Federal law and policy

Our Oregon lawyers have been fielding many questions regarding a recent civil RICO complaint filed in the federal court in Portland, Oregon styled as McCart v. Beddow et al. This case was filed on the heels of the Safe Streets decision out of Colorado that we discussed recently, and was clearly heavily influenced by that decision. You will recall that in Safe Streets, the Tenth Circuit allowed a private civil RICO action by a neighbor of a cannabis grow operation to survive a motion to dismiss.

As a reminder, RICO is a federal statute that provides for a civil cause of action for acts performed as part of an ongoing criminal organization (in addition to criminal penalties). It has become fashionable for meddlesome neighbors to bring these lawsuits against cannabis operators and their business affiliates. Because RICO complaints sound in federal law and implicate supply chain defendants, these cases differ from your ordinary nuisance-and-tresspass actions, which pursue only the marijuana grower itself, and also have been recently brought against Oregon marijuana growers.

Though McCart shares many similarities to the facts in Safe Streets, it is the differences that make things interesting. These differences let us tease out a couple of lessons for other cannabis companies seeking to avoid a similar lawsuit.

Oregon Cannabis First the similarities: Plaintiffs in both suits are bringing RICO claims against neighboring cannabis grow operations and alleging direct injuries to plaintiffs’ properties in the form of noxious odors that allegedly reduce property values. They also allege the mere presence of a “criminal enterprise” next door decreases property values.

But McCart is not Safe Streets. Taking the McCart complaint on its face, the direct operators of the neighboring grow operation are alleged to have gone out of their way to intentionally provoke the Plaintiffs at every turn. This isn’t just a case about noxious odors and neighboring criminal enterprises (although it is that); rather, the Plaintiffs are asserting this case is the culmination of a bitter dispute between neighbors in which cannabis is more of an extra than a star.

Specifically, the McCart Plaintiffs allege that:

  • The defendant cannabis growers menaced Plaintiffs and “made obscene gestures” and “screamed obscenities” at Plaintiffs;
  • The grow operation increased traffic on a shared driveway by an excessive amount;
  • The Defendants caused direct injuries to the property by leaving tire tracks on Plaintiffs’ property;
  • The Defendants revved their car engines when they saw Plaintiffs outside;
  • The Defendants “discharge firearms for extended periods”;
  • The Defendants frequently “blast the air horn of their dump truck”;
  • The Defendants damaged the shared driveway and at times blocked it; and
  • The Defendants littered on Plaintiffs’ property.

Whether these allegations are true will be Plaintiffs’ burden to prove. However, two immediate lessons come to mind:

Lesson 1: To paraphrase Wil Wheaton: don’t be a jerk. Be a good neighbor. If the McCart allegations are true, the behavior of these growers reflects poorly on the entire industry. If you want to be treated like a serious business, act like one. Recognize the precarious legal situation afforded by inane prohibition policies, and strive to be ideal neighbors.

Lesson 2: Control the odors. The Safe Street court found that the cannabis smell released by the Colorado grow op was enough to assert a claim for RICO damages. You should do everything you can to minimize odors on your businesses.

But what about the other McCart defendants?

Like in Safe Streets, the McCart plaintiffs seem to have sued everyone even tangentially related to their hated neighbors, including cannabis dispensaries that just happened to stock the neighbors’ products. These “Dispensary Defendants” are probably in much better shape than the growers.

A civil RICO claim under 18 U.S.C. Section 1962(c) (at issue in both Safe Streets and McCart) requires a plaintiff prove:

  • The existence of an enterprise affecting interstate or foreign commerce;
  • The specific defendant was employed by or associated with the enterprise;
  • The specific defendant conducted or participated in the conduct of the enterprise’s affairs;
  • The specific defendant’s participation was through a pattern of racketeering activity; and
  • Plaintiff’s business or property was injured by reason of defendant’s conducting or participating in the conduct of the enterprise’s affairs.

