the DoJ published with its press release states that BNPP used cover payments to conceal the transactions it processed through its New York location and other U.S.-based banks. It also removed identifying information about the sanctioned entities and used complicated payment structures in order to prevent the transactions from being blocked when transmitted through the U.S. BNPP helped to finance oil and petrol exports for both Sudan and Iran. And the bank’s involvement in Sudan has been instrumental to the country’s foreign commerce market. All told, BNPP’s actions effectively undermined the U.S. sanctions, opening the U.S. financial system to those countries.
BNPP’s actions justify DoJ prosecution as U.S. authorities certainly have jurisdiction over U.S.-based activities. A stiff penalty also seems in order, given the bank’s blatant disregard for both the legal violations and their ramifications. The DoJ quotes a May 2007 BNPP Paris executive memorandum: “In a context where the International Community puts pressure to bring an end to the dramatic situation in Darfur, no one would understand why BNP Paribas persists [in Sudan] which could be interpreted as supporting the leaders in place.”
But did the DoJ go too far when it imposed $9 billion in sanctions? As of the date of the settlement, the fine more than doubled the enforcement agency’s highest criminal penalty on record. (Of course, big settlements with banks are becoming the norm: the DoJ recently settled with Bank of America for $16.5+ billion and with JP Morgan Chase for $13 billion.) The $9 billion penalty may not have had the desired impact of shock and awe the U.S. may have sought. Instead of being perceived as a show of force with a deterrent effect, some of the international community has reacted with disdain. Not surprisingly, this includes the French, who have been quite vocal about their feelings. The French Foreign Minister, Laurent Fabius, said the fine was an “unfair and unilateral decision.” The French Finance Minister Michel Sapin questioned its legality by pointing out that the offending transactions were not illegal under French law.
It is not as though the U.S. is jumping across the pond and punishing a French bank on French soil for activity in France. The actions in question took place through U.S. markets and therefore make U.S. prosecution justifiable. But the French finance minister’s statement demonstrates the U.S.’s waning credibility abroad. Sapin did not stop at the BNPP settlement – he went on to question the entire monetary regime based upon the U.S. dollar: “Shouldn’t the euro be more important in the global economy?” The U.S. should not ignore this growing antipathy. Nor should we take for granted our economic or political authority. Examples like this settlement, or the largely resented Foreign Account Tax Compliance Act, may not be seen as a show of force but rather as an act of bullying. As we throw our weight around, others are considering whether the cost of doing business with us is just too high. If we keep it up, we could find ourselves at a table of one.
When it comes to a conviction, or even an arrest, the collateral consequences that are sometimes overlooked by client and counsel can be extremely damaging, especially when dealing with government agencies and programs.
One such set of consequences is unique to contractors who do business with federal or state governments. Because even a plea to a criminal conviction represents a person’s affirmative statement of the underlying facts, that can lead to a proceeding to suspend or debar (that is, prohibit) the contractor from federal or state business. A government agency may issue a notice of suspension or debarment based on the criminal conviction alone, if the statute provides for such a basis of debarment. Moreover, in some circumstances, a government agency may issue a notice of suspension or debarment based on the underlying conduct (which the plea or conviction affirms as true) that poses a risk to the integrity of government contractors. Thus, even if a government contractor facing serious charges and a lengthy trial enters a plea to a less serious charge, that plea may cause the debarment of the government contractor and possibly deal a fatal blow to its business based on the conduct on which it was based.
Another example of an unforeseen consequence is when a person applies for one of the various government programs that are a “privilege” and not a right. The U.S. Customs and Border Protection (CBP) has implemented Trusted Traveler Programs, such as the Global Entry program, which allows expedited clearance for pre-approved, low-risk travelers upon arrival in the United States. There is no right to participate in that program; rather, it is a privilege granted to individuals upon acceptance by the CBP. There is an application process for entry into the program, and, the CBP explicitly warns that applicants may not qualify if they have been convicted of any criminal offense or have pending criminal charges or outstanding warrants. Notably, as with similar statutes or prohibitions, there is no end date for when the CBP will stop considering the criminal conviction. Therefore, the criminal conviction will likely act as a lifetime bar to gaining acceptance into this program and into similar types of programs.
