A video replay of the webinar “Cannabis 205: What Big Global Companies Should Know About Entering the Cannabis Space” is available to view.
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Michigan Court Issues Preliminary Injunction Prohibiting State’s Emergency Ban of Flavored Nicotine Products From Taking Effect
By Joe Pangaro and Jessica Linse
On September 18, 2019, Michigan became one of the first states to impose a ban on flavored e-cigarettes. The Michigan Department of Health and Human Services (“MDHHS”) issued emergency regulations that stated, in part, that a retailer shall not “[s]ell, offer for sale, give, transport, or otherwise distribute, nor possess with intent to sell, give, or otherwise distribute a flavored nicotine vapor product.” The ban went into effect immediately upon the release of the emergency regulations and was supposed to last for six months.
Shortly thereafter a local vape shop owner filed suit in state court against MDHHS, Governor Gretchen Whitmer, and the State of Michigan seeking a preliminary injunction to prevent the emergency rules from going into effect. See Marc Slis, et al. v. State of Michigan et at., Nos. 19-000152-MZ, 19-000154-MZ (Mich. Ct. Cl., Oct. 15, 2019). At the preliminary injunction hearing, one plaintiff testified the emergency rules forced him to “shutter[] his business and that his customers have been obtaining their flavored vaping products from Wisconsin.” Id. at 7. Another presented evidence that the emergency rules “ban plaintiff from using its tradename and branding.” Id. The court found both harms constituted “irreparable harm” necessary for preliminary injunction.
The court also found the Plaintiffs established a likelihood of success on the merits of their claims, because the MDHHS rules were procedurally invalid under Michigan law. Id. at 8. Specifically, an agency must comply with standard procedures for the promulgation of new rules except in “emergency” situations, and the Court did not find there was a “genuine emergency” that warranted circumventing the standard rule-making process with respect to flavored nicotine vaping. “The plaintiffs have convinced the Court that defendants’ proffered reasons for the emergency declaration have fallen short. It is not enough under [Michigan law] for DHHS to merely identify a problem.” Id. at 10.
The court also considered the potential harm to the public that would result from allowing the ban to be enacted. After recognizing “compelling interests on both sides of the issue,” the court cited witnesses for the Plaintiffs that testified about their improved health after switching from traditional tobacco products to e-cigarettes. “Thus, plaintiffs have presented evidence that at least some segment of the population will be harmed by the vaping ban.” Id. at 14. Ultimately, after carefully weighing all factors pertinent to granting a preliminary injunction, the court concluded the Plaintiffs carried their burden, and issued a preliminary injunction preventing Michigan’s emergency rules from going into effect.
The Michigan ban of flavored e-cigarettes is significant because many other states around the country have since enacted similar bans, either through emergency regulation or executive order. These states include Rhode Island, Oregon, New York, Washington, Missouri and Montana, and the city of Los Angeles. Each of these bans may face similar challenges in the near future, and this court’s decision to block the emergency rules, which is in line with another recent ruling by a District Court in Indiana, indicate that such challenges may be successful.
Duane Morris Named One of America’s Top Trusted Corporate Law Firms
Duane Morris has been named one of America’s Top Trusted Corporate Law Firms by Forbes.
The publication writes:
More than 13 million attorneys practice at more than 400,000 law firms in the U.S., according to the American Bar Association, and those firms are becoming increasingly specialized. … Many firms have been expanding into new areas of law necessitated by the emergence of technologies such as blockchain and of state laws legalizing cannabis use. …
[Duane Morris] has a growing and strong focus on the legal cannabis industry, partnering with the American Trade Association of Cannabis and Hemp and representing cannabis companies in one of the first public cannabis industry mergers, a $640 million deal.
For more information, visit the Forbes website.
SAFE Banking Act Passes the House – Cannabis Banking May Soon Be Reality
By Joseph J. Pangaro, Justin M. L. Stern, David E. Landau, Seth A. Goldberg and Michael S. Zullo
On Wednesday evening, September 25, by a vote of 321 to 103, the United States House of Representatives took a meaningful step toward easing federal restrictions that have limited the access of cannabis businesses to banking services notwithstanding the growth of the cannabis industry by passing the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”). The public safety concerns resulting from the dearth of cannabis banking has led dozens of state Attorneys General, the American Banking Association, and numerous other voices to urge the passage of legislation like the SAFE Banking Act so that the U.S. cannabis industry, which now exceeds $10 billion in annual sales revenues, not to mention hundreds of millions in state tax revenues, will benefit from the same banking services – checking accounts, payroll, and credit cards, to name a few – that are common to virtually all other U.S. businesses. Passage of the SAFE Banking Act in the Senate would be liberating for the cannabis industry, as banking services will stimulate even more growth and better business practices, while eliminating the overhang of public safety concerns relating to large cash transactions. Below is: (i) a brief summary of the history leading to this point; (ii) the key provisions of the SAFE Banking Act of 2019; and (iii) a preview of what comes next.
