Legalfilter: What's the legal status of non-laundered illegal money?

January 27, 2020 10:25 AM

I'm curious if there is a legal state of non-laundered money that gets put into a depository institution? Now that cannabis is decriminalized on the left coast, if a cannabis company gets an account at a credit union and puts the money into the institution, those funds are derived from illegal activities. When they pay PG&E on their electric bill, is the money that PG&E has in their account illegal?

I did some searching on google, but I think its a rare case where the money doesn't qualify as laundered by both common legal analysis and the wording of the law. Every answer that came up on google talked about money laundering though and since IANAL (and I'm meeting with ours this week), I was hoping the hive mind might have some ideas around this.

posted by herda05 to Law & Government (15 answers total)

In my experience, institutions will not accept this money because it is not FDIC insured (because according to the feds it is illegal money, and the feds are what insure banks). When cannabis companies pay for services, they do so in cash (and yes, they keep a LOT of cash on hand. They tend to have a lot of bodyguards for this reason among others, and said bodyguards are some of the scariest dudes I have ever had the displeasure of meeting.) That cash makes accountants nervous, but it can (as far as I know) be legally deposited and federally insured.

Source: a legal cannabis company used to be a client of mine, so I have experienced this first-hand.
posted by branca at 10:35 AM on January 27, 2020 [1 favorite]

I was under the impression that this is why these are cash-only businesses. From my experience (which isn't great), when I go buy legal pot, I have to pay cash. No cards. None. There are ATMs inside most pot shops. I can't speak to the business operations, but my understanding is that all business is in cash to skirt possible problems. Not sure how they pay their electric bills.
posted by jdroth at 10:39 AM on January 27, 2020

This article discusses the situation in California: SB 51 and the Future of Cannabis Banking in California".
posted by Lexica at 10:50 AM on January 27, 2020

It's not so much that the money somehow "becomes illegal" as that banks (and credit unions) must comply with "Know Your Customer" regulations that are designed to prevent the deposit of the proceeds of illegal activities (and, to the feds who regulate most banks, the sale of weed is still very much illegal) into the banking system. Thus, it is still quite difficult for cannabis businesses to use deposit accounts at all. There's a lot of pushing on this point and so this answer may be obsolete in a year or three, but that's where it is.
posted by praemunire at 11:09 AM on January 27, 2020 [4 favorites]

I think the OP is asking a different question rather than whether banks can hold money in accounts held by cannabis question.

My understanding of the OP's question is: "are non-cannabis companies (like PG&E) that have bank accounts allowed to hold money derived from illegal activity (cannabis sales?" In other words, if a (generally) law-abiding entity accepts money from an entity known to generate the majority of their income from illicit activities, has the entity accepting money committed a crime?

I can confidently say I have no idea what the answer to that question is, although I am interested in the answer.
posted by saeculorum at 11:29 AM on January 27, 2020

Response by poster: So too clarify a little: The laws (AFAICT) are designed not to stop illegal funds from being deposited, but to stop the source of the funds from being hidden. That's the crime of money laundering. Cannabis companies, and depository institutions that take the money openly, are in a unique position in that they are not hiding the source of funds. The reason most criminals don't do this is because it creates a paper trail for prosecution of the actual illegal activities they are perpetrating. So I'm hoping that maybe someone has an analogy of this type of situation that allows me to describe what the money that moves upstream into the rest of the financial system becomes?

I'm trying to describe the "state" of this money form a legal standpoint. It is derived from illegal activity, but when the financial institution gets it, does it become an asset under management? When PG&E gets it, they pay employees. Now what is the state of the money?
posted by herda05 at 12:01 PM on January 27, 2020

Speaking super super generally, you can sell goods or services to criminals so long as you don't intend to promote or facilitate the criminal action or, in some formulations/states, perform an action that aids the crime while knowing that the crime is going to be committed. Assuming PG&E knows the nature of the company's business, electricity is a tricky one because of grow lights. A cleaning company that cleans up the corporate offices, on the other hand, is much less likely to be considered to have some form of secondary liability. There's not a bright line, which is what makes companies so anxious about doing business with cannabis businesses.

But the reason I mentioned the deposit account is that WeedCo. probably won't have one, for the KYC reasons mentioned above.
posted by praemunire at 12:05 PM on January 27, 2020 [2 favorites]

The laws (AFAICT) are designed not to stop illegal funds from being deposited,

As I've already explained, this is not correct. The very reason that banking regulations are designed to prevent the deposit of the proceeds of illegal activities is that it is very hard to regulate the movement of funds once they're within the banking system.
posted by praemunire at 12:07 PM on January 27, 2020 [3 favorites]

Response by poster: praemunire thanks for the reply. I'm hoping you can point to where the banking regulations show a design to prevent deposits of illegal activity. I've read the FIFEC manual, as well as FinCEN, FDIC, NCUA, and OCC regulations, guidance, and opinions. I'm trying to understand as much as possible about this area beyond simply my ability to research.

