The U.S. Department of Justice (DOJ) recently announced a shift in its policies for enforcing federal marijuana laws in states where marijuana has been decriminalized or legalized. Notwithstanding this shift, however, the DOJ is unlikely to begin prosecuting marijuana growers and distributors who are operating in compliance with state law. So where will the feds go now? The DOJ will likely prosecute the most egregious violators of state law which means that the stakes are higher for those individuals and companies. The worst offenders of the state regimes now face not only state penalties, but the risk of enforcement by federal authorities, who have more investigative resources and can seek much more extensive and severe penalties.
DOJ Policies on Marijuana Enforcement
On August 29, 2013, then DOJ Deputy Attorney General James Cole issued a memorandum to all U.S. Attorneys (the "Cole Memo") in response to legislation in states that had legalized the recreational use of marijuana—at the time Colorado and Washington. Other states had legalized marijuana for medicinal use, but these two states were the first to take this further step. These states' legalization of the production, sale, and use of recreational marijuana had created a conflict between the states' laws and the federal law that still deemed the substance illegal. The Cole Memo provided some certainty to marijuana-related businesses by directing federal law enforcement to pursue prosecutions only if one or more of a number of factors were present: sales to minors; violence; interstate sales; sales by gangs; or sales as a cover for other illegal activity. Even if conduct violated state law, it could not be prosecuted federally unless one of these aggravating factors were present. Otherwise, federal authorities were instructed to leave enforcement to state law enforcement.
On January 3, 2018, Attorney General Jeff Sessions rescinded the Cole Memo, along with a number of other previously released DOJ guidance memoranda regarding federal prosecutions of marijuana-related businesses. Notwithstanding these actions, the Rohrabacher-Blumenauer Amendment, which has been part of the federal budget since 2014, still prohibits the DOJ from spending any funds to interfere with the implementation of state medical marijuana laws. While this amendment limits what DOJ can do with appropriated funds, it does not apply to non-appropriated funds, such as those in its substantial asset forfeiture fund. In addition, how this amendment would apply to a company or individuals involved in both legalized medicinal and recreational use, distribution, and sale is unclear. Thus, this amendment may not necessarily be as limiting as expected. And notwithstanding the amendment, the revocation of the Cole Memo has stoked some doctors' anxieties about prescribing medical marijuana.
Risks to Individuals and Businesses in the Marijuana Industry Under the New DOJ Policy
The withdrawal of the Cole Memo gives federal authorities the authority to prosecute individuals and businesses that grow, distribute, and sell marijuana for recreational purposes, and those who assist them or manage their money in states that have legalized those activities. Under the Cole Memo, federal authorities were instructed to leave such prosecutions to state authorities unless one of the aggravators mentioned above were present. Fortunately, federal law enforcement agencies have limited resources and are unlikely to pursue every technical violation. Federal authorities will most likely prosecute the types of cases brought prior to the Cole Memo, namely actions against the most egregious violators of the state regulatory regimes. The defendants in these cases not only grew or distributed marijuana, which remains a violation of federal law, but flouted the state regulatory regime put in place when the state legalized marijuana. For example, in 2011, federal authorities cracked down on marijuana dispensaries that operated, not as medicinal marijuana shops—legal under state law, but technically illegal under federal law—but as full-on recreational marijuana outlets in open violation of the state laws and regulations. Such federal prosecutions involved both stiffer traditional criminal penalties (jail time) than state actions and other penalties that are often unavailable under state law, such as asset forfeiture (confiscation of property).
Federal officials have already forecast that such prosecutions are on the horizon. Recently, an Oregon State University professor reported that the state of Oregon is producing three times more marijuana than could legally be consumed. Billy Williams, the U.S. Attorney for the District of Oregon, told a group of law enforcement and cannabis industry representatives that federal authorities "are going to do something about" the black market diversion that the production numbers reflected.
