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With a presidential election year looming, the politics of pot is once again front and center in Washington, D.C., but this time there seems to be a greater probability than ever before that something significant will be accomplished. Yesterday, a newish banking bill was introduced by a bipartisan group of senators that adds fuel to those hopes. Constructed on the smoldering bones of previous versions of the SAFE Banking Act, the ‘‘Secure And Fair Enforcement Regulation Banking Act,” or “SAFER Banking Act,” would, according to congressional analysis of the bill, “ensure that all businesses – including State-sanctioned cannabis businesses – have access to deposit accounts, insurance and other financial services.”
The Act is comprised of 15 sections that cover subjects clearly intended to provide a guarantee of federal protection for institutions offering financial services to “State-sanctioned” cannabis businesses. These include safe harbor; protections for providing services to State-sanctioned cannabis businesses; protections under Federal law; requirements for filing suspicious activity reports (SARs); guidance and examination procedures; banking services for hemp-related legitimate businesses and hemp-related service providers; and treatment of income derived from a State-sanctioned cannabis business for qualification for a covered mortgage loan; requirements for deposit accounts.
Several sections also address congressional oversight of these protections by requiring annual access to financial services report; a GAO study on barriers to cannabis marketplace entry; and a GAO study on effectiveness of suspicious activity reports. To allay any concerns among financial institutions, the bill “underscores that this legislation does not require a bank or credit union, insurer or any other entity to provide a financial service or product to a State-sanctioned cannabis business.”
Notably, the Act moves the cannabis football down the field not only by building on previous versions of SAFE, but also by building “upon existing federal guidance from FinCEN and current agency practice at the OCC, FDIC, and Federal Reserve to ensure that banks and credit unions are operating in a safe and sound manner, including having processes and procedures to identify fraudulent or illegal activity—without placing pressure on the bank or credit union to restrict access to deposit accounts for political reasons, including through use of reputation risk,” states the analysis. “At the same time, through tailored rule-making conducted by the Federal banking regulators, the bill will expand access to deposit accounts in the communities in which banks and credit unions serve, and to consumers and business owners from all backgrounds.”
Industry Response
It’s almost unfair to expect the industry to seriously believe that this latest bill is going anywhere considering the fact that every previous effort has failed to get out of committee, and that each iteration of SAFE has pretyy much been a watered-down version of the previous version. Even before SAFER was released, however, hope was being rekindled that this time the political stars are aligned. Still, a consensus of sorts had also taken hold among many members of the industry that even if cannabis banking were to finally pass, that its usefulness would be limited because of advances on the ground, and banking could be found if one searched hard enough.
Only days ago, an article from Harris Bricken titled “How Important is the SAFE Banking Act, Anyway?” made essentially that case, and that the legislation could well have unintended consequences. “Most worrisome to me is that SAFE Banking could ultimately increase AML/BSA compliance burdens for financial institutions with cannabis clients,” wrote Vince Sliwoski. “Hundreds of them already offer services to state-licensed marijuana businesses: these banks are well versed in the old-as-dirt 2014 FinCEN guidance on working with industry. If SAFE Banking passes, we’ll surely get additional rules and guidance from the Treasury Department and elsewhere. Be careful what you wish for.”
Sliwoski was talking about the SAFE Act and not the SAFER Act, which was released a few days later, but his argument (and hesitant support) would likely remain the same. “I don’t mean to be discouraging,” he concluded. “In fact, it’s easier to feel OK when you think of SAFE Banking as not the biggest deal. These days, it’s really not.”
Not everyone aligns with that final analysis, however, even if they may agree that final passage of the bill “feels like miles and miles away.” Following the release of the SAFER Act, Cannabis Business Executive spoke with Jonathan Havens, a partner at Saul Ewing and member of its Cannabis Law department, to get his first impressions of the bill and whether this latest version was diluted in any way.
“I wouldn’t say that it’s been watered down,” he said. “I think there’s been some expansions. If you look at, say, Section 10, there is additional language about banking services in rural areas, low- and moderate-income areas, tribal communities, and unbanked businesses and consumers. I think what you’re seeing are some revisions and attempts to broaden the base of support to hopefully secure the necessary levels of support at the committee level, and if it gets reported favorably out of the committee into the full Senate for the full body’s consideration. So, I would say the language has been expanded to hopefully appeal to members that might have lingering concerns about one thing or another in the bill.”
