Arnold & Porter Discusses Bill on Banking Services for Marijuana-Related Firms
Depository institutions have been understandably reluctant to provide banking services to cannabis-related businesses in light of the significant (and costly) regulatory and compliance expectations that apply under the Bank Secrecy Act (BSA) and other anti-money laundering (AML) laws and regulations.1 Legislative relief, however, may be on the way. On March 27, 2019, with approval of the Secure and Fair Enforcement Banking Act of 2019, H.R. 1595 (SAFE Banking Act), the US House Financial Services Committee (HFSC) is now seeking to increase access to banking services for cannabis-related businesses and their service providers.2 The SAFE Banking Act, which was introduced by Congressmen Ed Perlmutter (D-CO) and Denny Heck (D-WA) and is cosponsored by 148 members of the House, including 12 Republicans, is the most supported stand-alone piece of cannabis legislation introduced in the current Congress.
The enactment of the SAFE Banking Act would be an important first step for depository institutions and insurers, as well as cannabis-related legitimate businesses and service providers in the US, in terms of normalizing a market segment currently fraught with compliance risks. However, the SAFE Banking Act has its own limitations and could result in additional operational costs for financial institutions in ensuring compliance with the requirements for the Act's safe harbor, including verifying on an ongoing basis the legitimacy (i.e., record of compliance with applicable state laws) of its customers operating in the cannabis industry, as further discussed below.
Rights and Protections Offered Under the SAFE Banking Act
The SAFE Banking Act, if adopted, would prohibit federal financial regulators from taking certain actions against depository institutions, such as taking adverse or corrective supervisory action or terminating the institution's deposit insurance or share insurance, that provide services to a "cannabis-related legitimate business"—generally defined as a person or business that handles cannabis products in compliance with applicable state law. Significantly, in recognition of the fact that much of the cannabis industry has been forced into operating on a "cash-only" basis because of existing law, the bill also includes a provision that prohibits penalizing a depository institution or a service provider for authorizing, processing, clearing, settling, billing, transferring, reconciling or collecting payments for a cannabis-related legitimate business for payments made by any means, including a credit, debit, or other payment card, an account, check, or electronic funds transfer. This relief would significantly alleviate the security and related concerns created by the large amounts of currency with which the industry currently grapples.
Additionally, the legislation would require the Financial Crimes Enforcement Network (FinCEN) to develop and issue guidance on the preparation of suspicious activity reports for cannabis-related legitimate businesses and service providers, which must be consistent with the intent of the SAFE Banking Act and may not discourage financial institutions form providing financial services to such companies. Further, the Federal Financial Institutions Examination Council (the FFIEC) would be required to develop uniform guidance and examination procedures for depository institutions with respect to banking cannabis-related businesses and service providers. Such uniform guidance would help ensure that all depository institutions, regardless of charter type, could offer services to the cannabis industry under substantially similar regulatory expectations.
For entities covered by the SAFE Banking Act that operate within the US states or territories where cannabis is legalized for recreational or medical purposes,3 the legislation would also protect such depository institutions, service providers, and insurers, together with their officers, directors, and employees, from prosecution under federal law solely on the basis of providing such financial services to a cannabis-related business or further investing any income derived from such financial services. The measure also requires a government study regarding diversity in the cannabis market and a study of the effectiveness of suspicious activity reports for cannabis-related businesses and service providers.
According to Representative Maxine Waters (D-CA), Chairwoman of the HFSC, the SAFE Banking Act "addresses an urgent public safety concern for legitimate businesses that currently have no recourse but to operate with just cash"; however, the bill is also "part of a holistic approach toward providing criminal justice reform to those who have been harmed by criminalization of marijuana and should not by any means be the only bill the House takes up on the important issue of cannabis reform."4
Congressional Support For The SAFE Banking Act
The HFSC approved the bill on March 28 by a 45-15 vote, defeating a number of Republican amendments during a lengthy markup session. All in all, the bill has enough bipartisan support that prospects for passage by the full House are strong. One GOP amendment that was accepted by voice vote, offered by Rep. Steve Stivers (R-OH), added insurance services to the scope of financial services that would benefit from the bill's safe-harbor.
Some Republicans have voiced concerns with the bill, characterizing it as a "massive change in federal policy" according to Congressman Patrick McHenry (R-NC), Ranking Member of the HFSC. McHenry and other Republicans had asked for Chairwoman Waters to delay a vote on the bill in committee, expressing concern that the committee had only had one hearing on the issue. However, numerous financial services trade groups have come out in support of the measure, including the American Bankers Association and the American Property Casualty Insurance Association, among several others, which could further soften Republican opposition. In the Senate, Sens. Jeff Merkley (D-OR) and Cory Gardner (R-CO) have indicated interest in sponsoring companion legislation to the SAFE Banking Act later this year.5 Prospects for Senate action are unclear—while Senate Majority Leader Mitch McConnell (R-KY) has "long supported legalizing industrial hemp,"6 he may not want to devote floor time to a discussion exclusively on banking and insurance for cannabis-related businesses.
