This article was originally published in the November/December issue of ELFA Equipment Leasing & Financemagazine.
In mid-July 2022, the United States House of Representatives passed a provision allowing legal cannabis-related businesses to access federally regulated financial services. This marks the seventh time the House has passed a version of the Safe and Fair Enforcement (SAFE) Banking Act. The original version of federal marijuana banking reform was introduced nine years ago by Rep. Ed Perlmutter (D-Colo). Passage of the SAFE Banking Act, either as standalone legislation or as an amendment attached to a must-pass bill, would prohibit federal banking regulators from penalizing federally regulated depository institutions for providing banking services to marijuana businesses. Currently, cannabis businesses have essentially no access to federally regulated financial services, which include the ability to raise capital, obtain loans and process payments.
It is expected that the latest attempt by the House to implement marijuana banking reform, which comes in the form of an amendment to the National Defense Authorization Act of 2023, will once again face significant obstacles in the Senate where all previous attempts have failed. With the retirement of Rep. With Perlmutter’s impending departure likely without marijuana banking reform, those in the marijuana space are left questioning the reason for the holdup. Supporters claim that without reform, the marijuana industry, estimated to exceed $30 billion by 2022, will be forced to operate primarily in cash or through several state-chartered banks and credit unions for premiums. Others in space are not bothered by the lack of progress in gaining access to federally supported financial institutions. These differing opinions raise the question of whether the reform was necessary and, if so, why it stalled?
Is federal bank reform important?
Election Day 2022 will mark the 10-year anniversary since the first states in the union—Colorado and Washington—decriminalized or legalized marijuana operations within their respective jurisdictions. Today, 39 states allow marijuana operations and use in some capacity, with more expected after the upcoming 2022 election. Similarly, a November 2021 Gallup poll found that 68% of the American public supports the legalization of marijuana. Despite these growing numbers, the federal government has been hesitant to take official action to legalize marijuana. The impact of the federal government’s failure to act was so pronounced that Supreme Court Justice Clarence Thomas—one of the Supreme Court’s most conservative justices—issued a statement in Standing Akimbo, LLC et al. vs. United States (2021) 594 US that federal marijuana laws may be outdated due to the government’s “piecemeal approach” to regulation.
Despite remaining a federally illegal product, existing federal policy on marijuana does not prohibit financial institutions from providing services to businesses in the industry. On the other hand, most financial service providers voluntarily choose not to participate in the market due to various legal risks and compliance costs. In fact, currently, only about 700 of the 5,000+ commercial banks in the United States provide financial services to cannabis operators. More specifically, currently, in order to offer banking services to cannabis operations, financial institutions must navigate the labyrinth of anti-money laundering laws. For example, under the Bank Secrecy Act (BSA), financial institutions are subject to various recordkeeping and reporting requirements and must file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) when there is a suspected case of money laundering. , fraud or use of funds resulting from federal illegal activities—such as marijuana operations. Regulations under the BSA, the Controlled Substances Act (CSA) and other federal statutes also subject financial institutions to enforcement actions and severe civil financial penalties for providing services to federally illegal enterprises. Compliance with this law requires banks and other financial institutions to essentially function as drug enforcement agencies if they choose to provide banking services to marijuana operations.
Recently proposed banking reforms would alleviate many of the concerns financial institutions have about transactions with cannabis-related businesses by providing a number of safeguards, including:
- Prohibit federal bank regulators from restricting, penalizing or discouraging financial institutions or depository institutions from providing banking services to legal marijuana-related businesses;
- Determines that transactions involving proceeds from legitimate cannabis-related businesses are not the proceeds of illegal activities and therefore, not within the purview of anti-money laundering regulations;
- Establishes that depository institutions are not, under federal law, liable or subject to asset forfeiture for providing loans or other financial services to legal marijuana-related businesses;
- Prohibits federal banking regulators from requesting or ordering a depository institution to terminate its customer relationship with a marijuana-related business unless the agency has a valid reason not based on reputational risk; and
- Amends the reporting requirements for SARs and requires FinCEN to issue guidance on transactions related to cannabis-related businesses that are “consistent with the purpose and intent of the SAFE Banking Act of 2021 and do not significantly impede the provision of financial services” to those businesses.
This change will not only give banks the level of comfort needed to enter the market but also allow the use of payment processing networks, such as Visa and Mastercard, for business-related transactions (currently, Visa’s position is that the use of cashless ATMs by cannabis dispensaries violates its service rules ).
Although reform is preferred by many, some argue that it is not necessary. Due to widespread state marijuana legalization and public support for decriminalization, the number of financial institutions—namely credit unions and state-chartered banks—recognizing and responding to the tremendous business opportunities the industry offers is growing at an impressive rate. However, even with some credit unions and government chartered banks supplying this service, this does not address the issue of payment processing. Additionally, these typically smaller financial institutions have limits on deposits to ensure adequate capitalization.
Why hasn’t the reform happened yet?
Congress is not without options to address the marijuana problem. For example, it could revise the BSA by creating an exemption for financial institutions that provide services to marijuana operators that comply with state and local laws—as proposed by the SAFE Banking Act. Or Congress could deschedule marijuana as a federally illegal drug under the CSA. Many in the marijuana industry believe one of these changes is about to happen now. However, as we approach the 10-year anniversary of state-initiated legalization and nine years since federal reform was first proposed, the United States is no closer to reforming marijuana banking, despite bipartisan support and lobbying efforts from organizations and businesses, including American Bankers Association, American Financial Services Association and National Association of Credit Unions. This delay begs the question—why is the cannabis industry still at a disadvantage when it comes to providing financial services despite widespread bipartisan support, at least in the House?
For whatever reason, the July 2022 version of the SAFE Banking Act has yet to reach the Senate stage for a vote, languishing in various committees until this year’s version of the bill is essentially dead. Although Republicans have begun to make changes to cannabis laws, especially with regard to banking reform, Democrats have moved away from dealing solely with banking and, instead, focused on full federal legalization that includes components of both banking and social equity bills, a concept which intends to use marijuana legalization to address communities disproportionately affected by the War on Drugs. In doing so, Congress has introduced no fewer than three cannabis-related bills this year in addition to the SAFE Banking Act. With competing bills, lawmakers’ support has been split, resulting in another year of unwarranted gridlock that continues to harm the marijuana industry.
While the SAFE Banking Act may not solve all cannabis-related issues, banking reform would still be a huge win for the cannabis industry. It would also mark the beginning of federal destigmatization of the product, promote public safety by discouraging participation in the illegal marijuana market, and help marijuana-related businesses comply with tax laws. Congress would be wise to heed the calls of both the cannabis and banking industries and focus on at least passing banking reform in an effort to legalize and regulate the cannabis industry.
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