Everything You Need to Know About Cannabis Banking

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Update 11/30/20: On September 28, 2020 Democrats in the House of Representatives unveiled a new bill to address the ongoing economic impact of the COVID-19 pandemic. The bill cut back on a previous version of the HEROES Act passed by the House earlier this year, but continued support for cannabis banking as a part of its relief to American workers, families, businesses, and schools.

In May, the House approved the HEROES Act at a total $4.4 billion price tag and but the Senate declined to consider the measure at this price. The new version of the bill, at $2.2 billion, was released by Democrats on Monday in an effort to restart failed talks with Republicans in the Senate and the Trump administration.

As of November 29, 2020, this new version of the HEROES Act has not been passed and seems unlikely to be passed before 2021.

CASH RULES EVERYTHING AROUND WEED

Due to federal money laundering statutes, legal cannabis companies are denied access to common services including credit card processing, loans, and deposit and payroll accounts, because despite marijuana being legal in 33 states as of November 2020, the product is still considered a narcotic at the federal level.

These federal laws mean weed businesses have to deal largely in cash, putting them at risk of robbery and other money crimes. The SAFE Act would allow permit financial institutions to provide services to cannabis businesses that operate in compliance with state law.

The SAFE Banking Act was passed by the House in September 2019, which was intended to bring clarity and relief for banks that are interested in serving cannabis related legitimate businesses in states where various levels of cannabis is legal and desperately need clarity on the gap between state and federal law. The SAFE Banking Act is a step in the right direction, but has yet to still be voted on in the Senate.

Background

US Cannabis Legalization Status – 11/29/2020

When the dynamics of the house flipped in the last midterm elections, it became clear that there would be an avenue forward to move something through the banking committee. In March 2019, a preliminary vote of 45–15 showed promising bipartisan support. In addition, there was a changing perception in the U.S. about this issue — 33 states legalized cannabis in some form. The American Bankers Association polled its members and found 99% were supportive of doing something to update federal banking laws to regulate this multi-billion dollar industry, regardless of their stance on legalization. When banks are left out of the picture, there are heightened levels of crime, tax evasion, dangers due to a lack of regulation, etc. The final House vote was 321–103, with 91 Republicans voting in support and 1 Democrat opposing. This is the first time in Congress that there had been any substantial, serious vote on cannabis. This is a testament that whether these businesses can participate in the economic framework is a less divisive question rather than the broader question around the status of the drug. This is one of the fastest ways to address the public policy problems around the issue.

Why would banks hesitate?

For banks, there are simply too many uncertainties. Even though a state may permit and regulate the manufacture, distribution, possession or dispensation of marijuana, the Controlled Substances Act (CSA), in addition to criminalizing these same acts, also punishes those who assist or facilitate the commission of one of these crimes. Bankers understandably are concerned that a prosecutor, litigant or bank regulator might take a harsh view of the provision of banking services to a firm that appears to be in regular violation of the CSA. **This is a classic federalism issue — the Constitution’s handling of a conflict between a federal law and a state law, or one between the laws of several states. ****To date, the U.S. Supreme Court has not been asked to apply federalism principles to the conflict between the CSA and a state law that decriminalizes marijuana.

What does the House bill do?

It is a very narrow bill and not directly related to the use or legalization of marijuana. It tries to address the federal-state conflict for the banking industry. It provides that if a bank is providing services to a business that is engaged in growing or sales of marijuana, and if it is licensed and legal at the state level, then it is considered safe under federal law. These banks won’t be subject to any enforcement action by any regulators and will not liable under federal law. It provides a level of comfort and safe harbor which is important for banks and one of the reasons why so many banks have steered clear from banking these businesses even though they’re legal in state law.

The bill also provides provisions for the non-direct, grey area marijuana related businesses (MRBs) which include the commercial landlords, utility companies, and vendors who might not be in the marijuana business but have clients in the industry. The financial crimes enforcement network, or FinCEN, has classified businesses that have direct contact with the plant as being ‘marijuana related businesses’ but because the way the U.S. anti-money laundering laws are written, any funds that are produced by a criminal activity (i.e. sale or distribution of growing marijuana) would be considered money laundering or illegal proceeds.

