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.”
The long awaited regulations establishing a regulatory framework under the 2018 Farm Bill passed last December were issued today (10/29/19). An Interim Final Rule will be published in the Federal Register later this week, which will make the U.S. Domestic Hemp Production Program effective. As explained in the Interim Final Rule: “The program includes provisions for maintaining information on the land where hemp is produced, testing the levels of delta-9 tetrahydrocannabinol, disposing of plants not meeting necessary requirements, licensing requirements, and ensuring compliance with the requirements of the new part.” USDA has published the Interim Final Rule and Guidelines for Sampling and Guidelines for Testing pursuant to the Interim Final Rule on its website.
Among other key provisions, the new regulatory framework provides for USDA’s approval of State and Tribal Land hemp programs established under the 2018 Farm Bill, which will end debate as to whether hemp activities in a State or Tribal Land receiving such approval are federally lawful. To be approved, those plans will have to contain stringent requirements for testing the THC content of hemp to ensure it does not meet the definition of marijuana, and contain procedures for the enforcement of violations of the State or Tribe’s hemp program. Importantly, the regulatory framework provides for USDA’s granting of hemp production permits in states and territories that do not establish hemp programs for approval by USDA.
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”): 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 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.
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.
 21 U.S.C. § 801 et. seq.
 Financial Crimes Enforcement Network
The past week has shown the challenges that the cannabis industry supply chain—manufacturers, processors, distributors and dispensaries—faces, as regulators target claims relating to the health benefits of CBD and media outlets report, without any scientific evidence, that cannabis vaping may be linked to lung illnesses, and, as of the issuing of this Alert, the Trump administration is reported to be poised to ban flavored nicotine vaping. These kinds of issues could spur claims against cannabis industry participants for consumer fraud, personal injury and products liability, and heighten the scrutiny of cannabis products by federal and state regulators.
On September 10, 2019, the Federal Trade Commission announced that it had sent warning letters to three unidentified businesses “that sell oils, tinctures, capsules, ‘gummies,’ and creams” containing hemp-derived CBD, concerning health-related claims about the benefits of their CBD products. Although the FTC did not release the warning letters or identify the recipients, the FTC’s press release announcing the warning letters explained that the letters were issued to reinforce that “it is illegal to advertise that a product can prevent, treat, or cure human disease without competent and reliable scientific evidence to support such claims.”
On August 26, 2019, the Drug Enforcement Agency (DEA) issued a press release announcing “it is moving forward to facilitate and expand scientific and medical research for marijuana in the United States.” This announcement comes in the midst of a growing demand for marijuana for medical and scientific research. Several years ago, in an August 11, 2016, press release, DEA first announced its intention to “expand… the number of DEA-registered marijuana manufacturers” because “only one entity was authorized to produce marijuana to supply researchers in the United States: the University of Mississippi.” Since that announcement, 33 entities have applied to DEA for a marijuana manufacturer registration. However, the approval process was stalled during Attorney General Jeff Sessions’ term in office, and to date no new applications have been approved. Meanwhile, the number of entities registered by DEA to conduct research on marijuana, marijuana extracts or marijuana derivatives has jumped from 384 in January 2017 to 542 in January 2019. Thus, while demand for marijuana for research purposes has increased sharply, the number of suppliers has remained stagnant.
The Agriculture Improvement Act of 2018 (the “2018 Farm Bill”), signed into law on December 20, 2018, altered the federal government’s treatment of hemp in a number of ways. The 2018 Farm Bill expanded the definition of “hemp” to include, explicitly, derivatives, extracts and cannabinoids, and removed hemp from the definition of federally unlawful marijuana under the Controlled Substances Act (CSA). See 2018 Farm Bill, Pub. L. No. 115-334 §§ 10113, 12619, 132 Stat. 4490. Notably, the 2018 Farm Bill also explicitly permitted the interstate transportation of hemp: “No State or Indian Tribe shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113).” Id. at § 10114.