Collateral consequences are increasingly becoming an important area of law due to the fact that the total number of collateral consequences has increased tremendously in recent years. This requires a broad understanding of many areas, which is contrary to the trend in law practice of specialization in niche practice areas. Unfortunately, counsel are often completely unaware of the potential collateral consequences in practice areas outside their scope of practice. With funding provided by a DOJ grant and other sources, the ABA has developed an interactive tool called the National Inventory of the Collateral Consequences of Conviction (available at www.abacollateralconsequences.org), which provides a database of the sanctions and restrictions in each state. This is a useful tool for both counsel and client in understanding the full gamut of collateral consequences resulting from a criminal conviction.
Prosecutors and often even judges do not appreciate the collateral consequences of a criminal conviction, regardless of whether it results from a trial or a plea agreement. While the direct consequences of conviction are obvious – such as jail time, probation requirements, and fines – the collateral consequences are more insidious. Yet sometimes those consequences can have an even greater impact on a person’s life than the sentence meted out by the court. These consequences may be difficult to identify, though they may be mandated by statutes and regulations scattered throughout state and federal law, and may arise from a misdemeanor conviction, or even a simple arrest.
One of the most serious collateral consequences of a criminal conviction is its effect on a person’s immigration status, and thanks to the United States Supreme Court, it is now one that has great visibility for most defense counsel. In Padilla v. Kentucky (130 S. Ct. 1473 (2010)), the U.S. Supreme Court held that the Sixth Amendment’s guarantee of effective assistance of counsel requires that a defendant must be provided with notice of deportation consequences of a guilty plea he or she is considering. This issue arises most frequently in the context of drug cases because of the draconian treatment of such conduct under U.S. law for non-citizens. Since the Supreme Court’s opinion in Padilla, many courts now specifically include in their allocution during guilty pleas a specific notice regarding the possibility that a guilty plea may result in immigration consequences for the, including deportation, reversal of naturalization and non-admission.
But there are many other collateral consequences that are routine, but are not always referenced in a plea agreement and are often not recognized by defendants. Under federal law, a person convicted of a felony may not possess a firearm – indeed, possession of a firearm by a felon constitutes a felony violation itself. And many state laws require that defendants who commit sex crimes register with local authorities. A conviction for driving under the influence of alcohol or drugs may result in the administrative loss of driving privileges for a period of time.
There are even more serious collateral consequences that persist for long periods of time involving exclusion from employment prospects, eligibility for professional licensing and access to government benefits. For instance, employees in the nursing care industry are generally subject to background checks by their employer and are required to maintain certain licensing in their individual capacity as a condition to working in the industry. But even a relatively minor criminal conviction will raise a red flag on the background check and foil any chance of receiving a license. Similarly, a state agency may refuse to issue a business an operating license if some of its higher level employees have criminal convictions. Not only does this restriction limit a person’s employment prospects, but more broadly, they also harm the person’s chances of earning any livelihood because this person will also be prevented from owning any business that required such a state license.
For these reasons, it is absolutely essential that when considering whether to accept a plea agreement that both counsel and the client understand the consequences of the guilty plea in order to properly evaluate the benefits and the collateral damage of accepting a guilty plea versus proceeding to trial. And it is essential that counsel advise their clients in an effective manner of the consequences of a conviction that may persist long after the clients leave the courthouse or the jail.
Criminal defendants face a wide range of consequences for their alleged actions. The high emotional and financial cost of defending a case may pale in comparison to the personal toll resulting from a conviction and the associated direct consequences including fines, penalties, remuneration, and incarceration. For most offenders, however, the longest-lasting consequence of all is the criminal record which they carry with them for life. Some collateral consequences of a criminal conviction are imposed by law—for instance, convicted felons lose the right to vote and are ineligible for welfare benefits and federal student loans. (A database of collateral consequences by state can be found here.) Others are imposed by society. Nowhere is this stigma more apparent or restrictive than in the ex-offender’s job search when, in trying to become productive members of society, they are routinely screened out of the workforce due to criminal history questions on initial job applications.