In Reves v. Ernst & Young, the US Supreme Court held that the language of 1962(c) requires the defendant have “participated in the operation or management of the enterprise itself.” (page 183). There are a few out of jurisdiction cases that have held that mere business relationships and supplier-purchaser relationships are insufficient to establish RICO liability, even with knowledge of the illegal activity. If you are curious, take a look at In re Mastercard Intl. Inc., (page 487) and Arenson v. Whitehall Convalescent & Nursing Home, Inc. It seems unlikely the Dispensary Defendants in this case had anything to do with operating or managing the enterprise. They appear to have merely been customers, in which case they shouldn’t have liability here.

Though there is a dispensary defendant in Safe Streets, the Tenth Circuit appears to have found the conduct requirement was met because the Safe Streets defendants admitted they all “‘agreed to grow marijuana for sale’ at the facility adjacent to the [plaintiffs’] property.” The Safe Streets dispensary defendant was directly involved in operating the specific grow operation at issue. This is not the same thing as an innocent dispensary accepting product from a third-party farm.

We will be watching this case and reporting back if anything of importance breaks, but in the meantime, it never hurts to be a good neighbor, and to take steps to minimize odors.

Cannabis banking lawsJune produced two pieces of interesting news on marijuana banking. First, the FinCEN issued its newest Marijuana Banking Update. This update provides information regarding the number of banks and credit unions that are providing services to marijuana businesses and are complying with their Bank Secrecy Act compliance obligations and reporting those services to FinCEN. If a financial institution has a customer that is a marijuana related business, that financial institution is supposed to file a suspicious activity report (SAR) quarterly with FinCEN. These reports are generally used for banks to report potential illegal activity. Given that all marijuana businesses are illegal at the federal level, FinCEN still requires the reports, but it doesn’t force banks or credit unions to shut the accounts down as long as the customer does not violate federal marijuana enforcement priorities.

The data from the report shows that at the end of March 2017, nearly 300 banks and around 50 credit unions were providing banking services to marijuana related businesses. That will seem like a really large number to industry participants that continue to struggle to find banking solutions in most jurisdictions. In Washington, there are 5-10 financial institutions that openly provide banking services to marijuana businesses, close to the same number in Colorado, and far fewer than that in Oregon and California.

So, where does the big number come from? The two main culprits are financial institutions that provide services to ancillary businesses and still file reports, and financial institutions providing services without being public about it. On the first point, many institutions do not feel comfortable providing deposit services to a marijuana cultivator or retailers, but they do feel comfortable providing such services to a marijuana business’s landlord, or to a staffing company or consulting company that works with cannabis businesses. Determining whether FinCEN would consider a business to be a “marijuana related business” is not an exact science, and many financial institutions take a broad view of that term.

The numbers also get inflated by financial institutions that don’t want to market themselves as marijuana businesses but are willing to take on a small number of them for purposes of customer retention. Banking is a business like any other, and many cannabis entrepreneurs have other business interests. If a really good banking customer wants to start a marijuana company, financial institutions are often willing to make an exception to their general policy.

But regardless of whether the number is a little inflated, the fact it is so high is really good news for financial institutions that are in the industry or are considering moving into it. There are still legal risks involved for financial institutions that work with marijuana businesses. Their only protection from regulatory and criminal enforcement are enforcement memoranda issued by the Department of Justice and FinCEN, and the DOJ memos don’t carry legal weight. The more that authorities perceive that bank and credit union industry participants are widespread, the more carefully they will step regarding enforcement action. It’s easy to make an example of an outlier business — it’s harder to do when the business is one of several hundred.

In other news, Fourth Corner Credit Union got a mixed result in its appeal to the 10th Circuit Court of Appeals. We have been following this case for a while because of its potential impacts on access to banking for cannabis businesses. The basics of the case are that Fourth Corner received a state charter from Colorado to operate as a credit union and its business plan clearly included the provision of banking services to marijuana businesses. Two federal agencies, the NCUA and the Federal Reserve, refused to work with Fourth Corner, denying it deposit insurance and a master account respectively. This appeal specifically relates to Fourth Corner’s attempt to get a master account from the Federal Reserve. In an interesting legal decision, the three judge appellate panel had three different approaches to resolving the case, and each one wrote separate concurring opinions.