History of Marijuana Regulation and Banking Implications
- Controlled Substances Act (“CSA”):[1] Marijuana is a federally unlawful Schedule I drug under the CSA, 21 U.S.C. § at § 841(a), and direct and indirect (conspiracy and aiding abetting) violations carry stiff criminal and civil penalties, including forfeiture. at §§ 841(b), 853.
- Bank Secrecy Act (“BSA”) and Money Laundering Control Act (“MLCA”): The BSA and MLCA obligate banks to root out financial transactions involving “unlawful” activities and thus banks must comply with BSA reporting requirements for suspicious transactions and must have robust customer diligence and MLCA programs.
- 2014 FinCEN[2] Guidance: In an effort to stimulate cannabis banking, FinCEN issued Guidance in 2014 that clarified BSA expectations of financial institutions by describing how financial institutions can provide services to cannabis businesses consistent with their BSA obligations. This Guidance included stringent customer due diligence obligations and a special category of suspicious activity reporting (SAR) for marijuana-related businesses. The 2014 Guidance created three types of marijuana SAR filings: (i) “Marijuana Limited”; (ii) “Marijuana Priority”; and (iii) “Marijuana Termination.”
Reluctant Banking and Public Safety Concerns
Notwithstanding FinCen’s Guidance, the CSA, the Bank Secrecy Act, and the MLCA have presented significant obstacles for banks interested in providing their services to cannabis companies that “touch the flower” and even companies that provide ancillary services to the cannabis industry. Most financial institutions, including commercial banks, investment banks, and insurance companies, have avoided the core and ancillary cannabis companies. For example, FinCen last reported that as of March 2019, only 633 of the 8,700 FDIC insured or supervised financial institutions are servicing marijuana-related business.
This widespread abstention has had a significant impact on the cannabis industry. An overwhelming portion of the $10 billion plus cannabis industry is comprised of cash transactions — purchases are made in cash, employees are paid in cash, accounts payable, including rent and other bills are paid in cash, even state taxes are paid in cash. Cannabis businesses may not have checking accounts or payroll services, cannot process credit cards, and are forced to find private lenders at high interest rates.
Public safety is at risk due to the volume of cannabis cash that is going untracked by the U.S. banking system. There is an increased risk of theft, and there have even been claims for ransom and violent crimes. Businesses may not carry enough insurance for their premises and products. Accurate record-keeping, accounting, and the calculation and payment of state and local taxes is challenged. Most importantly, the transparency objectives of the BSA are undermined, as cannabis companies often engage in corporate structuring intended to provide some access to banking, even if not directly. In addition, it is widely understood that some FDIC banks simply turn a blind eye, and provide services to cannabis businesses without reporting.
Key SAFE Banking Act Provisions
Although the SAFE Banking Act contains numerous important provisions, below are three of the most significant.
SAR Filings
The SAFE Banking Act does not do away with the requirement to file SARs. However, it does mandate that FinCEN issue revised guidance concerning SAR filings that “is consistent with the purpose and intent of the SAFE Banking Act of 2019 and does not significantly inhibit the provision of financial services to a cannabis-related legitimate business or service provider in a State.”
Protections for Financial Institutions
Further, the SAFE Banking Act would protect financial institutions against adverse actions by federal banking regulators—such as limiting or terminating the insurance provided under the Federal Deposit Insurance Act or the Federal Credit Union Act—taken solely on the basis of the financial institutions’ provision of banking services to cannabis businesses operating in accordance with state law or their service providers. The bill also prohibits regulators from discouraging institutions from providing financial services to such businesses or from incentivizing banks or credit unions to refuse, terminate, or downgrade accounts held by those engaged in the cannabis industry (such as owners or employees of cannabis businesses). Similarly, the bill provides that banks or other financial institutions providing financial services to legitimate cannabis businesses in states or jurisdictions where the cannabis business is lawfully operating will not, because of their dealings with such cannabis businesses, be held liable under federal law either for providing the financial services or for investing income derived from the provision of such services. The result of these protections is that financial institutions would, under the SAFE Banking Act, be able and thus more willing to provide cannabis businesses with routine services that companies in other industries take for granted, i.e., the processing of credit card transactions, the maintenance of operating and payroll checking accounts, etc.
Protections for Ancillary Businesses
The bill also provides protections for so-called “ancillary” businesses; under the SAFE Banking Act, receipt of money by a legitimate business or service provider, through a transaction with a cannabis business, would not on that basis result in the ancillary business’ violation of 18 U.S.C. §§ 1956 and 1957, concerning transactions involving the proceeds of illegal activity. This protection would extend to ancillary business service providers such as accountants, lawyers, bankers, and landlords, as well as to sellers of goods or services to cannabis businesses, such as cable and internet providers.
