Post-Election Analysis of the Legalization of Marijuana: Where Do We Go From Here? Presenters:

Oren Bitan, Buchalter Cheryl Lott, Buchalter Rebecca Stamey-White, Hinman & Carmichael, LLP

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

November 10, 2016

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Prop 64 • Passed with 56% of the votes. • Opposition from current cannabis growers, who fear that big business will monopolize the trade • In 2023, Prop 64 will allow Type 5 license to large corporations, who will be well positioned to comply with increased regulations included in Prop. 64. • The legalization of recreational cannabis will likely bring in $1 billion in tax revenue to California • Legalization will also more than double marijuana sales within the state to a projected $6.46 billion in 2020 from $2.76 billion in medical marijuana sales in 2015, according to cannabis market researcher New Frontier

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Prop 64 Proposition 64 legalizes the recreational use of marijuana in California and allows the state to issue licenses to those who grow, transport and sell cannabis. Marijuana is an illegal substance under federal law, which will not change. Legal experts believe the California initiative will take effect despite the conflict in law. What does Proposition 64 do? The law allows Californians to possess, transport and use up to an ounce of marijuana for recreational purposes, and allows people to grow as many as six plants. The measure also imposes a 15% tax on retail sales of the drug. How can Proposition 64 allow marijuana use when it is listed by the federal government as an illegal drug in the same category as heroin and LSD? States have the power to decide that they will not make it a state crime to grow, transport and use small amounts of marijuana. The federal government retains the authority to enforce federal laws in California, but has notified states it is not a priority to take enforcement actions in such cases, especially in states that adopt strict rules. “The federal Controlled Substances Act makes it a federal crime to possess any marijuana, but the United States government does not prosecute possession of small amounts of marijuana,” said Erwin Chemerinsky, dean of the UC Irvine School of Law. “It’s a value decision that it’s not worth law enforcement resources to do so.” This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Prop 64 Could federal authorities enforce marijuana laws against large growing operations and dispensaries? Theoretically, yes. But federal officials have said the government does not plan to enforce many marijuana laws in states that have legalized recreational use of marijuana but with robust regulations to avoid abuses, including marijuana being sold to minors. Proposition 64 has similar restrictions. What is Congress’ position on enforcing marijuana laws in the states? A bipartisan effort in Congress has attached a rider to the budget prohibiting the Drug Enforcement Agency from using federal funds for enforcement actions against marijuana operations that comply with its state's medical marijuana laws. What other assurances do states have that federal authorities will not enforce marijuana laws in states that legalize cannabis? In 2009 and again in 2013, the U.S. Department of Justice issued guidelines to federal prosecutors that said their priority should include eight significant issues raised by drugs, including the operation of drug cartels, narcotics activity leading to violence and preventing drugs from being provided to minors. Lesser priorities, wrote Deputy Atty. Gen. James M. Cole in 2013, should be left to enforcement by the state.

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Prop 64 Does that mean there is no chance for enforcement? No. If California fails to enforce its restrictions on marijuana being sold to minors or pot trafficked to other states, federal authorities could step in with enforcement. How long will that federal policy of non-enforcement apply to California? It remains to be seen what sort of priorities President-Elect Trump will have with regard to federal enforcement of the Controlled Substances Act. What is President-Elect Trump’s position on legalizing marijuana? President-Elect Trump has said he is in favor of permitting marijuana use for medical purposes and that he supports allowing states to decide whether they will legalize adult recreational use. Banks are federally regulated, so will they accept business from marijuana firms? One significant problem in states that have legalized marijuana is that banks have generally refused to handle the money generated because the drug is still illegal on the federal level. But the banks usually cut off services after routine audits determine money is coming from drug sales. Lt. Gov. Gavin Newsom said pressure will build on federal officials to work out a solution to the banking problem. This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Prop 64 Broadcast television and radio stations are regulated by the Federal Communications Commission, so how will that affect the ability of marijuana businesses to advertise over the airwaves? Because of federal regulation, television and radio stations in other states where cannabis is legal have generally not accepted marijuana ads, and their attorneys have advised them not to. Proposition 64 includes a provision restricting TV and radio ads so they are not targeted to minors, but that was only included in case federal law one day changes. When does it take effect and when can Californians legally buy marijuana for recreational use? The law allows Californians to possess and use up to an ounce of marijuana on the next day, Nov. 9. However, the state would have until Jan. 1, 2018 to come up with a system for licensing those who would grow, transport and sell marijuana for recreational use. Supporters say a change in the law could allow temporary licenses before then but even then it would not likely be until mid-2017 that such sales could begin.