The downside for Fourth Corner is that none of the judges indicated any sympathy for the original argument that the Federal Reserve had the obligation to provide a master account to Fourth Corner because it had received a state charter. The judges all seem to agree that the Federal Reserve has discretion there even with the state charter in place. The good news for Fourth Corner is that the judges vacated the original order of dismissal “with prejudice” and instead mandated that the trial court dismiss the case without prejudice. Over the course of litigation, Fourth Corner sought to amend its proposed business model set forth in the complaint. It decided to argue that it would only provide services to marijuana businesses if they were legal. Based on this opinion, they can now reapply for the master account with that caveat, and if the federal reserve denies them again, Fourth Corner would have a stronger case. So, that’s good news if you are Fourth Corner and want to open and provide banking services at all, but it doesn’t help marijuana businesses.

Still, this isn’t a ground-shaking decision for the industry as a whole. The Federal Reserve and the NCUA are not punishing existing banks and credit unions that work with marijuana businesses, especially those that are not over-exposed to the cannabis industry. So though it will be extremely challenging to open a new master account for any new chartered institution that wants to work with marijuana businesses, it isn’t at the moment as much of a concern for existing institutions with existing master accounts and insurance policies. As we have said thousands of times, however, the status quo on cannabis banking is barely workable, and everybody’s lives will be easier when Congress acts to clarify that banking marijuana businesses is entirely legal.

The Darth Vader of CannabisRoger Stone, the infamous conservative strategist and provocateur, seems to want to emerge as an angel on Trump’s shoulder to balance out Attorney General Jeff Sessions when it comes to federal cannabis prohibition. As readers may be aware, Mr. Stone recently announced the launch of his United States Cannabis Coalition, which bills itself as a bipartisan non-profit organization dedicated to protecting the states’ right to choose sensible cannabis policies. Though the goal is noble, Mr. Stone’s involvement will likely attract attention like a lightning rod.

It is understandable that a man with a back tattoo of President Nixon’s face is no stranger to controversy (warning: NSFL). Stone helped re-elect Nixon in 1972 and then served the Nixon administration in the Office of Economic Opportunity. After Nixon’s downfall, Mr. Stone remained with Nixon as an advisor, respecting Nixon’s willingness to go to any lengths to win. So it is unsurprising that Mr. Stone kindled a life-long friendship with President Trump, urging Trump to run for President decades ago and arguably masterminding Trump’s recent rise to power. After a lifetime of toxicity, Stone now wants to leverage his relationship with Trump for good. It can all seem a bit too much like an attempt at Darth Vader’s redemption over Endor, and at least some cannabis activists think Stone should sit this one out.

Cannabis LawAt the start of a video on the United States Cannabis Coalition’s website, Stone says “Richard Nixon is my mentor. Among the biggest mistakes that President Nixon made was the War on Drugs. The War on Drugs has proved to be an expensive, ignominious and racist failure.” Though this is a nice sentiment a half century later, the problem is that Nixon’s administration knew exactly what it was doing. Harper’s Magazine published the highly disturbing details of a decades old interview with Nixon’s domestic policy chief, John Ehrlichman, who made an appalling admission that deserves to be repeated in its entirety:

You want to know what [the drug war] was really all about? The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.

So though it is certainly tempting to dismiss Stone’s current efforts as more grandstanding, at the same time, any insider ally against Trump’s parade of drug zealots might be critical while we ride this administration out. Despite Stone’s past, I’m tempted to rest a little bit easier knowing at least someone in Trump’s inner orbit is pushing for an end to the cannabis war madness.

Trial_by_Jury_UsherWe are business and corporate lawyers, not criminal lawyers. This means we know enough about the law to tell someone when he or she may need criminal defense services, but we do not provide those services. Still, the specter of federal criminal charges is ever-present in the cannabis industry. When cannabis clients ask us about theoretical legal risks, we advise them that both civil and criminal liability exposure exist, on a spectrum from asset forfeiture to actual imprisonment. And we advise them that if they were charged for a violation of the federal Controlled Substances Act (CSA), we would help them find them a criminal lawyer.

