On September 25, 2019, the U.S. House of Representatives passed a historic bill: H.R. 595, the first marijuana reform bill to pass out of the chamber. The aptly titled “Secure And Fair Enforcement (SAFE) Banking Act” passed by the bipartisan margin of 321 to 103 (the “Bill”). While its prospects in the Senate are unknown, this legislation shines a light on a burgeoning industry and should both increase financial transparency and mitigate risks associated with the cannabis industry.
Safe Harbor for Financial Institutions Working with Cannabis-Related Industries
As of the date of this writing, marijuana is legal (recreationally or medically) in 33 states – a majority of the United States. However, due to the federal ban on the substance, in all respects, companies in these states have difficulty engaging most banks, credit unions, and other financial institutions to assist in running their (legally operating) businesses. To that end, “[t]he stated purpose of the SAFE Banking Act is to “increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses.” A cannabis-related business is defined in the Bill as one which engages in “any business or organized activity that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products” pursuant to the governing law of a state or relevant political subdivision of a state.
Without guidance from the government, banks are worried about running afoul of various federal anti-money laundering laws and risking their federal charters or access to certain federal payment systems. Therefore, the Bill will also provide safe harbor to financial institutions and insurers who work with cannabis-related industries and clear up the federal/state law confusion regarding the legality of such.
Because of the reluctance of banks to work in this industry, businesses can be targets for robberies or related crimes because they operate largely in cash. For example, Rachel Pross, chief risk officer at Oregon-based Maps Credit Union, told lawmakers that a recent analysis found that without being banked, one in every two cannabis dispensaries gets robbed or burglarized.” Further, “every time an employee of a cannabis-related business uses his or her paycheck to buy something as benign as groceries, the local Arkansas or Idaho bank or credit union depositing the company’s profits gained from those sales is directly impacted by the dilemma before this committee today,” Pross went on to say.
Considering that one cannabis industry executive said that they were forced to pay a $3 million tax bill in cash, inserting banks into the process would (hopefully) severely curb the desire of prospective criminals to target these businesses. In addition, it would make tax collection much more efficient and verifiable.
Along with clarifying that banks may engage with legitimate cannabis businesses (i.e., in states where it is legal), the Bill directs federal regulators to write up the rules for how they will supervise this banking activity. Banks have, of course, thrown support behind this bill, as it opens up a new sector of business for them and also allows them to service the industry without fear of federal retribution, including fines, regulatory consequences, or criminal prosecution.
The Bill also enjoys wide support outside of the cannabis and banking industry, as “[t]he National Association for State Treasurers, a bipartisan group of more than 30 state attorneys general, and the governors of 20 states have urged Congress to pass the bill.”
Of course, the Bill must pass both chambers of congress before arriving at the President’s desk for signature. Currently, the Senate has its own version of the Bill, co-sponsored by 33 senators. However, this particular bill has not made its way out of committee yet. Therefore, its chances in the Senate cannot be predicted with any degree of certainty. Chairman of the Senate Banking Committee Mike Crapo (R-ID) “plans to mark up a cannabis banking measure in his committee before the year ends, though it may not be the banking bill that has already been introduced.” Of course, as with all legislation, the party-specific political benefits will be a driving force behind additions and subtractions to any bill that gets a vote. For example, vulnerable senators such as Cory Gardner (R-CO) may want to see the Bill passed for assistance in a re-election campaign in marijuana-friendly Colorado.
All in all, the broad support for this bill does suggest that a degree of enthusiasm for its ultimate passage is warranted. The Bill provides legal cover for financial institutions to offer its services to growing, legal, businesses and protects said businesses in the process. In addition, as more and more states consider legislation or ballot initiatives for cannabis legalization – both recreational and medical – the Bill may provide additional incentives for states to move forward quickly, knowing that the businesses and banks will be protected on a federal level.
We note that despite the current federal/state law confusion, some banks and credit unions have started working with cannabis-related businesses (CRBs) based on Financial Crimes Enforcement Network (FinCEN) rules that offer substantial protection against any possible prosecution of financial institutions working with the marijuana industry. FinCEN is a division of the U.S. Treasury that collects and analyzes data about financial transactions to crack down on possible terrorist funding, money laundering or other financial crimes. Some sources have publicly stated that banks are already free to work with the cannabis industry and there is evidence of a substantial increase from 2018, but many other institutions are waiting for passage of the Bill.
As with all legislation, there is no set timetable for when we can, or should, expect the Bill to come up for a vote in the Senate; however, one can only hope that Congress moves expeditiously.
For more information on the SAFE Banking Act, contact Alon Harnoy.