Therefore, these peripherally related businesses (landlord, employees, utility companies, investors) who are receiving funds from a marijuana related business were considered to take illegal proceeds. The SAFE act would cleanse all that because the initial transaction’s proceeds would be legal under federal law and not considered money laundering.

The SAFE act focuses on a tailored solution specifically for banks, not the marijuana businesses. By tackling the cash problem — if the act can make that cash legal for bank deposits and provide those basic levels of financial services — then the community is safer with better tax collection, easier regulation at state and federal level with cleaner audits, and overall less criminal elements. Under current law, these businesses do not have access to banks so they operate on an all cash basis which is appealing to criminals and harder to track or use funds.

The House strategy was a successful suspension vote, a speedier process due to a higher majority that is required to pass. This signals to the Senate that the SAFE Banking Act has tremendous bipartisan support. There were also two provisions added to the bill to help Senate passage — operation choke point and additional hemp certainties. Operation Choke Point was an Obama era initiative where certain merchant categories believed to be at high risk for fraud and money laundering (e.g. firearm manufacturers, payday lenders, etc.) were investigated. In this case, these safeguards were added to ensure that banks cannot close bank accounts related to MRB’s which are otherwise legal. The hemp amendment directs federal banking regulators to issue additional guidance connected to financial services for hemp related businesses. The 2018 Farm Bill included hemp but there are continuing challenges for banks to provide financial services to hemp related businesses because it is difficult to distinguish them from illegal cannabis businesses. Regulators have not issued any guidance to banks around this but this bill would force that.

What’s next?

Senate Banking Committee Chairman Mike Crapo (R-Idaho) has signaled that he intends to move the bill through the committee at some point this year but it’s difficult to predict the prospects of this legislation. There is optimism on the hill that it can move through the Senate, as there was willingness across the aisle in the House. There is a broad understanding in DC that this bill is a common sense first step solution to address the situation on ground in 33 states, and the majority of the US population is dealing with these issues — making the community safer, enabling tax collection and allowing for better regulation — while continuing to debate what the national drug policy should look like. This issue transcends past the marijuana industry into the broader economy and business economy. MRB’s banking relationships are being pulled into this divide between state and federal law, and these divides are having serious impacts on a broader sense.

Crapo’s office is working to address some issues that he feels aren’t addressed fully in the SAFE Banking Act, and we hope that he will pick up the House version and add improvements that he feels are necessary for the most comprehensive and appropriate banking solution as possible through the Senate. It will be important to build support from a variety of concerned parties — attorney generals, mayors, state treasurers, banking commissioners, etc. as well from the business community.

Cannabis banking is a bipartisan issue and the SAFE Banking Act would relieve some of the hurdles that financial institutions are facing in regards to the discrepancy between federal and state laws serving marijuana related businesses. There is significant traction and the hill should seize the opportunity. Banks interested in serving customers in the marijuana related business niche have interesting challenges ahead. They will need to think through the specific (and unfamiliar) needs of these customers, and at times, will have to adapt traditional bank services to meet these needs.

References

Agencies Clarify Requirements For Providing Financial Services To Hemp-Related Businesses. Federal Reserve Board. December 03, 2019.

Cawley, Terence. Community Banking and Marijuana Decriminalization. ABA Insurance Services. November 2018.

Chairman Crapo Outlines Concerns with Cannabis Banking Legislation. Senate Banking Committee. December 18, 2019.

Debt Capital will Flow Into Cannabis: Canaccord CEO. Bloomberg Markets P&L Podcast. December 19, 2019.

H.R.1595 — Secure and Fair Enforcement Banking Act of 2019. 116th Congress (2019–2020).

H.R.5485 — Hemp Farming Act of 2018. 115th Congress (2017–2018)

Pe128 Understanding Federal Cannabis Policies. Periodic Effects: Cannabis Business Podcast. December 23, 2019.

Regulators Clear the Air on Hemp Banking. PwC: Our Take: Financial Services Regulatory Update. December 6, 2019.

What the SAFE Banking Act Means for Banks and Cannabis. American Bankers Association Banking Journal. September 26, 2019.