On July 14, the D.C. Council unanimously approved the Fair Criminal Record Screening Act of 2014, a bill which requires private employers to consider job applicants based on their merits and qualifications prior to considering their criminal convictions. The Act applies to all private employers in DC employing 10 or more persons, with the exception of employers providing programs, services, or direct care to minors or vulnerable adults. The Act prohibits employers from asking, in connection with a person’s employment, any questions relating to arrests or criminal accusations not currently pending which did not end in conviction. Additionally, private DC employers may not ask job seekers any questions about criminal convictions during the initial application process. Rather, employers may only ask an applicant about his or her criminal convictions after the employer makes a conditional job offer. Once the applicant discloses any convictions, the employer may only rescind the offer for a legitimate business reason, taking into consideration the seriousness of the offense and the bearing it may have on employment, among other factors. The D.C. Mayor must sign the bill prior to it becoming law.
This is the latest development in the “Ban the Box” movement which has gained traction in many states and municipalities–so called because of the “check here if you have ever been convicted of a crime” box commonly found on job applications. We wrote about Baltimore’s initiative in a previous post. The ban the box movement is an effort to restrict initial job application questions about criminal history and thereby increase the odds that former offenders become productive members of society by re-entering the workforce. A July 2014 National Employment Law Project report (not yet updated with the passage of DC’s bill) found that 12 states and 66 municipalities have instituted some legal measure restricting the timing of inquiries into criminal history during the job application process. The laws vary as to specifics. In some jurisdictions, employers can make an inquiry into the applicant’s criminal history after an initial round of screening or interviews but prior to making a conditional offer. In some jurisdictions the law applies only to public sector employers, while in others it also applies to private sector employers of a certain size. Some employers, such as retail giants Target and Wal-Mart, have independently instituted similar policies company-wide.
The Ban the Box movement has garnered criticism in some quarters for being a superficial fix which will ultimately deter employers from hiring at all. Employers, the reasoning goes, will incur unnecessary expense in interviewing candidates and making conditional offers which they later rescind upon doing a criminal records check. Then the employer could face litigation over whether the offer was rescinded based on a “legitimate business reason.” The candidate also allegedly loses out by counting on a job offer that doesn’t result in a job.
While there will be, no doubt, instances in which former offenders are disappointed by rescinded job offers, this concern is outweighed by the opportunity to receive fair consideration of their qualifications in the first place. And a positive result on a criminal records check does not automatically mean that an employer has wasted time and resources in the hiring process; an individualized inquiry into the circumstances of the offense may not change the hiring decision at all, especially for offenses that are older or relatively minor. To the extent that banning the box marginally increases the length or cost of a hiring process, more and more governing bodies are determining that this is an acceptable cost in furtherance of the greater good. And in D.C., complaints about criminal records-based hiring decisions are referred to the Office of Human Rights for administrative remedies rather than being resolved through litigation.
The Council’s approval of the Act is a great step forward for the estimated 60,000 D.C. residents with criminal records, as well as for non-residents employed in the District. The Ban the Box movement gives former offenders a much-needed opportunity to show that they are more than their records, and to be considered for employment on their merits, in context.
Federal Criminal (Other)
On April 28, 2014, Ifrah Law attorneys Jeff Hamlin and Casselle Smith attended a symposium on incarceration presented by The Johns Hopkins University and its Urban Health Institute. The day–long program focused on adverse impacts of mass incarceration and potential strategies for mitigating them and reversing trends toward continued prison growth. Throughout the day, panels comprised of medical professionals, sociologists, legal scholars, and ex–offenders took the stage to address issues bearing on their areas of expertise.
