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By Steven Schain
While preferable to its predecessors, the SAFE Banking Act fails to provide legal marijuana growers, processors, transporters or sellers (marijuana-related businesses or MRBs) with the access to banking that every other legitimate industry enjoys.
Is the third time a charm?
Following failed 2019 and 2021 attempts, both the House of Representatives and Senate reintroduced the Secure and Fair Enforcement Banking Act of 2023 (SAFE Banking Act) on April 26.
While preferable to its predecessors, the SAFE Banking Act fails to provide legal marijuana growers, processors, transporters or sellers (marijuana-related businesses or MRBs) with the access to banking that every other legitimate industry enjoys.
Banking and cash management have been among legalized marijuana’s greatest obstacles and, seeking to align federal and state “banking services access laws,” the SAFE Banking Act prohibits federal banking regulators from penalizing banks servicing MRBs.
Despite lessening criminal/administrative penalties and depository insurance obstacles, and although adding residential mortgage loan protections, the Safe Banking Act fails to put legal cannabis on equal footing with all other legitimate industries or make depository accounts and merchant services either available or affordable.
Cannabis Banking’s Legal and Operational Difficulties
- Marijuana-Related Businesses
MRBs take two forms: plant touching and nonplant touching.
First, businesses which “manufacture, distribute or dispense marijuana” or literally touch cannabis at some point along the supply chain are deemed plant touching. See “FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses,” FinCEN, Feb. 14, 2014. Licensed by the state, plant touching MRBs include: cultivating, harvesting, processing/extracting, testing, packaging, disposing, transporting and dispensing. See U.S. Senate, “S. 1726: Marijuana Businesses Access to Banking Act of 2015,” July 9, 2015; Representatives, H.R. 2076, April 28, 2015.
Further, any entity having a financial or controlling interest (regardless of ownership percentage) in a Plant Touching MRB, including investment or management shell companies which may be seeking “to conceal or disguise involvement in marijuana related business activity,” are deemed plant touching MRBs.
Second, businesses providing products and services to plant touching MRBs but not directly “manufacturing, distributing, or dispensing marijuana” are labeled nonplant touching and include: banking, payment processing and armored car services; commercial real estate (landlord and property management); professional services (accounting, consulting, legal, lobbying and insurance); testing and lab services; construction, plumbing and electrical; and cultivation packaging and supplies.
- Criminal and Civil Exposure of MRBs
The Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. Section 801, Et. Seq (1970) (Controlled Substance Act) lists marijuana next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision.” The Controlled Substance Act prohibits marijuana’s manufacture, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s supremacy clause, state laws conflicting with federal law are generally preempted and void. U.S. Const., Art. VI, cl. 2; see Wickard v. Filburn, 317 U.S. 111, 124 (1942) (”No form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress”).
This federal prohibition creates criminal and civil exposure for MRBs. First, depending on amount of cannabis possessed, cultivated or sold, the Controlled Substance Act impose penalties ranging from incarceration of 15 days to life and fines of $1,000 to $1 million. Second, because working together to distribute drugs to a third party forms a “conspiracy” in violation of 21 U.S.C. Section 846, anyone “furthering sales” (e.g., the dispensary’s landlord) faces conspiracy exposure. Third, one whom knowingly leases property for the purpose of “distributing a controlled substance” may be deemed to be “maintaining a drug premise” in violation of 21 U.S.C. Section 856 subject criminal (up to 20 years incarceration and fines up to $500,000 for individuals and $2 million for an entity) and civil (forfeiture of gross receipts earned from leased space) penalties.
- Cannabis Banking Law and Regulation
Any transfer or deposit of monies yielded from the sale of cannabis sale may deemed “money laundering” in violation of 18 U.S.C. Section 1956 for the seller and a Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970, 31 U.S.C. 5311, Et. Seq (Bank Secrecy Act) violation for the bank accepting the deposit and “failing to identify or report financial transaction involving proceeds of Controlled Substance Act violation.” (“Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana related business would generally involve funds derived from illegal activity”).
In its Feb. 14, 2014, dated “guidance,” the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) clarified that through adhering to institution specific factors (particular business objectives, evaluation of risks associated with offering particular product or service and capacity to effectively manage risks), banks may provide financial services to MRBs consistent with Bank Secrecy Act obligations by: obtaining and reviewing “marijuana-related business and parties” information from licensing and enforcement authorities including application, license and registration documentation; (developing an understanding of the business’ normal and expected activity including types of to-be-sold product and to-be-served customers (e.g., medical versus adult use); monitoring publicly available sources for adverse information about business and related parties; monitoring for suspicious activity, including the guidance’s specified red flags; and routinely updating customer due diligence information commensurate with risk (FinCEN guidance).
These FinCEN guidance red flags indicating state law or Department of Justice policy clarifying memoranda restraining Controlled Substance Act enforcement in legalized marijuana states violations (i.e., Cole Memorandum priority violations) include MRBs: appearing to use a license as a pretext to launder “criminal activity derived funds;” inability to demonstrate a licensed business operating consistently under state law or legitimate source of significant outside investments; concealing or disguising cannabis involvement; are, or have been, subject to a marijuana-related law or regulation enforcement action (including owners and operators); engaging in international or interstate activity including making/receiving out-of-state cash deposits or interstate transfers; or purporting to be a “nonprofit” while engaged in commercial activity inconsistent with classification.
