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By Joseph E. Silvia
Businesses of all kinds depend on financial services provided by banks, credit unions, and other depository institutions to operate and grow their businesses. Cannabis related businesses are no different. Even as a majority of states have legalized various form of cannabis, whether hemp, marijuana, or CBD, most businesses directly and indirectly involved in the cannabis industry (“cannabis related businesses”) continue to the search for banking relationships.
While some financial institutions are currently accepting deposits, lending money, and providing limited financial services to cannabis related businesses, they are the exception and not the rule. In most of those cases, they are providing financial services to those cannabis related businesses that deal exclusively with hemp derived products (since the passage of the Farm Bill in 2018 to legalize hemp). However, the overwhelming majority of depository institutions are hesitant to establish or even retain relationships with cannabis related businesses given the complex patchwork of state and federal laws. Despite 2014 guidance released by the Financial Crimes Enforcement Network (“FinCEN”), depository institutions are hamstrung by a lack of material guidance from federal bank and credit union regulatory agencies, specifically the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration. This is most pronounced for cannabis related businesses that directly or indirectly deal with marijuana.
Thus, cannabis related businesses remain severely limited in their ability to obtain financial services because marijuana remains illegal as a Schedule I drug under the Controlled Substances Act. As such, any financial institution providing financial services to businesses that are directly or indirectly related to the development, manufacture, sale, or distribution of marijuana could be exposing themselves to liability under federal law. Specifically, liability under the Bank Secrecy Act, formally known as the Currency and Foreign Transactions
Reporting Act of 1970, and as amended by the USA PATRIOT Act of 2001, the primary money laundering statute in the U.S. Without more concrete assurance that providing financial services to legitimate cannabis (specifically marijuana) related businesses will not be prosecuted or met with regulatory enforcement actions, depository institutions will remain largely on the sidelines.
Fortunately, there have been efforts afoot to alleviate these concerns. First, what is known generally as the Rohrabacher-Farr amendment has been passed by Congress every year since 2014 and prohibits the Justice Department from preventing certain “States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” While helpful, it remains limited in scope relevant to concerns of depository institutions.
Second, over the last few years, federal legislation, in particular the Secure and Fair Enforcement Banking Act (the “SAFE Banking Act”), has been introduced and passed by members of the House of Representatives seven times to date. However, the Senate has failed to take any material action on the legislation, despite broad industry support for the concepts underlying the SAFE Banking Act, and both Democrats and Republicans are digging in on the details, leaving the legislation in a standstill.
What the SAFE Banking Act aims to address is precisely what depository institutions are most concerned about. If passed, it would make it easier for depository institutions to provide traditional financial services to cannabis related businesses dealing in products that remain illegal under federal law. The legislation would generally prohibit a federal bank regulatory agencies from penalizing depository institutions that provide services like deposit accounts and small business loans to cannabis related businesses. The legislation would also clarify that the proceeds from transactions involving legitimate cannabis related businesses (i.e. properly authorized, licensed, or registered) would not be considered proceeds from unlawful activity, as they are
currently categorized under the Bank Secrecy Act. Another critical piece of the legislation would exempt depository institutions from liability and asset forfeiture risks for loans to cannabis related businesses – a legitimate concern for lenders.
The benefits have been outlined time and again. Cannabis related businesses continue to experience challenges with the cash-intensive nature of their current business model. Opening up opportunities for deposit accounts would relieve much of the frustration and concern over threats of theft, robbery, and potentially physical harm to owners and operators of cannabis related businesses.
Less-discussed benefits include the benefit of encouraging substantive guidance from bank and credit union regulatory agencies to assist depository institutions appropriately identify novel risks, manage those risks, learn from the experience of other depository institutions, and appreciate examiner expectations.
There is arguably another benefit for the financial system from the engagement with cannabis related businesses – information. Just like any other business that opens a deposit account, obtains a loan, or otherwise engages with a depository institution, the owners and/or operators of the business will generally provide background information to the depository institution, as required under anti-money laundering laws and regulations. In addition, depository institutions are required to file certain kinds of reports (e.g. currency transaction reports and suspicious activity reports) with FinCEN, the financial intelligence unit of the U.S., which is housed within the Department of the Treasury.
These reports are filed based on certain transactions that take place through the depository institution, for example when a transaction exceeds certain dollar thresholds or is otherwise atypical based on the business’ profile or characteristics. FinCEN and bank and credit union regulatory agencies obtain as much information as possible to combat criminal activity in money laundering, illicit finance, and the financing of terrorism. This monitoring information related to the use and distribution of cannabis, specifically marijuana, is critical in combating money laundering and countering the financing of terrorism, the most significant roadblock to providing financial services to cannabis related businesses. So, the benefits seem compelling – what is the risk?
The real risk is the risk of exposing the financial system to increased money laundering activity. This risk already exists in the context of cannabis related businesses and cannot be completely eliminated, but opening the banking system to legitimate cannabis related businesses could increase risks associated with money laundering activities and illicit finance. Some view this as gateway to the expansion of services, and thus risk to the financial system, similar to how marijuana gets labeled as a gateway drug that leads to debilitating, universally illegal drugs.
Money launderers and illicit financiers are creative, flexible, and highly motivated to find ways to evade detection, so this is a real risk. This risk necessarily results in a material increase in the potential exposure for depository institutions.
However, many in the banking industry, the cannabis industry, and in the halls of Congress believe that the benefits outlined above outweigh the associated risks of taking the step to allow depository institutions to provide basic financial services to legitimate cannabis related businesses. So, why the delay for legislation, like the SAFE Banking Act, to become law?
Admittedly, the details will matter a great deal, but there is no perfect legislation. The ultimate test will be the years-long development of regulations (which has its own laborious process, including requesting comments from the public) that implement legislation by a multitude of federal agencies. Maybe what we need is strong, flexible legislation, not the pursuit of a perfect unicorn piece of legislation.
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