Subtitle G, for its part, provides that “[n]othing in this section prohibits the production of hemp in a State or the territory of an Indian tribe—(1) for which a State or Tribal plan is not approved under this section, if the production of hemp is in accordance with section 297C or other Federal laws (including regulations).” Id. at § 10113 (emphasis added). This final clause, “or other Federal laws,” is significant because the Agriculture Act of 2014 (the “2014 Farm Bill”) is also a “federal law,” and to date approximately 40 states have instituted industrial hemp programs pursuant to the 2014 Farm Bill. Under the language of the 2018 Farm Bill, then, states may not interfere with the interstate transportation of hemp produced in accordance with either the 2014 Farm Bill or—once regulations are implemented and state hemp programs are approved—the 2018 Farm Bill.
Notwithstanding the language of the 2018 Farm Bill, the absence of federal regulations implementing the new law and sanctioning state hemp programs revised pursuant to the 2018 Farm Bill has caused significant confusion regarding the true impact of the act.
A two-hour special program, “Cannabusiness: The Marijuana Industry,” will be broadcast on Sirius XM’s Business Radio, Channel 132. Duane Morris partner Seth Goldberg will be interviewed on the program. The program will be re-broadcast at the following times:
Tuesday, February 26 from 2 to 4 pm ET
Tuesday, February 26 from 8 to 10 pm ET
Wednesday, February 27 from 1 to 3 pm ET
Thursday, February 28 from 2 to 4 pm ET
Friday, March 1 from 5 to 7 pm ET
Saturday, March 2 at Midnight and then again from 7 to 9 pm ET
Sunday, March 3 at 8 am ET and then again from 6 to 8 pm ET
With the rapid spread of marijuana legalization in the US, lawyers are discovering that the tangled web of regulations guiding the rapidly growing industry is a boon for business. …
There are several key reasons lawyers are attracted to the marijuana industry. For one, as cannabis companies grow, merge, and start getting the attention of Fortune 500 corporations as acquisition targets, they need more sophisticated advice on financing, tax planning, corporate structure, and M&A. …
That’s an opportunity to a select group of lawyers who have cut a trailblazing path into the industry. Once reluctant, some of the biggest law firms, like Duane Morris, Baker Botts and Dentons, are building out specialized cannabis practice groups as the industry continues to grow in profitability and complexity. …
Business Insider has pulled together a list of the top lawyers who’ve worked on the largest deals in the past year in the growing marijuana industry.
Firm: Duane Morris
Location: Philadelphia, New York, and San Francisco
Duane Morris has staked out big territory: It’s one of the few AmLaw 100 firms marketing its cannabis practice group, said Neeraj Kumar, an associate at the firm who works on cannabis issues.
“This is a very good opportunity for our firm,” said Seth Goldberg, the chair of the firm’s practice in Philadelphia. Cannabis is one of the “few emerging markets that has multibillion-dollar potential.”
Goldberg, a seasoned trial lawyer with decades of experience, said he spearheaded the firm’s involvement in the industry in 2014 after Colorado became the first state to allow recreational pot shops.
And for Kumar, the opportunity to become an expert in a field where there’s “a new development every week” was something he couldn’t turn down.
Duane Morris represented iAnthus, a US cannabis company, in its $640 million merger with MPX Bioceutical, also the first public-to-public transaction in the US cannabis industry. Further, the firm has advised investors on real-estate acquisitions.
The Controlled Substances Act defines “marijuana” as: all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.
The DEA has recently affirmed its position that CBD sourced from the parts of the plant that are included in the definition of marijuana are unlawful. This is true even if the CBD does not contain any THC. CBD derived from the excluded parts of the marijuana plant does not violate federal law. Were it to investigate/prosecute a business or individual for possessing CBD, the DEA would place the onus on the target to prove the CBD was sourced from the lawful parts of the plant.
Just like THC-containing products that are lawful under a state’s marijuana laws, CBD that may be lawful under a state’s marijuana laws, is still federally unlawful if sourced from the parts of the plant included in the definition of marijuana.