Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Posts Tagged ‘marijuana legalization’
Nov 24
2014

Smart is the New Tough: A Changing Approach in America’s War on Drugs, Crime?

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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 Drugsare 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.

Feb 21
2014

Banks Shy Away From Processing Marijuana Transactions in Colorado – Will Anyone Step Up?

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.

Feb 12
2014

Wild, Wild West: The Legalization of Marijuana Brings Lots Of Regulatory Concerns

The beginning of 2014 has brought many new laws into effect and we have written on a number of them. But few laws have received more mainstream media exposure than Colorado’s legalization of recreational marijuana. Of more importance to us, the legalization of recreational marijuana has posed some interesting problems for regulators.

The most obvious effect of the law was to allow the recreational use of marijuana, but there has also been a significant side effect: Colorado has seen an explosion of food products with marijuana additives (known as “marijuana edibles”). A big reason for the wide variety of marijuana infused products is because it is relatively simple to manufacture them. The regular food manufacturing process is used and then cannabis oil is added to the recipe, which adds THC (tetrahydrocannabinol) the main psychoactive substance in marijuana, to the food. Marijuana edibles range from candies and sweets (e.g. chai mints, truffles) to sodas to cake (e.g. cookies, brownies), and even peanut butter. These products are especially attractive to people who want to avoid the coughing and inhaling of pot smoke, or, to partake of marijuana in a place where smoking is not permitted.

We are not generally in favor of more regulation, but we do think that there is a need for more robust regulation of marijuana edibles.  These are standard food products with all the associated risks (e.g. going rancid, food poisoning like salmonella).  Also, THC is not particularly stable as a good additive. Yet, despite these characteristics that pose risks associated with food products, marijuana edibles are not being monitored by the experienced federal food regulators (such as the Centers for Disease Control and Prevention and the Food and Drug Administration).  Moreover, Colorado Department of Public Health also cannot provide oversight because part of their funding comes from the federal government.  And while Colorado’s Marijuana Enforcement Division may monitor these products, its original purpose was to regulate the medical marijuana industry and it is therefore ill equipped to regulate the entire recreational marijuana industry from the perspective of experience and resources.  The Marijuana Enforcement Division has taken some significant steps to ensure marijuana edibles’ safety – such as requiring laboratory certification of edibles and implementing a tracking program that would be able to trace any food poisoning outbreaks directly back to the plant – but the absence of experienced food regulators from this process is worrisome.

Like many new laws, the legalization of recreational use of marijuana in Colorado is creating unforeseen challenges for regulators necessary to ensure the health and safety of the public.  We are confident that, even in the continued absence of federal agency involvement, Colorado state authorities will find new and effective ways to meet these challenges.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, health care, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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