What Cannabis Banking Could Look Like
By: Johnny McGowan, Meredith Kinner, Andrew Gargano
Cannabis has been legalized for medical or recreational use in 33 states, the District of Columbia, Guam and Puerto Rico. Despite this widespread acceptance, the $10 billion dollar quasi-legal industry is largely prohibited from working with banks, credit unions, and credit card processors. This means the industry is predominantly cash-only. With Congress finally back in session after the August recess, lawmakers in both the House and Senate are expected to consider the Secure and Fair Enforcement (SAFE) Banking Act of 2019 in the coming weeks. The SAFE Act would mitigate risks faced by both cannabis businesses and financial service providers, by setting out clear pathways for these providers to begin working with the cannabis industry.
It is no secret that cannabis remains an illegal controlled substance under federal law. Due to the federal pariah status of cannabis, licensed cannabis purveyors and the ancillary businesses that serve them are both at risk when conducting transactions. These cannabis-related transactions can be construed as evidence of money laundering, or other activity, which would subject the cannabis business or ancillary business to criminal or civil liability. There are some financial service providers that work with the cannabis industry; however, these providers often charge so-called “Marijuana Related Businesses (MRBs)” exorbitant account fees based on the increased compliance costs caused by working with MRBs.
A bi-partisan group of Congressional members introduced the SAFE Act in February 2019; coupled with companion legislation introduced in the Senate. The legislation is far reaching but the gist is that it would provide protections for FDIC insured financial institutions that work with the cannabis industry, and would allow these institutions to provide loans to “cannabis-related legitimate businesses”. These “legitimate businesses” refer to state-licensed cannabis businesses that operate in states with medical cannabis or adult-use laws in place. The House Financial Services Committee approved the bill on March 28, 2019, by a 45-15 vote. The SAFE Act is expected to get full floor vote in the House by the end of September, 2019. The Senate Banking Committee is preparing to hold a vote on the Senate bill by the end of the 2019.
The SAFE Act would also require the Financial Crimes Enforcement Network (FinCEN) and the Federal Financial Institutions Examination Council (the FFIEC) to establish guidance and procedures related to banking for cannabis businesses and issues that may arise therefrom. In addition to bringing billions of dollars into the banking sector, the SAFE Act would also provide law enforcement and tax agencies the ability to more effectively monitor cannabis businesses and their transactions. While the Act would allow cannabis businesses to have greater access to banking services, these businesses should be mindful that they would then be subject to greater oversight and regulation.
Support for the SAFE Act is widespread. The bill currently has 206 cosponsors in the House and 31 cosponsors in the Senate. The bill also has the bipartisan support of 38 attorneys general, who in March 2019, submitted a letter to Congress urging members to pass the SAFE Act, or any other legislation that would permit cannabis businesses to work with financial institutions. Financial industry groups have also shown support for the bill. The Credit Union National Association in June sent a letter to the House, while the American Bankers Association has also expressed support for the legislation. Additionally, the National Association of Treasurers and several state banking associations have supported the bill.
While the SAFE Act continues to move more slowly in the Senate, it is expected that the House will advance the legislation in coming weeks, with some optimism that the bill will pass out of the House no later than October. For industry participants, this is great news. Up to now, this fragile financial framework has resulted in a gray market, which creates difficulty in tracking revenues and creates public safety concerns related to an industry dealing in mountains of cash.