Congress can open financial institutions to legal cannabis industry with SAFE Banking Act

Federal statutes create risk for banks that want to operate in the cannabis space. Banks face the threat of civil actions, asset forfeiture, reputational risk, and even criminal penalties if they do business with customers in the cannabis industry. Further, because most banks will not touch cannabis money, the growers, processors, and retailers in the industry must often operate on a cash-only basis. The Internal Revenue Service has even had to build “cash rooms” to accommodate taxes paid by legal cannabis companies. Lawful businesses therefore have to decide between investing heavily in security that other businesses do not need or making themselves easy targets for would-be armed robbers. 

That could be changing soon. Last month, the House Financial Services Committee voted 45 to 15 in favor of a bill that would protect banks from punishment by federal regulators for providing financial services to cannabis businesses. Rep. Ed Perlmutter (D-Colo.) introduced the bipartisan SAFE Banking Act, which would prevent federal regulators from punishing financial institutions who provide services to cannabis businesses that are operating legally under state law. During the markup, Rep. Steve Stivers (R-Ohio), offered an amendment to extend the bill’s protections to insurers, which the committee agreed to include. The bill now moves to the House Judiciary Committee for consideration. It has 165 co-sponsors including 17 Republicans.

{mosads}This month, Sens. Jeff Merkley (D-Ore.), Cory Gardner (R-Colo.), and twenty co-sponsors filed a companion version of the SAFE Banking Act that would shield banks that hold accounts for state-approved marijuana businesses. The bill would require banks to comply with current Financial Crimes Enforcement Network (FinCEN) guidance, while at the same time allowing FinCEN guidance to be streamlined over time as states and the federal government adapt to legalized medicinal and recreational cannabis policies. Both bills are still subject to debate and could undergo substantive changes; industry’s lobbying efforts are far from over. Neither the House bill nor the Senate bill is scheduled for a vote on the floor, but the bills’ sponsors are optimistic.

“Forcing legal businesses to operate in all-cash is dangerous for our communities,” said Merkley.  “It’s absurd that cannabis business owners have to shuttle around gym bags full of cash to take care of their taxes or pay their employees. Operating in cash is an invitation to robbery, money laundering, and organized crime. This is a public safety issue, and I hope that this will be the Congress when we build a bipartisan consensus to put this common-sense fix into law.”

“Conflicting federal and state marijuana laws make it difficult for legitimate businesses to use the basic financial services they need access to and this bipartisan legislation gives them that access they need,” said Gardner. “We must also take into account the risk to public safety as these businesses are being forced to carry around bags of money to pay for their employees and rent. Legal businesses should not be treated like this, and I’m glad that Republicans and Democrats are working together to address this issue.”

The SAFE Banking Act has broad support, including from the American Bankers Association (ABA), Credit Union National Association (CUNA), Independent Community Bankers of America (ICBA), Law Enforcement Action Partnership (LEAP), the Electronic Transactions Association (ETA), the National Cannabis Industry Association (NCIA), Mid-Size Bank Coalition of America (MBCA), The Real Estate Roundtable, and various U.S. trade associations such as the American Land Title Association (ALTA), American Property Casualty Insurance Association (APCIA) and the Reinsurance Association of America (RAA).

{mossecondads}In a recent House hearing, Treasury Secretary Steven Mncuhin also encouraged Congress to look at the issue on a bipartisan basis, noting “there is a conflict between federal and state law that we and the regulators have no way of dealing with.” He added, “[t]here is not a Treasury solution to this. There is not a regulator solution to this.” The FinCen guidance issued five years ago clarifies how financial institutions can service cannabis businesses in a manner consistent with Bank Secrecy Act obligations, but that guidance goes only so far. Federal Reserve Chairman Jerome Powell therefore recently stated during a Senate hearing, “Financial institutions and their regulators and supervisors are in a very difficult position here with marijuana being illegal under federal law and legal under a growing number of state laws.”

On April 15, 2019, top financial regulators from 25 states echoed that sentiment. Specifically, the regulators urged Congress “to consider legislation that creates a safe harbor for financial institutions to serve a state-compliant business or entrusts sovereign states with the full oversight and jurisdiction of marijuana-related activity.” According to the regulators, led by Pennsylvania Secretary of Banking and Securities Robin L. Wiessmann, “[e]stablishing a safe harbor for banks to serve these entities would help reduce the risk associated with large cash-and-carry operations and bring the safeguards, activities, and sales associated with this business into the regulatory reporting compliance framework.”  Regulators from both red and blue states, including Alaska, Colorado, Connecticut, Georgia, Hawaii, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Montana, New Jersey, New Mexico, New York, North Dakota, Oklahoma, Oregon, Utah, Washington, West Virginia, and Wisconsin, co-signed the letter. “While there are unresolved and differing opinions concerning marijuana policy, at the state and federal level, banking services availability has bipartisan support and is agnostic about the other issues pertaining to marijuana,” they stated. The regulators concluded, “We must work together to look for solutions rather than ignoring the new policy landscape.”

The question therefore seems to be not whether banks will have the legal assurance they need to conduct business with the cannabis industry, but when. Increased support from industry will speed up the timeline, so engaging with Congress is critical. Once the legislative and regulatory framework exists, though, many will scramble to understand the precise regulations that banks and their cannabis customers will have to follow to comply with the law. When in doubt, businesses and their bankers should consult legal counsel, particularly in the rapidly evolving compliance landscape for medical and recreational marijuana.

Robert M. Kline is a partner at McDermott Will & Emery. He focuses his practice on complex litigation and sensitive internal investigations, with an emphasis on health care law, class action defense in state and federal courts and labor and employment disputes. He also is a member of McDermott’s multidisciplinary team of lawyers that provides clients with regulatory, litigation, intellectual property, trade and tax services with respect to their investments and participation in the cannabis industry. Anthony DeMaio is a professional advisor at McDermott Will & Emery.  With a background in politics and advocacy, Anthony has nearly a decade of experience lobbying members of Congress, congressional staff and executive agencies. He has worked on major pieces of legislation involving infrastructure, tax and appropriations.