In Oregon, Washington and California, we represent large cannabis businesses and vanguard industry players. For this reason, ever since Donald Trump was elected—and especially once Jeff Sessions was appointed attorney general—the question of whether our clients could eventually need criminal lawyers became more likely than before. The theory among many lawyers and policy-makers, after all, is that if the federal government takes action, it would not start with state programs or even with individual users, but with marquee industry players.

It is well established under Supreme Court jurisprudence that the federal government can enforce the CSA against state-legal operators. It is also worth noting that the Rohrbacher-Blumenauer amendment only safeguards medical marijuana programs and participants. Therefore, if the feds sue an adult-use (“recreational”) operator and drag it into court, a jury would likely be instructed that if the operator traded in marijuana it had violated the CSA. And that is where things could get interesting.

Most people—and even many lawyers—are surprised to learn that juries are not required to follow the law. When a jury’s conscience takes over and tells it that someone does not deserve criminal punishment for his or her actions, regardless of the law, the jury can choose to acquit. In legal terms, this is known as “jury nullification“: a systemic public safeguard from government run amok. To the chagrin of prosecutors, when jury nullification occurs, the Fifth Amendment’s Double Jeopardy Clause also prevents the acquitted person from being re-tried for the same charge.

Jury nullification has been a thorn in the side of state and federal prosecutors from our country’s early days. It became common in trials under the immensely unpopular Fugitive Slave Act of 1850, which criminalized any action that interfered with the recovery of fugitive slaves by slave owners. It again became common in the 1920s, when the immensely unpopular Volstead Act criminalized alcohol possession, on the heels of the 18th Amendment. These examples beg a timely question: what other federal law has become immensely unpopular of late?

The possibility of jury nullification in a CSA case against a cannabis business is both fascinating and realistic. It is realistic not just because of the favorable polling for cannabis nationwide, but also because these juries would be empaneled in jurisdictions that voted to legalize pot in the first place. Imagine a hapless U.S. attorney being ordered to charge a popular cannabis farm in Humbolt County, California, which is America’s largest cannabis labor market. It would make for an interesting show, to say the least.

We tend to write more about law than policy on this blog, but the 29 states with medical marijuana programs, the 8 states with adult use programs, and the overlapping 46 states that allow some form of cannabis possession, are all acting at the direction of their citizens when it comes to marijuana, ignoring federal law. The Cole Memorandum, which has helped facilitate state-level legalization since 2013, likewise discounts federal law.

What’s to say a jury wouldn’t do the same? If you were on a jury would you convict for cannabis?

EDITOR’S NOTE: This article stems from a paper titled “Jury Nullification Risks for Federal Cannabis Enforcement: How History and Common Sense Protect the Recreational Marijuana Market.” The paper was written by Emily Baker, a third year student at Lewis & Clark Law School in Portland, Oregon.

California cannabis bankingPolitical change comes in fits and starts. Cannabis laws did incredibly well at the state level in the 2016 election cycle, but it looks like we are going to be facing the status quo at the federal level for the foreseeable future. That is good news to some extent, as it is seeming less and less likely that the worst case scenario of the Trump/Sessions Department of Justice will come to fruition. We aren’t expecting to see mass arrests, seizures, and shut-downs in the cannabis industry. On the other hand, we also aren’t expecting to see any major positive changes on cannabis banking or taxes coming out of this government either. The unsteady status quo will remain, where agencies at the federal government will continue to grapple with balancing the criminality of marijuana with the fact that they cannot treat it as wholly criminal, lest they bring about more crime by burying their heads in the sand.

With banking in particular, things have remained relatively consistent since 2014. In February of that year, the Department of Justice and the Financial Crimes Enforcement Network (FinCEN) at the Department of Treasury released simultaneous memoranda creating a civil structure where financial institutions like banks and credit unions that provide services to the cannabis industry could comply with their regulatory obligations. They would still potentially be committing crimes, but the DOJ would treat them as the lowest enforcement priority.