- Federal Criminal Prosecution and Asset Forfeiture
Marijuana is still considered a controlled dangerous substance under federal law. Possession and distribution of it carries hefty criminal penalties on a sliding scale, from a 5-year maximum (less than 50 kg) up to a maximum of life and a mandatory minimum of 10 years (more than 1000 kg). 21 U.S.C § 841(b). These penalties are far more severe than those of most state drug laws. For example, in 2014, the owner of a marijuana dispensary in North Hollywood, California who earned $194,000 a month shipping large quantities of marijuana to other states—including in hollowed-out computers—was sentenced to 17½ years in prison after his conviction at trial in federal court. While this prosecution could have been brought under the Cole Memo— because it involved the interstate distribution of marijuana—U.S. Attorney's offices may well have more of an appetite to bring such cases now that the Cole Memo has been revoked and the atmosphere has changed.
In addition, engaging in monetary transactions involving the proceeds of marijuana-related businesses may be considered money laundering. Federal prosecutors typically bring two different types of marijuana-related money laundering charges: (i) charges for conducting a financial transaction involving $10,000 or more derived from a marijuana-related business (18 U.S.C. § 1957); or (ii) charges for engaging in a financial transaction with the proceeds of a marijuana-related business with the intent to assist the business or conceal that the proceeds are from marijuana sales (18 U.S.C. § 1956). The penalties for money laundering include fines and imprisonment that vary in severity, depending on multiple factors related to the offense. Almost all criminal indictments include a forfeiture provision that seeks to take anything involved in the offense. 21 U.S.C. § 841; 853. State regimes typically have far less robust ancillary financial charges and penalties.
- Standalone Civil Asset Forfeiture
Even if the DOJ does not elect to prosecute a criminal case, it may choose to take ownership of—a legal process called "forfeiture"—a marijuana-related business's property and assets as a lesser penalty for a less egregious violation. Federal civil laws allow the federal government, if it satisfies an evidentiary burden lower than what is required in a criminal case, to forfeit any real estate or personal property (including equipment, cash, cars, etc.) that constitutes proceeds of marijuana sales or that was used to facilitate the marijuana-related activity. See 21 U.S.C. § 881.
Instead of charging an individual, the government brings these cases against the property itself, which becomes the named defendant. For example, in a pre-Cole Memo case that was later dismissed after the memo was issued, the federal government tried to forfeit a commercial building from a landlord who rented space to a marijuana dispensary in United States v. Real Property Located at 2601 West Ball Road, Anaheim, California. To contest these types of cases an individual must intervene by timely filing a "claim." See 18 U.S.C. § 983(a)(4); Rule G(5) of the Supplemental Rules for Certain Admiralty and Maritime Claims and Asset Forfeiture Actions.
In another example from the 2011 federal crackdown in California, federal authorities filed civil actions seeking the forfeiture of real property used by three marijuana dispensaries. Two of the businesses settled with the government, which allowed the owners to retain their properties, provided they ended all marijuana-related business. One of two businesses also had to agree to the forfeiture of $136,686 seized from the business's bank account. The third business walked away and allowed the government take its property.
- Warning Letters: Close or Else
Another less severe enforcement action that DOJ could resurrect for a less egregious violator is its practice of sending a warning letter to pressure a marijuana business to close. As part of their pre-Cole Memo operations in California, federal authorities sent warning letters to 38 marijuana dispensaries stating that the stores had two weeks to "take the necessary steps to discontinue the sale and/or distribution of marijuana" or face criminal prosecution and asset seizures. The DOJ sent these letters to marijuana shops whose operations flouted state law, but that did not involve any of the aggravating factors that were prerequisites for federal prosecution according to the Cole Memo. Accordingly, the California U.S. Attorneys' offices ceased sending such letters upon the issuance of the Cole Memo. Now that the Cole Memo has been revoked, federal prosecutors might resume this practice against marijuana businesses that are in blatant violation of state law, but whose conduct is not egregious enough to warrant criminal prosecution.
- Risks to Third Parties
Federal authorities could also use marijuana laws to take action against third parties that facilitate or assist marijuana-related businesses. These third parties could include anyone from a landlord or software provider to a bank, credit union, or other financial institution.
