Marijuana questions abound after AG rescinds guidance

Written on Jan 11, 2018

By Justin P. Breidenbach, MAcc, CPA, CFE

Justin P. Breidenbach, CPA, MAcc, CFEChange, uncertainty and conflict. These are common words that I use when discussing and presenting on the state legalized marijuana industry. While Ohio and other states continue to develop legalized marijuana markets, 2018 started off with a message from U.S. Attorney General Jeff Sessions that has created confusion and concern throughout the marijuana industry.

On Jan. 4, the U.S. Department of Justice issued a memo on federal marijuana law enforcement policy and announced the rescission of previous Obama-era guidance documents. In the memo, Sessions directs all U.S. attorneys to enforce the laws enacted by Congress. Based on the passage of the Controlled Substances Act (CSA) in 1970, and marijuana being classified as a Schedule I controlled substance, Congress has generally prohibited the cultivation, distribution and possession of marijuana.

The CSA has created significant obstacles for the state legalized marijuana industry – whether medical or adult-use (also known as recreational) – when it comes to taxation, banking, insurance, general business operations and more. Based on federal regulation and state legalization, the conflicts and complications impact direct plant-touching companies and ancillary services – including CPAs and attorneys.

One of the major guidance documents that was rescinded is referred to by many in the marijuana industry as “The Cole Memo.” The Cole Memo is a document that was issued in 2013 by former U.S. Attorney Cole to address conflict between state legalization and federal prohibition.

Those with direct and indirect links to the state legalized marijuana industry had concerns – and still do – that criminal or civil charges would be brought against them and assets could be seized by the federal government. The Cole Memo indicated that U.S. attorneys and law enforcement should only focus their efforts on state legalized cannabis operations if the operations were thought to be going against the following priorities:

  • Distribution to minors;
  • Funds going to criminal enterprises, gangs, and cartels;
  • Diversion of marijuana from states where legal;
  • Trafficking other illegal controlled substances;
  • Use of firearms along with operations;
  • Intoxicated driving and other adverse public health consequences;
  • Growing marijuana on public lands;
  • Possession or use of marijuana on federal property.

The Cole Memo was viewed as a shift by the federal government. Many thought federal enforcement of cultivation, distribution and possession would be more of a hands-off approach when it came to states that had developed legalized and regulated markets. The Cole Memo led to other government documents, such as the Financial Crimes Enforcement Network providing guidance to clarify the Bank Secrecy Act and expectations for financial institutions seeking to provide services to marijuana-related businesses. While still in short supply today, this led some banks, insurers and other ancillary businesses to enter the market. This allowed the industry to have more opportunity to operate in a manner that many traditional businesses take for granted nowadays.

The DOJ is not able to rescind a protection for the state legalized medical marijuana industry that was passed by Congress in 2014. The Rohrabacher-Farr (now known as Rohrabacher-Blumenauer) amendment has been attached to appropriation bills and has continued to be renewed. It is set to expire Jan. 19 and could be renewed by Congress. The amendment blocks the DOJ from spending funds to interfere with the implementation of medical marijuana laws. It is important to note that this amendment is for medical and not adult-use laws. Eight states and Washington D.C. allow adult-use marijuana, and, most recently, California’s adult-use laws took effect Jan. 1.

Since the release of the DOJ memo on Jan. 4, many government officials from around the United States have reacted defiantly to the announcement. Government leaders in legalized states have issued statements that they are concerned and disappointed, and think the memo will be disruptive to the market and state economies. However, no states have announced a slowdown or stoppage, and it appears to be “business as usual.”

Many investors and professionals in the marijuana industry also have announced their concern that Sessions is removing “protections.” As I tell many CPAs when I present on this topic, there is no line for where protections start or end when it comes to this industry. When announcing the DOJ memo on Jan. 4, a DOJ official stated “The Cole Memo as interpreted created a safe harbor for the marijuana industry to operate in these states… that is inconsistent with what federal law says.”

I foresee the industry continuing to operate as it had before Jan. 4, given the fact that The Cole Memo was guidance and not law. However, this will lead to a continuation of obstacles, as many financial institutions and ancillary service providers may decide to step back from the industry for the time being. This possible contraction of services might lead to interruption of operations for businesses or an increase in the price of services – which is already at a premium compared to non-marijuana businesses.

What does the Jan. 4 DOJ memo mean for the state legalized marijuana industry? Some predict a slowdown for the industry, while others think it is a spark that might lead Congress to discuss legalization at a federal level. In the end, “change, uncertainty and conflict” remain for the marijuana industry as we begin 2018.

Justin P. Breidenbach, MAcc, CPA, CFE, is an assistant professor of accounting at Ohio Wesleyan University in Delaware, Ohio. He conducts research on the business & accounting aspects of the cannabis industry and provides consulting services to individuals and entities in the industry.

Leave a comment