Panelists discussed the effects of over–incarceration on individual liberty, family cohesion, and economic inequality, among other things. Many speakers emphasized the critical importance of upstream intervention. To this point, House Representative Elijah Cummings (D-Md) challenged communities to provide children with opportunities in sports, scouts, band, and other activities that can offer a positive sense of belonging. Others emphasized the value of post-incarceration solutions, including decarceration, education, and re–entry assistance.
Much of the afternoon discussion revolved around underreported effects of incarceration, including the lifelong consequences of a felony record. Too often, criminal defendants serve their time only to face a new set of challenges upon their release. Ex–offenders typically lack meaningful options for lawful employment outside of prison. The structural barriers to prosperity erected in the aftermath of incarceration can be as confounding as the time served—especially for those stationed on the lower rungs of socioeconomic stratification. This lack of opportunity is a catalyst for recidivism and ends up perpetuating the cycle of crime.
In his keynote address, Rep Elijah Cummings lamented that the real sentence is not the incarceration, but the criminal record that follows you until you die. The day after Cummings’ address, the Baltimore City Council passed legislation to address that problem. The “Ban the Box” bill—named for the criminal history checkbox that has become commonplace on job applications—makes it a crime for private businesses (with at least 10 employees) to “require an applicant to disclose or reveal whether he or she has a criminal record” before a conditional job offer has been made. The bill has teeth. Failure to comply is a misdemeanor violation that can result in fines up to $500 and up to ninety days in jail.
According to local reports, Baltimore Mayor Stephanie Rawlings-Blake strongly supports the bill. It will take effect 90 days after she signs it into law. The next test will be effective implementation and enforcement to ensure its success. We will continue to monitor its evolution and report on major developments.
The Urban Health Institute plans to upload video clips of the panel discussions and speeches. Video clips of panel discussions and speeches can be viewed at the Urban Health Institute’s YouTube channel.
In a sentencing hearing yesterday in the Southern District of New York, yet another judge reached the conclusion that the quasi-mathematical formulaic approach of the United States Sentencing Guidelines fails to account adequately for differences between criminal defendants. But, in this case, the result was to the detriment of the individual being sentenced in that case.
Judge Jed Rakoff made headlines in October 2012 when he sentenced former Goldman Sachs director Rajat Gupta to a two-year prison sentence despite an advisory Guidelines range of 6-1/2 to 8 years (and an even higher range pressed by prosecutors and the Probation Department). As we wrote here at that time, in ordering a significant downward variance, Judge Rakoff bemoaned the Guidelines’ attempt to treat human beings and their attendant complexities as “commodities,” and the “bizarre results” that follows that approach.
In yesterday’s sentencing hearing for Anatoly Golubchik, Judge Jesse Furman focused on a different manner in which the Guidelines fail to account for differences from case to case. Golubchik had entered a guilty plea to a single count of participating in a racketeering conspiracy from in or about 2006 through in or about April 2013. The government alleged that this racketeering conspiracy engaged in illegal gambling, threats of violence, and laundering of approximately $100 million.
Under Section 2E1.1 of the Guidelines (applicable to racketeering), Golubchik’s base offense level was the greater of 19 or the base offense level applicable to the underlying conduct. That underlying conduct was the operation of an illegal gambling business, for which Section 2E3.1 provides a base offense level of 12. Thus, Golubchik’s base offense level was 19, and, despite the laundering of millions of dollars, the Probation Department calculated the advisory Guidelines range as 21 to 27 months.
In its submission prior to sentencing, the government argued that the Court should grant an upward variance from that range based, in part, on the failure of the Guidelines to reflect adequately the extent of Golubchik’s offense. The Court ultimately ordered the parties to be prepared to address at sentencing whether it should grant an upward departure under Section 5K2.0 on the ground that the offense conduct presented a circumstance of a kind or to a degree not adequately taken into consideration by the Guidelines. The issue was joined, in large part, simply because the Guidelines applicable to illegal gambling – unlike the Guidelines applicable to many other offenses – do not include an upward enhancement based upon the amount of money involved according to the loss table set forth in Section 2B1.1 of the Guidelines. (The Guideline applicable to money laundering (Section 2S1.1) directs the application of the offense level for the underlying conduct if that level can be determined; otherwise, it would incorporate an enhancement from the loss table.)