Since the federal government is clearly not going after businesses that are selling goods and services to criminal enterprises (see the 1300 exhibitors that openly sold products and services during the MJBiz Conference in Las Vegas), I can reclarify my question as:

Do finance, compliance, or legal professionals have terms of art that address money after it is used to commit an illegal act (in this case the sale of cannabis) and is then used to pay for a product or service?

Thanks all for your comments so far, they have been helpful in both further research and structuring my thinking around this topic.
posted by herda05 at 5:10 PM on January 27, 2020

Though the Trump administration has sent mixed signals about its ongoing application, on a practical level most of the guidance available is still based on the Cole Memo.

terms of art that address money after it is used to commit an illegal act

Likely covered already, but certain bank transactions will trigger a SAR.
posted by snuffleupagus at 8:44 PM on January 27, 2020 [1 favorite]

Best answer: Please read 12 CFR § 21.11, especially (c)(4)(A), first. But it sounds like you are unclear on how this works as a practical matter. Under most circumstances, it is not technically illegal merely to accept a deposit of the proceeds of criminal activity (as long as you don't know that the transaction is designed to hide the nature, source, etc., of the funds, which brings you into the scope of AML liability). There are policy reasons for this, some of which are not altogether unreasonable. However, speaking of national banks, which I know best, you are required to have an understanding of your customer's business sufficient to, among other things, allow you to recognize the kinds of activities enumerated in sec. 21.11 that require filing an SAR, which include, for amounts more than $5K, a transaction that "involves funds derived from illegal activities." And so doing, you will also be uncomfortably close to knowledge that might bring you into the ambit of 18 USC § 1956, if any money laundering is going on. The system is designed to prevent these deposits by requiring the institution to gather so much information that it doesn't have an excuse not to recognize funds derived from illegal activities and to force it to notify the feds of transactions involving such funds. Criminals will then, in theory, not seek to put the funds in the banking system because, um. Well.

When it comes to cannabis in particular, the degree to which the feds decide to pursue these SARs and the federal-law-illegal activity they reveal is a matter of policy. So banks are currently struggling to see if they can get comfortable accepting these proceeds, especially because it's definitely been known to happen that operations legal under state law when it comes to possession/distribution are still tangled up with criminal activity or investors in other ways. As the money from state-law-legal cannabis sales grows and grows, one can expect continuing changes in this area. But if you genuinely do not understand how the system I've outlined above works to deter banks from accepting such deposits, or the proceeds of any criminal activity, don't invest in whatever someone's trying to get you to invest in, please.
posted by praemunire at 9:48 PM on January 27, 2020 [1 favorite]

Response by poster: Thanks for the response praemunire. You've summed up the heart of the conflict in your last response.

it is not technically illegal merely to accept a deposit of the proceeds of criminal activity

I am clear in how this works as a practical matter. I wanted to make sure that I wasn't missing what is actually defined in law (technically legal/illegal). This allows me to separate out what is a matter of practice, behavior, and custom (what you referred to as the practical matter).

Cannabis poses a challenge to the practical side of things because the actual activity associated with the product (growing, processing, selling, and possession) is illegal, but the actual processing of the financial transactions aren't technically illegal if the business does not disguise the nature of the transaction in anyway, AND an institution can demonstrate an intent not to further the criminal activity, do the correct reporting, and not conceal or disguise any information or the nature of the transaction. This is considered to be a high burden by compliance people, legal departments, financial institutions, and their boards of directors (and as you noted in your second paragraph, with good reason).

It appears there is no publicly available language, models, policies, and procedures to describe what the practices, behaviors, and customs should be with regards to illegal money that is not being laundered. This is because as you put more clearly and much better than I could:

Criminals will then, in theory, not seek to put the funds in the banking system because, um. Well.

From a risk/reward standpoint then, it is far easier for an institution to close the account once it is identified and wait for the Federal government to reschedule cannabis so it can implement the existing practices, behaviors, and customs it uses for other businesses.
posted by herda05 at 1:11 PM on January 28, 2020

To the extent you're trying to appreciate the various financial complications that can confront commercial Cannabis enterprises on the Federal level, you should also be aware of the challenges posed by Section 280E of the tax code.
posted by snuffleupagus at 2:10 PM on January 28, 2020 [1 favorite]

This article about stolen bitcoin goes into some of the detail about the rules around money that was previously used for illegal purposes:
"Banknotes, coins, and other highly-liquid paper instruments have a very special legal status. If you unknowingly accept some banknotes from someone who just obtained them illegally (say via ransom or theft), the law can't compel you to give those banknotes back to the original victim. Money, as the great British jurist Lord Mansfield once declared, isn't like regular property: it "can not be recovered after it has passed into currency.""
posted by vegetableagony at 1:00 PM on January 30, 2020

I'd strongly caution against relying on the guidance of that blog post by some Canadian bitcoin goldbug SEO guy — it is at best a tremendous oversimplification of the law of no particular jurisdiction.
posted by snuffleupagus at 3:40 PM on January 30, 2020