The state-legal marijuana industry in the United States continues to grow – as does support for it. Ten states and Washington, D.C. have legalized recreational adult use and 23 other states allow some form of medical cannabis. According to recent polling, 65% of Americans favor legalization of marijuana. Although interest and investment in state-legal cannabis show no sign of slowing, marijuana still remains classified as a Schedule I drug under the federal Controlled Substance Act (“CSA”).

Because marijuana remains illegal under federal law, banks, credit unions, and other financial institutions that provide even basic banking services to marijuana-related businesses (“MRBs”) face signficant regulatory risk, even if the real-world chances of any criminal enforcement currently appear very remote. For this reason, although some credit unions and state-chartered banks are opening accounts for MRBs, most financial institutions, including the largest banks, remain reluctant to do so.

As we previously blogged, the conflict between state and federal law and the uncertainty regarding how federal laws will be enforced against financial institutions leave most MRBs operating on a cash-only basis. Operating solely as a cash business raises obvious safety and security concerns for both the MRBs and the communities in which they operate, and causes regulatory and tax compliance challenges. Additionally, MRBs may struggle to obtain access to financing needed for operations and expansion.

Recognizing these issues, Congress is taking action — possibly.  We discuss here two proposed cannabis reform efforts, the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”) and the Strengthening the Tenth Amendment through Entrusting States Act (“STATES Act”). If passed, both bills would provide federal protections to financial institutions servicing MRBs, thereby signficantly increasing MRBs’ access to the banking system. Both bills have received broad bipartisan support, along with support from affected industry groups.  Either of these bills, if passed, would represent a major change.

(Please also check out our related podcast on financial services and the cannabis industry, which more generally reviews the many recent developments in this area, including state approaches to banking services, the status of hemp legalization, the interplay between federal and state cannabis law, FinCEN guidance on Bank Secrecy Act expectations, the status of federal regulatory and enforcement activity.)

The SAFE Banking Act: Protection for Financial Institutions

On March 7, 2019, Rep. Ed. Perlmutter (D-CO) reintroduced the SAFE Banking Act in the House of Representatives. The bill has gained wide bipartisan support with 173 house cosponsors. In April, Sen. Jeff Merkley (D-OR) and Cory Gardner (R-CO) reintroduced the companion bill in the Senate with 20 cosponsors. The legislation would provide federal protection for financial institutions that serve state-authorized MRBs. The bill has received support from industry groups including the American Bankers Association and the Credit Union National Association.

If passed, the SAFE Banking Act would prohibit federal banking regulators from:

  • Terminating or limiting the deposit insurance or share insurance of a financial institution for providing financial services to a MRB;
  • Prohibiting or discouraging a financial institution from offering financial services to a MRB;
  • Penalizing a depository institution or a service provider for authorizing, processing, clearing, settling, billing, transferring, reconciling or collecting payments for a MRB for payments made by any means;
  • Recommending, incentivizing, or encouraging a financial institution not to offer financial services to an account holder solely because the account holder is affiliated with a MRB; and
  • Taking any adverse or corrective supervisory action on a loan made to a person because the person either owns a MRB or owns real estate or equipment leased or sold to a MRB.

Most importantly, the bill would remove the risk of liability and forfeiture exposure for depository institutions, service providers and insurers (and their officers, directors, and employees) that provide loans or other services to MRBs. Further, it would require the Federal Financial Institutions Examination Council to develop guidance and examination procedures for financial institutions that serve state-legal MRBs. Such uniform guidance would help ensure that all financial institutions could offer services to the marijuana industry under substantially similar regulatory expectations. The bill also requires a government study regarding diversity in the marijuana industry and a study of the effectiveness of suspicious activity reports for MRBs and service providers.

On March 28, 2019, the House Financial Services Committee voted 45-15 to advance the bill. Although advocates of the bill hoped that the legislation would be put to a chamber vote quickly, the bill instead was referred on April 8, 2019 to the Subcommittee on Crime Terrorism, and Homeland Security.

Although the bill likely would encourage more banks, credit unions, and insurers to do business with state-legal MRBs and third-party service providers, it is not a panacea because it does not make marijuana legal under federal law. Thus, in order to rely on the safe harbor under the SAFE Banking Act, and as part of their initial and ongoing customer due diligence obligations, depository institutions will need to know on an ongoing basis whether their MRB customers are in compliance with applicable state law. This could be difficult, because state marijuana laws are detailed and vary considerably from state to state.

The STATES Act: Federal Decriminalization

The STATES Act was initially proposed in both houses of Congress in 2018 in reaction to former Attorney General Jeff Sessions rescinding the Cole Memo, an Obama-era policy document that largely shielded states that legalized marijuana from federal interference. The purpose of the Act is to formalize that policy as law. In April 2019, Sen. Elizabeth Warren (D-MA) and Sen. Cory Gardner (R-CO) reintroduced the bill in the Senate. The bill has bipartisan sponsorship and is supported by the American Bankers Association.

If passed, the STATES Act would do what the SAFE Banking Act does not – make state law preempt federal law regarding marijuana. Thus, the Act would amend the CSA so that it no longer applies to any person acting in compliance with state or tribal laws relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marijuana. The bill also would amend the definition of marijuana under the CSA to exclude industrial hemp. To address issues regarding MRBs’ access to financial services, the bill provides that compliant transactions are not considered trafficking and that monies related to compliant transactions do not constitute proceeds of unlawful activity — thereby rendering such transactions unable to form the basis for federal criminal money laundering charges, and also changing fundamentally the nature of such transactions from the perspective of an AML program.

Questions of Equity and Social Justice

It is yet to be seen if either bill will pass. The House Financial Services hearing on the SAFE Banking Act made clear that some lawmakers have expressed concerns over social justice and industry access and the historic racial and social inequalities resulting from enforcement of the federal drug laws. Committee Chairwoman Maxine Waters (D-CA) stated that the bill “addresses an urgent public safety concern for legitimate businesses. . . . However, I also consider this bill as a part of a holistic approach toward providing criminal justice reform to those who have been harmed by criminalization of marijuana, and should not by any means be the only bill the House takes up on the important issue of cannabis reform.”

Although there apparently is broad bipartisan and industry support for allowing MRBs access to financial services, it is unclear if these efforts, in the form of the bills discussed here, will be successful. Among other potential obstances, including more traditional law enforcement concerns and certain perceptions that marijuana represents a so-called “gateway” drug leading to the abuse of other drugs, there is a chance that progressive Democrats will not support these bills because they are regarded as not adequately addressing questions of social justice or equity.  Thus, the first step in cannabis reform at the federal level may need to await more expansive criminal and social justice reforms.

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