During argument on this issue, Judge Furman pushed Golubchik’s counsel to “concede that two defendants, one convicted of racketeering offenses involving gambling amounting to $2,000 and two, a defendant convicted of racketeering offenses [involving] gambling involving $100 million” are treated the same under the Guidelines. Transcript of April 29, 2014 Hearing at 56.After hearing the parties’ argument, Judge Furman ordered an upward departure on that basis:
I do believe and find that a departure is warranted under Section 5K2.0, whether the problem is with the gambling guideline, namely 2E3.1, or the money laundering guideline, namely 2S1.1, by de-linking completely the offense conduct from the amount of money involved with the direct money laundering, the guidelines failed to distinguish, in my view, between run-of-the-mill gambling cases and run-of-the-mill racketeering cases involving gambling, and cases like this one involving a massive, sophisticated gambling operation that spans continents and involves upwards of $100 million.
Id. at 61. In addition to noting the failure of the gambling Guideline to consider the amount of money involved, Judge Furman noted the “anomaly created by the fact that for third-party launders the loss table is used to calculate the guidelines range.” Id. Based in large part on this issue, Judge Furman sentenced Golubchik to 60 months in prison – a sentence more than double the top of the advisory Guidelines range.
Our purpose in commenting on this hearing is not to criticize Judge Furman’s ultimate decision in sentencing Golubchik. Rather, we do so because Judge Furman’s identification of the “anomaly” created by the gambling and money laundering Guideline sections presents yet another manner in which the Guidelines simply fail to deliver on their promise to provide a mathematical formula for determining a sentence consistent with the mandate in Title 18, United States Code section 3553. Of course, one solution would be simply to tie those Guideline sections to the loss table. But given the growing – and, in our view, well-deserved – criticism of the application of the loss table in the Guidelines, this would simply make matters even worse. We instead view the analytical conflict identified by Judge Furman as yet another factor that should ultimately lead to the demise of the Guidelines as a useful tool for federal sentencing.
We have previously reported on the arrangements being made by the Garden City Group for remittance of money to the former customers of Full Tilt Poker. Since that time, there has been a lengthy process for the submission of claims to the group for administration.
It appears that players’ waiting has not been all for naught.
The Garden City Group reports that, on February 28, 2014, it issued more than 27,500 payments totaling approximately $76 million to former Full Tilt Poker players who timely confirmed the balance of their Full Tilt Poker accounts. GCG reports that petitioners will receive ACH transfers of the funds anywhere from the day it was issued until several business days later, depending on the practices of their banks.
These payments are only the first round of anticipated payments. The deadline for affiliates to submit a petition for remission is this Sunday, March 2.
Last Friday, the Department of Justice (DOJ) and the Department of Treasury, Financial Crimes Enforcement Network (FinCen), both published new guidance in connection with the legalization of recreational marijuana in Colorado. Because marijuana use remains illegal under federal law, the banking industry is prohibited from servicing any marijuana-related bank accounts. This forces the recreational marijuana industry to operate on an all-cash basis, which increases public safety risks (both to retailers and to customers) and is a great inconvenience to the industry (which is required to take extreme measures such as hiring armed guards, installing very high tech security measures, and the businesses are unable to obtain bank loans or credit).
In response, FinCen’s guidance, along with the DOJ memo, was supposed to enable marijuana-related banking and eliminate the public safety concerns, as it clearly stated: “This FinCEN guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” Although the guidance pursued an admirable goal, it fell remarkably short.
The DOJ memo states:
“The provisions of the money laundering statutes, the unlicensed money remitter statute, and the Bank Secrecy Act (BSA) remain in effect with respect to marijuana-related conduct. Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money transmitter statute (18 U.S.C. § 1960), and the BSA. … Notably for these purposes, prosecution under these offenses based on transactions involving marijuana proceeds does not require an underlying marijuana-related conviction under federal or state law.”