Landlords: In the past, the federal government has filed actions to forfeit real estate from landlords renting space to marijuana businesses. Federal prosecutors allege in these cases that the landlord (usually not involved in the business) knew that there was a marijuana-related business openly operating on its premises. For example, in California federal authorities sought to forfeit the property of a landlord who rented his property to two medical marijuana dispensaries. After more than a year of litigation and the issuance of the Cole Memo, the government dismissed its case and let the landlord keep the property. With the withdrawal of the Cole Memo the government might not give up in future cases.
Financial Institutions: Banks and financial services companies that hold and move money (or virtual currency or e-money) for marijuana businesses could also face increased exposure. Again, federal authorities are likely to prosecute only the worst offenders, but there is a risk that an unwary service provider's property could get wrapped up in a prosecution of a customer that is flouting a state marijuana regulatory regime. Once the government identifies transactions involving the proceeds of marijuana offenses—a marijuana offense constitutes a predicate for money laundering known as a "specified unlawful activity"—it can charge money laundering violations and seek to put third parties conducting those transactions in jail or forfeit (under either the criminal or civil law) the third parties' property. Particularly concerning is that such a forfeiture action can include both the money directly traced to the marijuana-related activity and other "clean" money that was commingled or part of a transaction intended to conceal or promote the marijuana-related activity. Thus, if a dollar directly traceable to a marijuana sale is put into a general bank account with millions of other dollars, all of the funds could conceivably be forfeitable.
The Department of Treasury Financial Crimes Enforcement Network (FINCEN) has issued guidance to banks and financial services on how to comply with their federal "anti-money laundering" legal obligations when servicing marijuana business clients. These obligations include, among others, "know your customer," suspicious activity reporting, and currency transaction reporting obligations. See 31 U.S.C. §§ 5318; 5321; 5322. The DOJ had previously issued a separate memo related to the Cole Memo addressing anti-money laundering compliance obligations and the liability of financial institutions. Generally, that memo stated that prosecutors should take action against a financial institution only if the institution knowingly offered services to a marijuana businesses whose conduct involved one of the aggravators listed in the Cole Memo. Attorney General Sessions withdrew this DOJ safe harbor. Although U.S. Treasury Secretary Steven Mnuchin recently testified at a hearing before the U.S. House of Representatives Financial Services Committee that the Treasury Department was working with the DOJ to implement a regime that will allow marijuana businesses to safely and legally deposit their cash in a bank, to date no such solution has been put in place. Thus, as it stands, while one side of the federal government, FINCEN, has provided some comfort that banks and money services businesses will not face anti-money laundering charges for servicing marijuana businesses, revocation of the Cole Memo increases the risk that such a company, or its assets, could be caught up in a DOJ prosecution of a customer who is egregiously violating state marijuana law.
What You Can Do to Mitigate Your Risks
Given the uncertainty in the law and the severe potential penalties, what should you consider?
- Ensure compliance with state law or federal guidelines. It may be less likely that the DOJ would bring a case against a business in full compliance with state law. Most pre-Cole Memo cases involved marijuana dispensaries that flouted their state's marijuana regulatory regime. Likewise, to the extent there are federal publications, such as the FINCEN guidance described above, compliance with those directives would also lessen the likelihood of a federal enforcement action.
- Conduct compliance audits: A robust compliance management system is not a guarantee of avoiding federal prosecution, but it may help mitigate the severity of the sanction the government seeks.
- Deploy a rigorous anti-money laundering compliance program. Financial services companies working with a marijuana-related business should be sure to maintain a robust anti-money laundering program. Efforts to identify, report, and weed out problematic customers may mitigate a business's exposure should federal law enforcement come knocking.
- When a problem arises, retain counsel with expertise as early as possible. Any business responding to a warning letter, criminal charge, or civil asset forfeiture action must ensure that its response is timely and comprehensive. Asset forfeiture and money laundering laws are complicated and involve a byzantine statutory scheme that includes numerous deadlines and draconian consequences for noncompliance.