That 2014 announcement of criminal and administrative enforcement strategy was scoffed at by large financial institutions, for good reason. If you are Bank of America, marijuana simply isn’t a large enough market for you to take any sort of criminal risk. But for smaller banks and credit unions, especially those that had been hit hard by the financial crisis, the memoranda provided just enough cover to take the cannabis risk. Between 2014 and now, Washington and Colorado have developed a small but stable network of financial institutions willing to serve the cannabis industry. Oregon has fewer institutions, but it is coming along as well.

California, however, was left behind, and medical marijuana businesses there still struggle to find banks willing to take their money. This is because of the particular wording in the 2014 FinCEN guidance. In order to comply with their regulatory obligations, part of what banks and credit unions that work with marijuana-related businesses have to do is verify that their cannabis business customer is duly licensed by a state that has robust regulations for its marijuana businesses. Until now, California has not had state-licensed marijuana businesses. It has worked under a series of vague state laws, with individual cities and counties coming up with their own regulations for marijuana businesses that have ranged from outright bans to open licensing processes. These local regulations have worked well in some circumstances, but they are insufficient for banks or credit unions that want to provide services to the marijuana industry without facing FinCEN’s wrath.

This is important for the banks because it isn’t only FinCEN that cares about compliance with their guidance. Federal providers of deposit insurance (the FDIC for banks and the NCUA for credit unions) are unlikely to renew a financial institution’s insurance policy if it looks like that institution is working with marijuana businesses but not following the FinCEN guidance. And that deposit insurance is key in separating banks and credit unions that provide real security for your funds and fly-by-night institutions that could potentially lose all your money.

But things are finally changing in California as we coming up on the issuance of state cannabis licenses in January 2018. This will finally give California’s banks and credit unions a system that allows them to comply with the FinCEN and DOJ guidance. And we predict that much like in other states, the early movers will be small banks and credit unions that are willing to take on a little bit of risk to gain the first-mover advantage. I have said for a long time that I don’t think a “cannabis-only” financial institution is the answer. A bank that only serves cannabis businesses would be subject to too much risk because it is only exposed to a single industry that happens to be criminal at the federal level. They would be completely uninsurable. So the best bet is for financial institutions that already have robust and diverse holdings to work with a number of cannabis businesses up to a maximum based on the size of the rest of the bank’s or credit union’s business.

For banks and credit unions looking to do this, it isn’t too early to start working on developing cannabis specific procedures. Well-run financial institutions have a compliance program in place that includes standard operating procedures and one or more employees dedicated to complying with the Bank Secrecy Act and other federal regulations. Those compliance officers will need to update standard operating procedures to include additional scrutiny for marijuana businesses and regular account updates. It is imperative for financial institutions to make sure those procedures are well-tailored so they are sufficient to meet the FinCEN guidelines while not being so cost-prohibitive that the bank or credit union will lose money on cannabis clients.

Most financial institutions in Washington and Colorado and Oregon that operate in the cannabis industry do so with little fanfare and rely on customer networking to get business. That will likely be the case in California as well, so there may not be much fanfare from banks and credit unions that are getting into the market. But we are confident that very at least some California banks and credit unions will start taking on cannabis accounts in the coming months.

Cannabis scienceLast week we dropped some science about the current state of cannabis research with a focus on a recent study reviewing all research to date on the positive and negative health effects of cannabis. The “overwhelming takeaway” was that additional research was needed.

We wanted to highlight another study from early April that was published in the Journal of Psychopharmacology. The study doubles down on the potential political ramifications of cutting-edge cannabis research. The team, inspired by earlier studies suggesting that medical cannabis leads to a reduction in opioid overdose deaths, decided to determine whether cannabis’ “substitution effect” applies to other medications. Among New England dispensary members, the results of medical cannabis are stark:

  • 76.7% of respondents reported that they reduced their opioid use since starting medical cannabis.
  • 71.8% reported reductions in anti-anxiety medications.
  • 66.7% reported reductions in migraine medications.
  • 65.2% reported reductions in sleep medications.
  • 42% reported reductions in alcohol consumption.
  • 37.6% reported reductions in antidepressants.

