Justice Department could help marijuana industry via Cole Memo 2.0 – or hurt reform

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Image of the exterior of the U.S. Department of Justice headquarters

The U.S. Department of Justice headquarters in Washington DC.

As federal marijuana reform inches forward in a Congress paralyzed by partisan gridlock, more immediate “progress” might have to come from the Biden administration.

U.S. Attorney General Merrick Garland’s Department of Justice might address the thorny issue of cannabis banking when his office revisits its approach toward the state-legal but federally prohibited marijuana industry, Washington insiders believe.

A friendly – or at least hands-off – Justice Department would be welcome news to marijuana businesses frustrated and exhausted with inaction in Congress, where bipartisan reform bills such as the SAFE Banking Act remain stalled.

However, a policy memo by itself, much like the landmark 2013 “Cole Memo,” is unlikely to convince more banks to offer basic services to marijuana businesses, several observers said.

And such a document – dubbed by some insiders as a Cole Memo 2.0 – could even backfire.

Pro-cannabis GOP lawmakers and the lobbyists attempting to win necessary conservative support for marijuana reform in Congress fear that unilateral action – though consistent with President Joe Biden’s MJ rescheduling review and low-level federal pardons – could turn off Congressional Republicans.

That, in turn, would make it more difficult to pass major reform legislation such as cannabis banking and removing marijuana from Schedule 1 of the Controlled Substances Act.

“I’m happy that both Congress and the administration are beginning to look more seriously at the need for federal cannabis reform,” U.S. Rep. Dave Joyce, an Ohio Republican and a lead sponsor of marijuana reform, told MJBizDaily.

“However, it would be most helpful if both branches worked in coordination as opposed to unilaterally.”

He added that lawmakers need “answers from the agencies and the agencies need more direction from” Congress.

Cole Memo 2.0

In 2013, a deputy attorney general in the Obama Justice Department named James Cole released a four-page policy advisory that’s been credited with allowing the state-legal marijuana industry as we know it to exist.

Crafted after voters approved adult-use legalization in Colorado and Washington but before the beginning of retail sales in those markets, the Cole Memo gave U.S. attorneys guidance for deciding how to deal with state-legal marijuana businesses in their districts.

Jeff Sessions, the first attorney general in the Trump Administration, rescinded the Cole Memo in January 2018.

But the Justice Department has not strayed from the memo’s general guidelines.

The Biden administration’s DOJ has been “examining marijuana policy” since at least last year, Garland said during a March 1 congressional oversight hearing.

“Within the department, we are still working on a marijuana policy” that “will be very close to what was done with the Cole Memorandum,” Garland told U.S. Sen. Cory Booker, a New Jersey Democrat who is a leading progressive voice for marijuana legalization in Washington DC.

Neither Booker nor the DOJ responded to MJBizDaily requests for comment.

It’s unclear when the DOJ might reevaluate its stance on the continuing conflict between federal drug laws and the legal medical and adult-use marijuana businesses operating in 39 states.

But several sources said they expect the Justice Department to move this year on so-called Cole Memo 2.0.

“We expect to see informal policy guidance in the form of a Cole 2.0 in the very near future here,” said Christian Sederberg, founding partner of Denver-based cannabis law firm Vicente.

The original Cole Memorandum identified eight tenets that state-legal marijuana businesses could follow in order to not become “priorities” for federal prosecution.

These included keeping cannabis away from minors, keeping marijuana sales revenue “from going to criminal enterprises, gangs and cartels” and stopping state-legal MJ from illegally crossing into other states.

At the time, the memo’s impact was profound.

States became confident they could legalize, regulate and tax adult-use marijuana without federal interference.

And entrepreneurs and investors could open and fund state-legal businesses with more clearly defined (and less) risk.

However, much has changed since then.

Friendlier White House

Adult-use marijuana is now legal in 21 states. Sales have begun in 19 of those states.

Companies operating in multiple states are listed on public stock exchanges in Canada and attracting investment from Fortune 500 legacy players such as tobacco giant Altria and garden-supply titan Scotts Miracle-Gro.