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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FinCEN Memo re Marijuana Business Banking Issued on February 14, 2014 Subject: BSA Expectations Regarding Marijuana-Related Businesses “Cole Memo” Priorities:  Preventing the distribution of marijuana to minors;  Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;  Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;  Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;  Preventing violence and the use of firearms in the cultivation and distribution of marijuana;  Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;  Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and  Preventing marijuana possession or use on federal property. This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Banking Diligence Required By Financial Institutions Pursuant to 2014 FinCEN Memo re Marijuana Business Banking “A financial institution should conduct customer due diligence that includes:       

verifying with the appropriate state authorities whether the business is duly licensed and registered; reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; requesting from state licensing and enforcement authorities available information about the business and related parties; developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); ongoing monitoring of publicly available sources for adverse information about the business and related parties; ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.”

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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SAR Requirements for Marijuana-Related Businesses “The obligation to file a SAR is unaffected by any state law that legalizes marijuanarelated activity.” “A financial institution is required to file a SAR if, consistent with FinCEN regulations, the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution:    

involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; is designed to evade regulations promulgated under the BSA, or lacks a business or apparent lawful purpose. Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity.”

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Types of SAR Filings 

“Marijuana Limited” SAR Filing (reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law);

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“Marijuana Priority” SAR Filing (reasonably believes, based on its customer due diligence, implicates one of the Cole Memo priorities or violates state law); and

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“Marijuana Termination” SAR Filing (used if financial institution terminates relationship with marijuana-related customer in order to maintain compliance with anti-money laundering program).

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Red Flags to Distinguish Priority SARs  A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law;  The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law.  The business is unable to demonstrate the legitimate source of significant outside investments.  A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.  Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.  The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuanarelated laws or regulations.  A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Civil Forfeiture, Risks of Tenant Medicinal Marijuana Facilities 1. “All real property, including any right title, and interest . . . which is used . . . in any manner or part to commit, or to facilitate the commission of [violation of the CSA] shall be subject to forfeiture.” 28 U.S.C. § 881(a)(7). Lienholders are “owners” of real property. 2. Innocent owner defense under Civil Asset Forfeiture Reform Act has two key elements: Owner before illegal conduct giving rise to forfeiture occurs is an “innocent owner” if • was not aware of illegal conduct giving rise to forfeiture; or • upon learning of such conduct, did all that reasonably could be expected under the circumstances to terminate the illegal use of property. Owner who acquires property after illegal conduct occurs is “innocent owner” if at time of acquisition it • was a bona fide purchaser or seller for value; and • did not know and was reasonably without cause to believe that the property was subject to forfeiture. This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Steps for Lenders to Take to Mitigate Against the Risk of Forfeiture 1. Review loan documents for “violation of laws,” recourse carveouts and Borrower liability for tenant illegal uses. 2. Underwriting and due diligence to address potentially illegal uses. • Appraisal, description of tenants • Site inspections • Rent roll and property financials 3. Post-closing, asset management procedures to address potentially illegal uses.

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City •

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Colorado chartered Denver-based Fourth Corner formed to be a credit union for the marijuana industry and requested a master account from the Federal Reserve Bank of Kansas City, the regional bank for the board of governors of the Federal Reserve System. The account allows banks to transact business. The Federal Reserve turned down the application. The federal justice guidelines were issued in February 2014 through the Financial Criminal Enforcement Network, which was in turn based on the 2013 “Cole” memo outlining the Justice Department’s priorities regarding marijuana. Fourth Corner sued and sought an injunction to force the Fed to issue a master account. The District Court denied the injunction and Fourth Corner appealed. Oral Argument is set for November 16, 2016 in the Tenth Circuit Court of Appeals A separate Fourth Corner lawsuit was filed in federal court in Denver against the National Credit Union Administration, which turned down the credit union’s application for share deposit insurance, a requirement for a master account. NCUA said it turned down Fourth Corner on grounds including concerns over its ability to mitigate the risk of banking only marijuana businesses.

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.

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