These results reconfirm that medical cannabis reduces opioid use, and now we also know that medical cannabis reduces use of alcohol, antidepressants, and a field of other medications. The team is quick to caution that these results were based on self-reporting and then repeated a far too common refrain, “Additional research is needed.”

Perhaps we could expect to see that research soon, if only the current political climate were not so vehemently anti-science. President Trump recently said: “Drug overdoses are now the leading cause of accidental death in our country. And opioid overdose deaths have nearly quadrupled since 1999 . . . Our Attorney General, Jeff Sessions, is working very hard on this problem. It takes a lot of his time, because this causes so much of the problem that you have to solve – that problem.”

Roughly translated, the President and his staff have recognized that opioid abuse has reached epidemic proportions that require immediate action. The science clearly gives us one piece of the solution: decriminalize cannabis. But with an administration willing to make the insultingly anti-scientific claim that cannabis is “only slight less awful” than heroin, we the people (and Trump’s supporters in particular) will likely be left waiting for a rational administration.

 

Marijuana lawIf you hadn’t noticed, the federal government was set to shut down on Friday due to lack of funding. Thankfully, our House and Senate representatives reached a tentative deal yesterday morning to avoid that. Better still, the budget deal extends the Rohrbacher-Farr Amendment provisions, which prohibit the U.S. Department of Justice from spending money to interfere with implementation of state medical marijuana laws. The legislation should pass later this week.

The new medical cannabis rider will likely be referred to as the Rohrbacher-Blumenauer amendment, or something similar, as Earl Blumenauer (D.-OR) has replaced outgoing house member Sam Farr as a co-sponsor of the rider. Here is the rider’s current proposed language:

SEC. 537. None of the funds made available in this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

By our count, that’s 44 states, plus D.C., Guam and Puerto Rico. For some reason, at least two states with new medical cannabis laws are left out. Those states include North Dakota, where voters approved a medical marijuana ballot initiative in November, and Indiana, whose governor signed a restrictive CBD medical cannabis bill into law late last week. Hopefully these omissions were just an oversight and North Dakota and Indiana make the final cut.

The FY2017 budget deal also extends protection of state industrial hemp programs from federal interference, and prevents Washington, D.C. from spending its own money to tax and regulate marijuana sales. An overview prepared by House Democratic Appropriations Committee members noted that the bill does not, however, include language protecting banks from penalties for working with state-legal marijuana businesses, which some in Congress had pushed for.

Like everything else in the spending bill, Section 537 is not a permanent solution of any sort – it merely kicks the can down the road until September 30, when FY2017 ends. Section 537 also is not the long-term fix medical (and adult use) cannabis businesses need, especially in the era of Jeff Sessions and a brutal executive branch.

Looking ahead, we do know from conversations with Rep. Blumenauer’s office that FY2018 legislation being drafted by lawmakers includes extension of the helpful Section 537 language. We also know that most of President Trump’s large proposed cuts take place in the FY2018 budget, and that his cuts do not include Rohrbacher-Blumenauer– at least for now.

But this is where it gets tricky. If medical marijuana safeguards are not present in the FY2018 House proposal, supporters will have to push for amendment on the House floor or in the Senate Appropriations Committee. That’s a tough slog, because House leadership has begun to restrict the scope of policy riders allowed to come to the floor. Last summer, for example, proposed amendments on banking services for marijuana businesses, and on Washington, D.C.’s ability to spend money regulating cannabis, were blocked from floor consideration altogether.

Note that over the past few years, Rohrbacher-Farr has withstood DOJ challenges and garnered a significant uptick in support. In 2014, the measure was approved in the House by a relatively narrow vote of 219-189. In 2015, the approval margin grew to 242-186. Since the last House floor vote, several more states have enacted medical or adult use cannabis laws, and a number of prohibitionists who opposed those measures have been replaced with freshman supporters.

Today, cannabis reformers are confident that if they can get an FY2018 amendment to a House vote, it will easily pass again. It also appears likely that advocates have the votes to pass a broader amendment protecting all state marijuana laws from federal interference — including those allowing recreational use. A measure along those lines came just nine votes short of passing on the House floor in 2015.