Outlook For the SAFE Banking Act and Compliance Considerations
For the Financial Services Industry
Enactment of the SAFE Banking Act would likely encourage more banks, credit unions, and insurers to have and maintain relationships with cannabis-related legitimate businesses and third-party service providers due to the measure's protection from federal prosecution as well as the more manageable and better defined BSA/AML compliance obligations. Depository institutions would be able to treat cannabis-related legitimate businesses and service providers similarly to other legitimate, albeit higher-risk, businesses for BSA/AML purposes, subject to existing or prospective guidance issued by FinCEN and the FFIEC. Under the Act, depository institutions and their personnel would also benefit from protection from federal prosecution solely on the basis of providing financial services to cannabis-related legitimate businesses under existing federal money laundering and drug laws, which is significant considering that certain forms of cannabis, including marijuana, are illegal controlled substances under federal drug laws.7
Importantly, the benefit to financial institutions will be influenced by the work to be completed by the regulators. As proposed, FinCEN would be required to develop guidance consistent with the purposes of the statute, and the FFIEC would be required to develop related examination procedures. One of the most important unknowns is whether FinCEN would depart from its prior guidance relating to marijuana-related businesses, which required burdensome reporting requirements, including specific instructions on filing suspicious activity reports related to marijuana-related businesses, or whether new guidance would reduce regulatory reporting requirements.8
Another point of contention with the legislation is that it does not preempt state laws, and depository institutions will need to be informed as to whether their cannabis-related business customers are in compliance with the laws in which the company operates. This task could pose great difficulties, considering that state cannabis laws are detailed and vary considerably from state to state. Depository institutions will need to remain informed of the laws of each state in which its cannabis-related business customers are located, and monitor such companies' compliance with applicable laws, including use and distribution laws, to be able to rely on the safe harbor under the SAFE Banking Act, which is limited to providing financial services to "legitimate" (i.e., legally compliant under state, province, or tribal law) cannabis-related businesses and service providers.
For the Cannabis Industry
For the industry, greater access to financial services would likely result in higher growth opportunities for cannabis-related businesses and services providers. Currently, cannabis-related businesses rely heavily on private investors and the capital markets for funding. Providing cannabis-related businesses and services providers with greater access to banking will provide them with greater access to loans and credit at more competitive rates. The legislation would also significantly reduce the instances of cash-motivated crimes in communities where such businesses and service providers are located, and generally provide greater transparency to the cannabis industry. Additionally, the ease of transactions between sellers and consumers of cannabis-related products would be improved with customers being able to purchase products using debit and credit cards, as well as other forms of payments processed by depository institutions.
The tradeoff for cannabis-related businesses and service providers having greater access to banking services, however, would be that the financial activities of those businesses would be subject to increased oversight, including in regards to tax collection. Of course, such tradeoffs are a normal part of operating a legitimate business in the US, and the benefits of having greater access to banking services, including greater access to loans, credit, and other forms of capital, presumably outweighs the "costs" of being subject to greater oversight.
Of the over 4,500 commercial banks(1) and over 6,000 credit unions in the U.S.,(1) the Financial Crimes Enforcement Network reports that only 438 banks and 113 credit unions provide banking services to cannabis-related businesses. See Federal Reserve Bank of St. Louis Economic Data, Commercial Banks in the U.S. for Q4 2018, and United States Credit Union Directory – March 2019.
H.R. 1595, Secure And Fair Enforcement Banking Act of 2019, 116th Cong. (Mar. 7, 2019).
Thirty-three states, Washington D.C. and the U.S. territories of Guam and Puerto Rico have enacted legislation authorizing the use of cannabis for medical or recreational purposes. Forty-seven states total have adopted polices allowing for some cultivation, sale, distribution and possession of cannabis.
Kyle Jaeger, "Watch Live: Key Congressional Committee To Vote On Marijuana Banking Bill," WM Policy (Mar. 26, 2019).
During the last Congress, Senator Jeff Merkley (D-OR) introduced the SAFE Banking Act of 2017, similar to the SAFE Banking Act being considered by the HFSC, which was cosponsored by 20 other senators, including 4 Republicans. See, S. 1152, "Secure and Fair Enforcement Banking Act," 115th Cong. (May 17, 2017). Senator Ron Wyden (D-OR) of the Senate Finance Committee has introduced a more expansive bill entitled "Responsibly Addressing the Marijuana Policy Gap Act of 2019," S.421, which covers broader areas in addition to access to banking for cannabis-related businesses, and a counterpart of the bill has also been introduced in the House by Representative Earl Blumenauer (D-OR). See, S. 421 and H.R. 1119, "Responsibly Addressing the Marijuana Policy Gap Act of 2019," 116th Cong. (2019).
Press Release, Representative Ed Perlmutter, "Pot Banking Bill Heads to Markup as Sponsors Eye House Floor," (Mar. 20, 2019).
FinCEN Guidance, "BSA Expectations Regarding Marijuana-Related Businesses," FIN-2014-G001 (Feb. 14, 2014) (see our Advisory here).