Banking continues to be a challenge for the cannabis industry. But, Wells Fargo recently erected a new barrier: It closed the campaign bank account of Nikki Fried, candidate for Agriculture Commissioner of Florida. According to a report in the New York Times on August 21, 2018, the bank took notice of the candidate’s advocacy for better access to medical marijuana. It then asked the campaign whether it accepted contributions from lobbyists for the medical marijuana industry. When the campaign replied it accepted contributions from executives and employees in the industry, Wells Fargo closed the account. The campaign now banks at BB&T. Full New York Times Story
On August 15, 2018, Constellation Brands, which owns popular beer, wine and spirits products, such as Corona, Robert Mondavi and High West, announced it is investing $4 billion in Canopy Growth, which is one of the leading investors in the global legal cannabis market. The announcement boosted Cannabis market stocks in the US and Canada, and is likely to catch the eye of big alcohol, big tobacco, big pharma and larger consumer products companies that have been interested in entering the growing legal marijuana markets. More and more companies once-hesitant about doing so are finding that good counsel can help them navigate the regulatory hurdles that might otherwise stand in the way of profiting from this exciting market.
Just weeks after Senators Elizabeth Warren (D-Mass) and Cory Gardner (R-Colo) introduced bi-partisan legislation to make marijuana lawful under a state’s marijuana laws also lawful under the Controlled Substances Act (CSA), Senate Minority Leader Chuck Schumer (D-NY) introduced legislation removing marijuana from the CSA altogether on Wednesday, June 27. Schumer’s bill also comes just one day after Oklahoman’s passed legislation legalizing medical marijuana in their traditionally red state, and one day before the U.S. Senate passed legislation legalizing hemp for all purposes, including extracts from hemp, such as cannabidiol.
By removing from the purview of the CSA, state-legal cannabis and proceeds derived therefrom, the Warren/Gardner legislation, if passed, would likely have the effect of nationwide legalization, but state operators and consumers would still need to be concerned about marijuana’s Schedule 1 status under the CSA, whereas the Schumer bill, if passed, would eliminate those concerns by removing marijuana from the CSA.
On Wednesday, an article I wrote describing the public safety concerns that result from the lack of banking in the cannabis industry due to the federal prohibition of marijuana was published in the National Law Journal.
Yesterday, Senators Elizabeth Warren (D-Mass) and Cory Gardner introduced bipartisan legislation that, if passed, would make the regulation of marijuana a state issue. Comments by Senator Gardner show public safety issues resulting from the dearth of banking providing services to the industry are a focus of the newly-proposed legislation. The Hill reports Gardner stating when introducing the legislation:
“This city of Denver, the state of Colorado, can collect taxes … they can take it to the bank,” Gardner said. “But if you’re in the business, if you work for the business, you can’t get a bank loan or set up a bank account because of the concern over the conflict between the state and federal law. We need to fix this public hypocrisy.”
It was widely reported on April 13, 2018, that President Trump promised to Senator Gardner that he would support a states’ rights approach to marijuana, which promise appears to have resulted in this proposed legislation. A lot has to happen before this bill reaches Trump, but if it does, a veto may be unlikely. Such states’ rights legislation could then pave the way for more banks to service the industry.
Senators Cory Gardner (R-CO) and Elizabeth Warren (D-MA) today introduced the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. While we have not seen the text yet, Sen. Warren has published a summary. The bill would amend the Controlled Substances Act (CSA) saying it no longer applies to anyone acting in compliance with state (or tribal) laws relating to the manufacture, production, possession, distribution, dispensation, administration or delivery of cannabis. It also legalizes industrial hemp and removes it from the CSA. In addition to other provisions, the bill prohibits the distribution or sale of cannabis to anyone under 21 other than for medical purposes.
There are a number of pending bills promising various levels of cannabis legalization or decriminalization. This bill is important because it is the result of conversations between Sen. Gardner and the President. When Attorney General Jeff Sessions rescinded the 2014 Cole Memo which de-emphasized cannabis enforcement against legal state actors, Sen. Gardner angrily stopped approving new judicial nominations. That led to Trump’s commitment to Gardner to support “states rights” legislation if brought to him. Advocates hope this bill has a chance to move quickly as a result.