Why Congress won’t just change the law, rather than restricting its enforcement, is a question for another day. For now, though, medical marijuana businesses can breathe a bit more easily, at least until September 30.

Donald Trump is expected to announce Representative Tom Marino (R-Pa.) as our country’s next director of the Office of National Drug Control Policy, colloquially known as the US drug czar. As drug czar, Marino would evaluate and coordinate domestic and international our country’s anti-drug efforts and advise the President on U.S. anti-drug efforts. The whole drug czar “thing” is bad news and Marino himself is even worse. He is “just another anti-marijuana, pro-pharma” extremist.

Tom_Marino_Official_Portrait,_112th_Congress

Marino began his professional career as a prosecutor who sought to do his part on in the “war on drugs” by prosecuting drug offenders. Since 2010, Marino has served in the U.S. House of Representatives and consistently opposed measures to reform federal cannabis law.

Marino voted against the Rohrabacher-Farr amendment which prohibits the Department of Justice from using federal funds to prevent states from implementing medical marijuana laws. He also voted against a measure allowing Veterans Affairs doctors to recommend medical cannabis to their patients and he opposed measures to ease federal restrictions on hemp and CBD. When asked about marijuana legalization, Marino stated he would consider legalizing cannabis only “if we had a really in depth-medical scientific study,” and if medical cannabis were available only in “pill form.” In other words, if it has anything to do with liberalizing our cannabis laws, Marino is against it.

 

According to the “Office of National Drug Control Policy Reauthorization Act of 1998” the drug czar “shall ensure that no Federal funds … shall be expended for any study or contract relating to the legalization (for a medical use or any other use) of a substance listed in schedule I” of the Controlled Substances Act and “take such actions as necessary to oppose any attempt to legalize the use of a substance” listed in Schedule I. Cannabis is still a Schedule I substance and therefore subject to this blanket prohibition on legalization and research.

Marino is no friend of cannabis legalization and Trump’s having has tapped someone with such outdated views is concerning. But even more concerning is the mandate that any drug czar must oppose all marijuana legalization efforts. More than half the states  have legalized medical marijuana and eight states have legalized recreational cannabis, with more to come. With legalization, the evidence that it works better than prohibition is piling up. This country’s director of drug policy should have the discretion to consider this evidence and draw his her own conclusions on cannabis prohibition. As things now stand, the role of our drug czar is not so much to craft policies based on changing realities, but to ensure that our drug policies remain stuck in another era. This is bad policy and it makes no sense and it needs to change.

Earlier this year, the Trump administration considered cutting the Office of National Drug Control Policy entirely. Unfortunately, the President’s tapping Marino as the next drug czar indicates he is now heading in a very different direction. Who needs a drug czar anyway? Trump had it right initially. This office should be eliminated and fast.

Cannabis credit cards

Because of federal prohibition, marijuana businesses have limited access to financial services. Distributing cannabis is a federal crime and proceeds from cannabis sales trigger anti-money laundering laws. The Bank Secrecy Act requires banks combat fraud and money laundering and protect against criminal activity. This Act mandates banks investigate their customers for criminal activity and it prohibits banks from doing business with bad actors. Additional banking laws also require national banks file Suspicious Activity Reports (SARs) with the federal government when they know or suspect an account holder is engaged in or trying to cover up illegal activity.

Yesterday, I participated on an educational panel entitled, “The Marijuana Industry & Financial Services: What’s Happening? What’s in Store?” at the American Bar Associations’ Business Law Section Meeting in New Orleans. This panel was co-sponsored by the ABA’s Credit Card Committee, highlighting how important the banking and financial services issues are to both the cannabis industry and to the financial services industry. Federal cannabis prohibition has been hugely costly to the cannabis industry and its customers and to the financial services industry as well, not to mention the massive public safety issues engendered by having to work in an all-cash business.

Federal banking laws kept most banks and credit unions from knowingly working with marijuana businesses until February 2014, when the Financial Crimes Enforcement Network (FinCEN) and the Department of Treasury issued guidelines for financial institutions that want to bank cannabis businesses. These guidelines require banks and credit unions vet their marijuana business customers and regularly report their marijuana customers’ activities to the federal government to ensure compliance with the 2013 Cole Memo.

