Does SAFE Banking Have a Chance



Great analysis of the chances that the SAFE Banking Act becomes law from Howard Penney at Hedgeye Risk Management:

The MSOs rallied 7% last week on the back of a bipartisan group of lawmakers reintroducing the SAFE Banking Act. The bill has a 0% chance of passing without hearing from Senator Mitch McConnell. In reality, SAFE does not change much for the industry. Other reform elements around 280e taxes, interstate commerce, and an updated Cole memo are more impactful to the industry’s fundamentals. Unfortunately, lawmakers in Washington, DC, have had difficulty passing modest cannabis reform for several reasons, including the following:

    •  Playing Politics: The cannabis reform issue has become highly politicized, with Democrats typically favoring legalization and Republicans generally opposing it. This is because cannabis reform has become a highly controversial topic, with politicians more concerned with political posturing and pleasing their base than with finding common ground; this can make it difficult to pass any meaningful reform measures.
    • No consensus: Even among people who favor cannabis reform, there may be differing opinions regarding the strategy that should be utilized. Some people may push for marijuana to be fully legalized, while others may merely favor incremental reform measures such as decriminalization or the legalization of medical marijuana. Because of this, it may be challenging to arrive at a consensus that has the potential to gain enough support to enact legislation.
    • A seemingly insurmountable conflict: even though several states have decriminalized cannabis in some form, the drug is still Schedule 1, making it against the law on the federal level. Because of this, there is a potential for legislation at the state and federal levels to contradict one another, making it more challenging to enact effective rules and regulations.
    • Lobbying and special interests: The cannabis sector in prohibition is in its infancy and rapidly undergoing change; as a result, a significant number of conflicting interests and stakeholders are involved. Lobbying efforts by these organizations (esp. pharma, tobacco, and alcohol) can sway legislators’ attitudes about the matter at hand and make it more challenging to enact reform measures that might not serve the interests of the lobbying organizations.

In general, achieving cannabis reform in D.C. is a complicated subject incorporating various elements, including political, social, and economic considerations. Even while there may be widespread popular support for cannabis law reform, D.C. is unlikely to change the challenging process actually to bring about significant change.

U.S. Senators May Introduce “SAFE Banking Plus” By End of Year

After finally introducing the comprehensive Cannabis Administration and Opportunity Act (CAOA) in the U.S. Senate last month,  last week Sen. 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. As we previously reported, the SAFE Banking Act would allow cannabis businesses to access the federal banking system and service providers to the cannabis industry such as attorneys, accountants, bankers and landlords would be permitted to accept payment from cannabis businesses without the risk of violating federal law. SAFE Banking has passed the House of Representatives seven times in recent years but so far has not been taken up in the Senate.

Since the introduction of the CAOA last month, which would not only permit cannabis companies to access the banking system but would legalize and decriminalize recreational cannabis with an eye toward supporting communities that have been most impacted by the war on drugs, Sens. Booker and Schumer (D-N.Y.) have said they would be willing to consider more incremental cannabis reform such as SAFE Banking with added equity provisions.  Many are referring to the as-yet proposed bill 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.

Schumer and Booker have been meeting with other lawmakers to work on a compromise bill, and Booker said a proposal might come after the November elections and before the new Congress starts in January.

Federal Banking Regulators Take Steps to Allow Financial Services for Hemp-Related Businesses

Banking has been an impediment for the cannabis industry because the Bank Secrecy Act of 1970 (BSA) and related regulations―which seek to prevent money laundering and other financial crimes―place onerous requirements on banks when a transaction is suspected to involve illegal activity. 12 C.F.R. Section 21.11. Notwithstanding billions of state-legal cannabis dollars exchanging hands, the commercial banking industry, which is largely federally regulated, is virtually nonexistent in the cannabis space. In 2014, the Treasury’s Financial Crimes Enforcement Network (FinCEN) provided guidance intended to enhance the banking of cannabis-related monies by establishing a category of suspicious activity reporting for “marijuana related businesses.” But, according to FinCEN, as of June 30, 2019, just 553 commercial banks and 162 credit unions had filed an SAR for a “marijuana-related business.”

View the full Alert on the Duane Morris LLP 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

California Cannabis Banking Bill – Moving Along with 35-1 Senate Vote in Favor – Brad A. Molotsky, Esq.

The CA Senate voted 35-1 to allow banks and credit unions to accept cash deposits from marijuana retailers.

Per reporting from the Star Tribune, those banks would be permitted to issue special checks to the retailers that could only be used for certain purposes, including paying taxes and California-based vendors.

State lawmakers are of the view that such banks would make it easier for licensed cannabis retailers to pay their taxes, which fell far short of expectations in the first year after legalization.

“This is as close as we can get until the federal government changes its policy,” said Sen. Bob Hertzberg, a Van Nuys Democrat and the author of the bill that now goes to the Assembly.

Per the Marijuana Law Reporter, Marijuana has been legal in California since January 2018, but it’s still illegal under federal law under the Controlled Substances Act.

-Brad A. Molotsky, Esquire

Cannabis Banking – Can Do in West Virginia – Brad A. Molotsky, Esq.

Gov. Jim Justice of West Virginia signed into law, HB 2358, a medical cannabis banking bill, allowing bidding for financial institutions to provide banking services related to the state’s medical marijuana program.

Per reporting from MJ Biz, House Bill 2538 also establishes the Medical Cannabis Program Fund for collecting fees related to the program and the Treasurer’s Medical Cannabis Fund allowing the state treasurer to collect $ for banking services.

Justice said Tuesday he fully supports opening access to medical marijuana. Delegate Mike Pushkin, D-Kanawha, who co-sponsored the bill, said he was happy to see Justice sign the bill.

“I think that if we allow different types of entities to act as a depository, then we are more likely to find somebody to step up and do that business,” he said.

Justice has yet to act on a separate bill, House Bill 2079, which addresses issues with the original medical marijuana bill, including the permitting process and regional distribution requirements.

Justice has until midnight Wednesday to act on bills from this year’s 60-day legislative session. -Brad A. Molotsky

Bank Closes Campaign Account of Pro-Cannabis Candidate

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

Constellation Brands’ $4B Cannabis Investment

Seth Goldberg
Seth A. Goldberg

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.

Momentum Builds With Schumer’s Bill To Legalize Marijuana

Seth Goldberg
Seth A. Goldberg

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.

Cannabis Banking Concerns a Focus of Proposed States’ Rights Bill

Seth Goldberg
Seth A. Goldberg

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.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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