While not listed in the summary, according to MJBizDaily, the bill also would repeal tax code Section 280E which prohibits cannabis companies from deducting their ordinary business expenses, and also would allow federally insured banks greater ease in accepting cannabis customers. Stay tuned!
I have previously written about the public safety concerns resulting from the lack of banking in the cannabis industry. As I noted in that article, the elimination of the Cole Priorities in January 2018 has left federally-regulated banks wondering how they can follow FinCen’s guidance for banking cannabis issued in February 2014, which was explicitly dependent on the Cole Priorities.
While the Cole Priorities were in place, that guidance provided a clear path for banking cannabis industry participants adhering to the Cole Priorities. FinCen’s guidance is still in place, and banking cannabis is still possible, but confusion about how to do so without the Cole Priorities as guideposts has caused greater reluctance on the part of banks.
Enter proposed legislation in California, SB-930, which passed in the California Senate yesterday. Not a complete solution to the banking problem by a long shot, but progress nonetheless. If it becomes law SB-930, would result in the establishment of a California-chartered bank that would permit California cannabis industry participants to deposit the proceeds of their state-lawful cannabis activities, and would provide to them limited banking services that would allow for payment of taxes and vendors by check.
As reported in the Sacramento Business Journal, the Bill’s sponsor, Sen. Bob Hertzberg (D-Van Nuys), characterized SB-930 as an attempt alleviate the public safety concerns resulting from the federal government’s current hands off approach to banking cannabis. As Herzog stated, “It’s not only impractical from an accounting perspective, but it also presents a tremendous public safety problem. This bill takes a limited approach to provide all parties with a safe and reliable way to move forward on this urgent issue.”
Duane Morris partner Seth Goldberg is quoted in the New York Law Journal article, “Medical Marijuana Business Banking Remains Difficult.” Mr. Goldberg discusses how banking is a major hurdle for the legal medical marijuana business.
To read the article, visit the Duane Morris website.
On January 4, US Attorney General Jeff Sessions rescinded all prior advisory memos on prosecutorial priorities relating to cannabis, including the 2014 Cole Memo which many relied on in entering the space. One consequence of rescinding the Cole Memo is its effect on US Treasury Department guidelines for banks and financial institutions that seek to take cannabis customers. Those 2014 guidelines, issued by the Treasury’s Financial Crimes Enforcement Network (FinCEN), outline processes and filings to be undertaken when a cannabis customer is signed up. The main focus of the process is on due diligence the bank must do on the proposed customer, including ongoing monitoring while the company is a customer. The guidelines also require filing of a “suspicious activity report” (SAR) with FinCEN for each such potential customer.
The banking guidelines focus heavily on the now-rescinded Cole Memo, which suggested the low prioritization of enforcement against people complying with state cannabis laws. The Memo contained a list of exceptions, and if one of the exceptions was present, then enforcement could be pursued. The exceptions included things like providing cannabis to minors, the involvement of organized crime or firearms, and the like. The FinCEN guidelines require a bank to conduct an analysis of whether the potential customer is complying with the Cole Memo priorities. Indeed the type of SAR that the bank must file varies depending on whether or not the potential customer appears to be in compliance with the Cole Memo.
A story in Politico quoted a FinCEN spokesman who was asked if they are looking to bring their policies into line with the Justice Department. He said, “FinCEN works closely with law enforcement and the financial sector to combat illicit finance and provide relevant information that allows law enforcement to pursue their priorities. We will continue to work with DOJ and other stakeholders on this issue.” It does appear that confusion and uncertainty on this issue will continue until FinCEN provides further clarification or interpretive guidance. In the meantime, this might mean that some financial institutions will stop servicing cannabis customers and others that were considering it may suspend their efforts.
This post was the combined effort of David Feldman and Neeraj Kumar.