Though the FinCEN guidelines address getting a bank account (and thoughseveral U.S. Senators have asked for increased guidance from FinCEN regarding banking marijuana ancillary businesses), there are no federal guidelines regarding credit card usage in the cannabis industry, and so none of the big credit card networks (Visa, MasterCard, American Express, Discover) allow their cards to be used for buying or selling of cannabis. This means that even if a marijuana retailer manages to open and maintain a bank account, it likely has no way to accept credit card payments and cannabis customers still typically pay in cash to purchase marijuana products. Even the FinCEN guidelines don’t completely alleviate the cash issue as a result.

These cash payment issues have forced marijuana retailers to employ alternative payment processing methods, such as cashless ATMs, third party payment programs, and bitcoin. These non-bank financial services address many of the problems that arise from running a cash-only business, but they also come with their own set of challenges. Just by way of one example, my law firm’s cannabis business lawyers have handled many cases where banks stopped paying third party payment processors,  resulting in our clients (the cannabis businesses, themselves) not getting paid. No alternative payment service matches traditional credit cards on safety, costs or ease of use. Unless and until cannabis becomes federally legal, cannabis businesses and their customers will still need to employ credit card workarounds (for better or worse).

For more on cannabis and the banking industry, check out our following posts on this topic:

 

Is CBD legalThe DEA announced a new Final Rule late last year regarding “marihuana extracts” that left many in the industrial hemp and CBD industries concerned. The new rule created a separate classification for “marihuana extracts,” which it broadly defined as “any extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis.” This definition facially includes hemp-based goods running the gamut from hemp rope sandals to hemp lotion to therapeutic CBD oils, but critics have countered that such a definition exceeds the prohibition of “marihuana” created by the Controlled Substances Act. Some fear the DEA’s broadening of what constitutes marijuana extracts foreshadows a more aggressive federal enforcement posture that could devastate hemp-related companies the DEA now (and always) regards as criminal enterprises.

The DEA’s rule will soon be put to a court test as The Hemp Industries Association, Centuria Natural Foods, Inc. and RMH Holdings, Inc. last week filed a challenge to the DEA rule in the federal Ninth Circuit Court of Appeals. Whatever the result, this court’s ruling will likely significantly impact the future of the hemp-related industry and implicate key components of the burgeoning cannabis reform movement as well.

The core of the plaintiffs’ argument is that the DEA rule conflates “marihuana”—the substance prohibited by the Controlled Substances Act—with all cannabinoids and all parts of the cannabis plant, which it lumps into “marihuana extracts.” Plaintiffs point to legislative history that in 1937 Congress chose to use the term “marihuana” because at the time there was no meaningful and scientifically valid way to distinguish between the plant itself and the constituent parts Congress sought to outlaw. Plaintiffs also point to the 2014 Farm Bill, which permitted industrial hemp production so long as the plants remain below a threshold THC level, and the Consolidated Appropriations Act, which prohibited using federal funds to enforce the Controlled Substances Act against certain cannabis business. Plaintiffs contend that these legislative moves, along with greater scientific understanding of the cannabis plant and the ability to isolate specific components of the cannabis plant, all indicate Congress’s intent to carve out space for these businesses to operate legally. Plaintiffs also contend that the Ninth Circuit itself, in a 2004 case, recognized that not all naturally-occurring cannabinoids are per se prohibited by the Controlled Substances Act.

Plaintiffs contend the DEA exceeded its scheduling and enforcement authority under the Controlled Substances Act by undertaking a “de facto scheduling” of substances not contemplated by the Controlled Substances Act and that Congress views as distinct from marijuana as a “drug.” Plaintiffs essentially allege that with this rule the DEA is attempting to enforce a law Congress never enacted. This is a common challenge to expansive administrative rulemakings, but its application to any particular situation can be hard to predict and it usually hinges on the court’s reading of the underlying statute and the level of deference the agency’s action deserves.

We will keep an eye out as this case progresses and pass along any important updates as they come in.