The FinCEN guidance compounds compliance costs by requiring that a bank providing financial services to an MRB file suspicious activity reports (SARs) following aforementioned “red flags” or if it knows, suspects, or has reason to suspect that a conducted or attempted transaction: involves—or is an attempt to disguise—funds derived from illegal activity; is designed to evade BSA regulations; or lacks a business or apparent lawful purpose.
Because, regardless of state law, federal law bars all growing and selling, all marijuana-related business financial transactions that involve funds derived from illegal activity requiring banks to file a limited, priority or termination SAR with every deposit, withdrawal or transfer. First, if providing financial services to a business not violating state law or any Cole Memorandum priority, a bank must file a marijuana limited SAR listing: subject and related parties information and addresses; that filing SAR solely because subject engaged in a marijuana-related business; and no additional suspicious activity has been identified.
Second, if reasonably believing that a marijuana-related business violates state law or Cole Memorandum priority, a bank must file marijuana priority SAR providing: subject and related parties information and addresses; enforcement priorities believed to have been implicated; and “suspicious activity financial transactions” details including dates and amounts. Third, if “facilitating effective anti-money laundering compliance” requires terminating a “marijuana-related business” relationship, a bank must file a marijuana termination SAR” alerting the successor financial institution of potentially illegal.
- Operational Difficulties in Banking Cannabis Cash
Only 8% of the nation’s 9,603 financial institutions provide marijuana-related businesses with accounts, which, to offset onerous compliance costs, impose service fees reaching $10,000 per month per account. Due to difficulty in obtaining financial and armored car services and because marijuana is primarily, if not exclusively, a cash business, MRBs face overwhelming safety, security and operational issues.
First, MRBs, their employees and their patients and vendors face physical criminal risk of robbery and assault. Second, the “lack of financial services” access both imposes additional disbursement and “accounting and record keeping” requirements on the MRB and results in a massive productivity loss.
Third, because they lack financial services and receive all monies in cash, MRBs are forced to use cash to pay employees, landlord, taxes (local, state and federal), utilities (electricity, water), and vendors, thereby passing on the criminal vulnerability, administrative burden and productivity loss.
Fourth, because insurance typically only covers up to $20,000 cash loss and MRBs often have between $200,000 to $500,000 in cash on hand, theft can be a fatal blow to an enterprise.
Fifth, even if it has a banking account, after writing a check to another MRB, an MRB’s account may be flagged and shut down creating huge business interruption issues. Further, following an account closure, an MRB’s owners and employees often have their personal accounts shut down and experience difficulty in obtaining home loans or credit cards.
SAFE Banking Act’s Protections and Failings
While lessening penalties and depository insurance impediments and clarifying ambiguities between conflicting areas of law, the Safe Banking Act fails to provide the cannabis Industry with the unfettered access to banking available to every other legal industry.
Protections
First, the SAFE Banking Act clarifies that funds from a licensed plant touching MRBs operations are not proceeds from an unlawful activity. Thus, while not expressly removing MRB funds from the Bank Secrecy Act’s “money-laundering ambit,” the act partially legitimizes cannabis cash.
Second, the SAFE Banking Act prohibits federal banking regulators from: terminating/limiting deposit insurance solely for providing financial services to an MRB; prohibiting, penalizing, or discouraging a bank from providing financial services to an MRB; recommending, incentivizing, or encouraging a bank not to offer, downgrade or cancel financial services solely if the account holder is an MRB or its employee, owner operator; taking adverse action on a loan made to a MRB or its employee, owner, or operator; or prohibiting, penalizing or discouraging a bank from engaging in a financial service for an MRB.
Third, the Safe Banking Act protects banks and insurers providing MRBs with financial services from federal legal or regulatory exposure (including criminal, civil, or administrative forfeiture) solely for providing, or investing income, derived from such a financial service.
Fourth, the Safe Banking Act’s 2023 iteration adds:
- Protections shielding any residential mortgage loan lender, insurer or guarantor from any criminal, civil, or administrative forfeiture pursuant to any federal law for providing, insuring, guaranteeing, purchasing, securitizing, or guaranteeing payments from a security based on based on income from a state-sanctioned marijuana business.
- A broader ‘‘financial product or service’’ definition culled from Section 1002 of the Consumer Financial Protection Act of 2010, 12 U.S.C. 5481, which may be deemed to encompass credit card companies into the Safe Banking Act protective ambit.
Failings
Despite diminishing criminal and administrative punishment and depository insurance denial, the Safe Banking Act fails to put cannabis on an equal footing with all other legitimate industries regarding banking or merchant services access.
First, the act fails to amend the Bank Secrecy Act to remove MRBs’ proceeds from the “money laundering” purview that would make depository accounts and merchant services both available and affordable to MRBs.
Second, instead, the Safe Banking Act incorporates the FinCEN guidance requirements foisting onerous compliance requirements on financial institutions preventing from profitably banking cannabis, limiting the number of banks capable of providing financial services and causing these egregious costs to be passed on to plant touching MRBs.
Third, the Safe Banking Act expressly refuses to require banks or insurers to provide financial services to any plant touching or nonplant touching MRBs. Thus, because banks and insurers remain free to shun cannabis industry participants, the Safe Banking Act falls staggeringly short of achieving its stated objectives.
While amending the Bank Secrecy Act to add a “state-sanctioned marijuana businesses” safe harbor against money-laundering exposure would render depository accounts and merchant services both available and affordable, the Safe Banking Act’s incremental offering is the cannabis Industry’s best available option.
Reprinted with permission from the June 22, 2023 edition of the Legal Intelligencer © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].
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