States continue to open individual marijuana markets – sales in Missouri began in January, while Maryland could follow this summer – as the DOJ stands by and watches.

Businesses once fearful of federal raids are now considering more complex questions around institutional investment and even exploring interstate commerce.

And at the same time federal drug enforcement seems uninterested in stymieing legal marijuana, a friendlier-than-ever White House is emerging.

In December, President Joe Biden signed a cannabis research bill into law after triggering an administrative review of marijuana’s status under the Controlled Substances Act.

The president also pardoned certain low-level marijuana offenders, and in a near-complete reversal, Biden, the lead sponsor of the 1994 Crime Bill, called the country’s war on marijuana a “failed approach.”

An updated Cole Memo would fit neatly into that pattern.

“The cannabis industry is mindful that now is the time to better describe how the industry works,” said David Mangone, director of policy at the National Cannabis Roundtable, a Washington DC-based lobbying shop.

“I think when the Cole Memo was written, you’d be hard-pressed to find someone in the Justice Department who had contemplated MSOs or companies listing on Canadian exchanges.”

“I would be shocked if the DOJ just reupped the language word for word from the Cole Memo,” Mangone added.

“We’re in a different place now.”

For those reasons, it’s likely that Garland’s directions will do more than merely restate the decade-old Cole Memo’s eight tenets.

And there is existing federal policy that addresses cannabis banking that could easily be rolled into any policy document.

In February 2014, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued its own guidelines for marijuana businesses.

The FinCEN guidelines told banks what “red flags” would trigger “suspicious activity report” filings to federal regulators.

Also in 2014, the DOJ’s Cole released another memo.

While it restated the August 2013 memo’s caveat that it was advisory and not binding, it also gave banks clear directionnoting “it is essential that financial institutions adhere to FinCEN’s guidance.”

The FinCEN guidelines’ provisions inform the SAFE Banking Act that passed the House of Representatives seven times before stalling out in the Senate, most recently in December when Senate leadership blocked the language from inclusion in two larger bills.

Thus, it would be an easy win for the Biden DOJ to fold both into an updated policy document, observers said.

“I think it would definitely be helpful to give even more clarity to banks that are considering” working with cannabis businesses, Vicente’s Sederberg said. “It could help them get around some of the concerns around risk.”

“It definitely would not hurt, and it would help.”

Unsafe behavior

Though some marijuana business interests would welcome a “new Cole Memo,” its long-term value is debatable.

It would not reschedule cannabis, and so it would not fix the marijuana industry’s ongoing headache over Section 280E of the IRS code, which prohibits businesses from deducting typical business expenses on their federal tax returns.

It’s also unlikely such a document would encourage more banks to serve cannabis businesses, according to Washington lobbies for both banks and marijuana interests.

“Banks, being much more risk averse than folks in the cannabis industry – or even state governments – are going to need much more than just a regurgitation of guidance from either (the) Treasury (Department) or DOJ,” said Morgan Fox, political director for NORML.

“They’re going to need to see something in law before they really start getting involved.”

Also, an “activist” Biden Justice Department could fuel more investigations from a GOP-controlled House of Representatives while also giving Republican senators pause if and when SAFE Banking is again introduced in the Senate.

It could also create what would amount to a false dawn.

Andrew Freedman, the executive director of the Coalition for Cannabis Policy, Education, and Regulation – a Washington DC-based lobby whose members include cannabis-involved liquor and tobacco conglomerates – called a new Cole Memo “a double-edged sword” that “could do more harm than good.”

It’s possible that some cannabis business interests overstated to their investors or to other interests when federal legalization might be coming.

For them, a DOJ memo might offer brief cover, Freedman said – but only in the short term.

“This is ultimately now just a question for Congress,” he said. “Everything else we do around the rescheduling debate just gives a lot of false hope.

“No matter what, that’s going to be a long haul.

“And I think things that detract from the sense of urgency that Congress has to act is not helpful.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.