Simply stated, the DOJ memo confirms that recreational marijuana use remains illegal under federal law and could serve as the basis of prosecution against banks (or individuals), but that the DOJ will probably not enforce the applicable federal statutes against banks for processing marijuana-related accounts, provided that the banks follow certain guidelines that are outlined in the DOJ memo.
These wishy-washy “promises” of non-enforcement are extremely unlikely to sway banks from their decision not to permit marijuana-related accounts. Banks are naturally conservative and also have a huge self-interest to be 100% compliant with federal law because of the highly regulated banking industry; therefore, banks are only likely to permit marijuana-related accounts if it was legal under federal law, or if there were some form of safe harbor for the banks. However, there is clearly no safe harbor with the recent regulations and guidance.
For instance, the DOJ memo explicitly states: “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 CSA, the money laundering and unlicensed money transmitter statutes, or the BSA, including the obligation of financial institutions to conduct customer due diligence.”. The FinCen memo also repeats “that the illegal distribution and sale of marijuana is a serious crime…” Thus, although the guidance issued by DOJ and FinCen on the surface appear to be helpful, they are ultimately toothless.
Further, the ultimate decision (and the inherent risk and liability) remains with the banks, as also noted in the FinCen memo: “In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution.” Therefore, in the absence of any safe harbor and the illegal status of marijuana under federal law, banks will likely pursue the safe option of refusing to process marijuana-related accounts.
This scenario is quite similar to the recent aftermath in New Jersey when it legalized online gaming for intrastate users. Although New Jersey declared online gaming legal under New Jersey state law, banks generally refused and continue to refuse to process online gaming accounts. Banks deemed these accounts too risky because their internal regulations dictate that they would not process payments for accounts related to online gaming for real money when it was still prohibited in other states and would be an unwanted burden on their compliance checks. Similarly, the ultimate conclusion of banks considering marijuana-related accounts is likely to refuse to allow such accounts because they are still illegal under federal law and permitting those accounts presents an unwelcome risk for the banks.
Another significant hurdle that may cause banks to refuse marijuana-related accounts is the significant disclosure requirements applicable to the banking industry that are mandated by federal agencies like the FDIC and Federal Reserve. Banks, particularly banks that are publicly traded entities, have many filings and disclosures that they are required to make on a consistent basis. Therefore, the banks would presumably have to disclose that they are currently violating federal law by processing marijuana-related transactions and permitting marijuana-related accounts (and anticipate continuing to violate the federal laws). Regarding disclosure requirements, it should make no difference whether the DOJ presently anticipates prosecuting those crimes or how much of a priority they are in accordance with the DOJ memo – the fact remains that the bank is violating the federal law and that must be disclosed. Indeed, the DOJ could decide to prosecute these crimes at any time in the future. Furthermore, that disclosure (i.e. that they are currently violating the law) would likely trigger a host of regulatory issues that require banks to comply with all federal laws.
Yet, the banking market for marijuana-related accounts remains lucrative and underserved. The million dollar question is which bank will take the leap of faith to enter the marijuana industry?
One possibility is a Colorado bank that only has Colorado branches may be willing to permit marijuana-related accounts. Obviously, the potential reward is great because of the lucrative and underserved marijuana industry market. More importantly, the risk to Colorado banks is lower because they only operate in Colorado and can legitimately claim they are complying with all laws because Colorado state law permits recreational marijuana use, so they can be more confident that the DOJ will not prosecute them. More importantly, even if the DOJ decides to prosecute them, the state of Colorado will likely defend them and throw their weight behind the local bank, because if Colorado did not, then the whole recreational marijuana law and industry would quickly collapse.
Consequently, the risk-reward equation for a local Colorado bank is tilted more favorably toward permitting marijuana-related accounts because there is less risk to a Colorado-only bank, and the reward would be given more weight because the value of the marijuana accounts would mean much more to a smaller Colorado bank than to a larger national one. In the meantime, one would hope that the federal agencies would issue guidance that provides more clarity and real solutions to this issue, rather than just discouraging banks from this industry by issuing vague guidance.