Conclusions – What to Expect
Having passed the House, the bill now moves to the Senate where, despite its bipartisan support, its fate is unclear. Senator McConnell, the Senate Majority leader who was instrumental in the passage of the 2018 Farm Bill, has not shown much interest in the bill yet. Yet Senator Crapo, Chairman of the Banking Committee, however, has hinted he may be interested in the legislation. Given the strong vote count with which the House passed the bill, pressure may start to mount for Senate action, particularly in light of the broad based coalition that came together to pass the House bill. The Senate should have the very real public safety concerns resulting from the dearth of cannabis banking in plain view when it votes.
[1] 21 U.S.C. § 801 et. seq.
[2] Financial Crimes Enforcement Network
Webinar Replay – Florida Cannabis Legislation Update
Duane Morris attorney Justin Stern provided an update on Florida cannabis legislation during the “Cannabis 204: The Roundup of State Cannabis Legislation” webinar.
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It Is Permissible for Federally Insured Credit Unions to Bank Hemp Businesses
“Credit unions may provide the customary range of financial services for business accounts, including loans, to lawfully operating hemp related businesses within their fields of membership,” says the National Credit Union Administration (NCRU) in its recently released guidance 19-RA-02.
While this is a significant step for hemp businesses seeking banking outlets, it is far from the relief proposed by Secure and Fair Enforcement Act (“SAFE Banking Act”) and does not represent a blanket permission. Still, the NCRU Guidance signals a recognition of the growing Cannabis industry and the practical need to provide financial services to businesses in the industry. Here are some key takeaways.
First, the guidance only applies to Federally Insured Credit Unions, not national banks.
Second, the guidance explicitly relates to credit unions serving “hemp” businesses as defined in the Agricultural Improvement Act of 2018 (2018 Farm Bill), which removed hemp from Schedule I of the Controlled Substances Act.[1] Marijuana remains a Schedule I drug, which restricts banking access of marijuana businesses.
Third, because the USDA has yet to promulgate regulations and guidelines to implement the hemp production provisions of the 2018 Farm Bill, credit unions must ensure members in hemp-related business are operating under the industrial hemp pilot provisions of the Agricultural Act of 2014 (2014 Farm Bill).
Fourth, credit unions that elect to bank hemp-related businesses must maintain robust Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance programs. This includes:
- Maintaining appropriate due diligence procedures for hemp-related accounts and complying with BSA and AML requirements to file Suspicious Activity Reports (SARs) for any activity that appears to involve potential money laundering or illegal or suspicious activity.
- Remaining alert to any indication an account owner is involved in illicit activity or engaging in activity that is unusual for the business.
- Staying on top of state and tribal laws, regulations, and agreements under which each member that is a hemp-related business operates.
- Verifying that the member is part of the pilot program created in the 2014 Farm Bill.
- Adapting ongoing due diligence and reporting approaches to any risks specific to participants in the pilot program.
- Being familiar with any other federal and state laws and regulations that prohibit, restrict, or otherwise govern these businesses and their activity.
In sum, banking hemp-related businesses is permissible for credit unions. But they must be diligent in crafting BSA/AML policies. This is not a complete solution to the existing banking problems facing the Cannabis industry, but it does evidence a growing regulatory desire to provide access for the industry, which could sway policy makers down the road.
[1] The 2018 Farm Bill defines “hemp” as: “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”
Webinar Replay – New York Cannabis Legislation Update
Duane Morris attorney Neeraj Kumar provided an update on New York cannabis legislation during the “Cannabis 204: The Roundup of State Cannabis Legislation” webinar.
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Webinar Replay – Massachusetts Cannabis Legislation Update
Duane Morris partner Martin Shulkin provided an update on Massachusetts cannabis legislation during the “Cannabis 204: The Roundup of State Cannabis Legislation” webinar.
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Webinar Replay – New Jersey Cannabis Legislation Update
Duane Morris partner Paul Josephson provided an update on New Jersey cannabis legislation during the “Cannabis 204: The Roundup of State Cannabis Legislation” webinar.
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Duane Morris Partner Vince Capuano Quoted in AP News Article, “How much pot in that brownie?”
How much marijuana is really in that pot brownie? Chocolate can throw off potency tests so labels aren’t always accurate, and now scientists are trying to figure out why.
In states where marijuana is legal, pot comes in cookies, mints, gummies, protein bars — even pretzels. These commercial products are labeled with the amount of high-inducing THC. That helps medical marijuana patients get the desired dose and other consumers attune their buzz.
But something about chocolate, chemists say, seems to interfere with potency testing. A chocolate labeled as 10 milligrams of THC could have far more and send someone to the emergency room with hallucinations.
[…]
Scores of cannabis-related inventions have received U.S. patents, said [Duane Morris partner] Vincent Capuano, who holds a doctorate in organic chemistry. Inventors have patented ways of putting cannabis into milk, coffee pods, ice pops and chewing gum.
“There’s a lot of flash and hipness, snake oil and marketing. But there’s still a lot of real chemical advance happening,” Capuano said of the industry. “It’s right in center field for chemists.”
[…]
To read the full article, visit the AP News website.