Written by: Leonidas Moulis, JD, CRCM, Stephen R. King, JD, AMLP
Background
As of December 2022, marijuana products, whether for medical or recreational use, have been legalized by 39 states and the District of Columbia. Projected 2022 revenue in the industry will reach $33 billion, and provides upwards of 428,000 jobs, with a projected growth to 1.75 million jobs if legalized at the federal level. However, cannabis remains illegal under the federal Controlled Substances Act and listed as a Class I narcotic. Growing, possessing, selling, transporting, or distributing cannabis or related products is a federal crime and subject to civil and criminal prosecution.
While certain states have passed legislation to allow financial institutions to provide banking services to licensed cannabis-related businesses (CRBs), financial institutions still face potential penalties for violating the Controlled Substances Act (CSA), the Bank Secrecy Act (BSA), and Racketeer Influenced and Corrupt Organizations Act (RICO) forfeiture laws. In addition, major payment processing systems such as Mastercard and Visa do not allow payments related to CRB products or services to be knowingly processed on their networks. CRBs generally find it difficult or impossible to access banking services such as deposit accounts, credit, payroll, and tax payments. Many of these businesses are cash-intensive, creating significant risks regarding currency shipments, theft, robberies, and other criminal activity in the communities they serve.
Prior Federal Guidance
The Department of Justice (DOJ) and the Financial Crimes Enforcement Network (FinCEN) issued past guidance on the federal aspect of enforcement. In 2013 the DOJ issued a memorandum to US attorneys, commonly referred to as the “Cole Memo,” outlining deference to states in addressing marijuana-related activity if the activity does not violate the eight “priorities” reflected in the memo. In 2014, FinCEN issued guidance to financial institutions reiterating the Cole Memo and offering suspicious activity report (SAR) filing guidance and “red flags” for filing “priority” SARs. While the Cole Memo was rescinded in 2018 by Attorney General Jeff Sessions, the DOJ and federal banking agencies still adhere to non-enforcement under these principals. In April 2022, Attorney General Merrick Garland stated that the DOJ will not prioritize prosecuting marijuana use that complies with applicable state laws and regulations.
Legislation
Since these pronouncements, the U.S. House of Representatives has been attempting to pass legislation to either legalize marijuana or to provide safe harbor protections to financial institutions providing banking services to duly authorized CRBs. The most renowned bill is the SAFE Banking Act, first proposed by Representative Ed Perlmutter (D-CO-7) in 2019. The bill has passed the House seven times since introduction, most recently in June 2022, as an amendment to the FY2023 National Defense Authorization Act (NDAA). However, the bill has repeatedly failed to pass the Senate.
From the bill (H.R 1996 – SAFE Banking Act):
This bill generally prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis-related business. Prohibited penalties include terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate cannabis-related business and prohibiting or otherwise discouraging a depository institution from offering financial services to such a business. Additionally, proceeds from a transaction involving activities of a legitimate cannabis-related business are not considered proceeds from unlawful activity. Proceeds from unlawful activity are subject to anti-money laundering laws.
Furthermore, a depository institution is not, under federal law, liable or subject to asset forfeiture for providing a loan or other financial services to a legitimate cannabis-related business.
The bill also provides that a federal banking agency may not request or order a depository institution to terminate a customer account unless (1) the agency has a valid reason for doing so, and (2) that reason is not based solely on reputation risk. Valid reasons for terminating an account include threats to national security and involvement in terrorist financing, including state sponsorship of terrorism.
Finally, the bill decreases the cap on the surplus funds of the Federal Reserve banks. (Amounts exceeding this cap are deposited in the general fund of the Treasury.)
There are “safe harbor” provisions for financial institutions and ancillary businesses such as attorneys and landlords that provide services to licensed CRBs.
In July 2022, U.S. Senators introduced another bill, the comprehensive Cannabis Administration and Opportunity Act (CAOA). Senator Cory Booker (D-N.J.) softened his prior position on a separate, narrower cannabis banking bill when he said that he would now consider the banking bill with modifications. This was referred to as “SAFE Banking Plus” which would ensure equitable access to financial services for minority-owned cannabis businesses and require financial institutions to prove compliance with anti-discrimination laws, among other things.
While protecting banking institutions from scrutiny for dealing with legitimate cannabis businesses, the SAFE Banking Act Plus would also have expanded small business loan eligibility to cannabis businesses, legalized and decriminalized recreational cannabis, would have afforded veterans access to medical marijuana through the U.S. Department of Veterans Affairs, and would have provided financial resources to states for administrative costs relating to expungement efforts.
No draft of the text of the “Plus” bill has been released.
Current Status
On October 6, 2022, President Biden announced a pardon “for all current United States citizens and lawful permanent residents who have been convicted of the offense of simple possession of marijuana in violation of the Controlled Substances Act,” urging state governors to perform the same action for similar state convictions of civil possession of marijuana. In addition, President Biden requested that the Secretary of Health and Human Services and the Attorney General review marijuana’s classification as a Schedule I narcotic under the Controlled Substances Act.
The House Rules Committee was scheduled to take up the NDAA (with the attached SAFE Banking Act) on December 5, 2022. Hopes were high that lawmakers would seek to attach the cannabis proposals to the NDAA. Pushback from certain Republican lawmakers derailed that plan ahead of the meeting. There was also uncertainty as to whether the Senate would go along with the bill. Unfortunately, the plan unraveled at the 11th hour as top Senate Republicans pushed back on the cannabis banking legislation. The FY 2023 NDAA therefore did not include any cannabis language following these bipartisan and bicameral negotiations.
The SAFE Banking Act received another chance when supporters included its language within the recent 2022 omnibus spending bill. However as of December 21, 2022, the SAFE Banking Act language has been specifically excluded from the current omnibus appropriations bill.
This article is the first in a series of articles that will describe specific issues financial institutions consider when determining whether to bank cannabis-related businesses in the current legal and regulatory environment.
Our Cannabis Team offers compliance and advisory services to financial institutions and CRBs alike, as well as robust accounting and tax services specifically tailored for CRBs – reach out today.
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