Gaining bipartisan consensus will be essential, he added. “One of the challenges with a piece of legislation like this – or any piece of legislation in the Senate right now, given how narrowly divided it is – is that you can’t just rely on simple majority support,” he noted. “You’re going to need more than 51 votes here, so you’ve got to make sure that it contains the necessary features to get a broad enough base of support from the Republican and Democratic caucuses to get it across the finish line, which of course has never happened before in the Senate.”
But a minefield of negotiation still awaits the bill. “I think it is expected that we will see some amendments on the Senate floor, assuming the banking committee reports it favorably,” said Havens. “Majority leader Schumer has said time and again that he intends on offering criminal, social justice, social equity, criminal justice reform type measures to the legislation, which some would consider to be not palatable to the broader base of support. So, it’s got kind of a tricky climb, so to speak, but there do seem to be more favorable discussions than what have occurred in the past. I think many, like us and many of our clients, are optimistic that there is a better chance this time around, but it’s not a done deal.”
I mentioned that industry insider critiques of the SAFE Act are already shifting to the SAFER version. Havens was well aware of the criticisms. “I think some of what you’re hearing is along the lines of the following,” he said. “Cannabis businesses are already banking with mostly state and local credit union banks, the non-money-centered banks. The major banks – Wells Fargo, BNC, and Chase – aren’t banking in this space. But there are banks available, so what’s the big deal with this piece of legislation?
“Well, the big deal is that the entire Congress has never passed broad-based reform like this,” he continued. “So, part of this is symbolic, but part of it is substantive as well. There are banks that are already in this space and feel comfortable being in this space based on, among other things, the 2014 FinCen guidance that was based on the Cole Memo, which has been rescinded by former Attorney General Jeff Sessions. So, it would enable those who have been waiting on the sidelines for more official statements from Washington, rather than unenforceable guidance that could change at any time, which is the best way to characterize the FinCEN guidance. So, it’s a needed step along the way to reforming our policies around cannabis.”
That said, Havens agreed that fixing banking is one part of a much larger push to address decades of cannabis prohibition. “Obviously, the big thing many people are waiting for is for marijuana to be moved from Schedule 1 to something else, because under Schedule 1 it’s federally illegal for all reasons,” he said. “The DEA considers it to be highly likely to be abused and with no medical use. We know that neither one of those things is true, and hopefully DEA follows HHS’s recommendations to at least move it to schedule 3, if not farther down the schedule.”
And while the SAFER Act does not exactly shift the financial playing field in a momentous way, Havens insists that its more subtle provisions will have significant implications. “If we’re talking technically what would this bill do versus what some have feel like they can already do, the answer is maybe not materially different,” he said, “but it would broaden the base of banks that are out there. Right now, if you’re a member of the cannabis industry, you might only have one bank to choose from if you’re in a certain jurisdiction, and hopefully this will encourage others to get in off the sidelines and participate in the space.
“It would also make it safer for businesses that are dealing more in cash than they would like to be doing, to be providing different solutions,” he added. “The reason it’s called Safer Banking is because there are well documented safety issues with dispensaries, many of which handle a lot of cash and have been robbed. It’s been pretty well documented, including by some in Congress who are supportive of this measure. So, I don’t want to say that this would allow something that’s not currently allowed – because there are a lot of banks out there that have undertaken the work to do the necessary audits and compliance checks to make sure that the businesses they’re dealing with are in fact state-regulated businesses as opposed to drug dealers – but that’s why you hear some people talking about, ‘What would this do that can’t already be done?’ The answer is it would formalize in official U.S. law rather than in policy what could be done.”
Substance and Symbol (and More)
“Beyond the substance, symbolically, this is the biggest thing that cannabis stakeholders are looking at right now,” said Havens. “It signals to the markets, it signals to the entire country, to the world even, that the U.S. federal government understands the impact and the importance of the state-regulated cannabis industry, and that Washington cannot bury its head in the sand, and Congress needs to do something to make sure that the industry has the tools it needs to succeed, and that it has competent and reliable banking solutions and choice in operating. I personally think it’s more than just symbolism. I think it’s substance and symbolic, and very meaningful.
“Plus,” he added, “even though the bill talks about depository services and banks, I think it signals to the capital markets and to the NASDAQs and New York Stock Exchanges of the world that Washington is a-okay with this from a banking perspective, and will that allow these public cannabis companies that are now currently public in Canada to be listed on NYSE or NASDAQ? I don’t want to get too far afield and say that this bill in and of itself changes the listing conditions here in the United States, but I think it would make the exchanges think long and hard about getting off the sidelines.”
Additional measures may be needed to get them off the sidelines, but passing this bill would be a very welcome sign. “Our conversation is more about the legislation at hand, and not predicting what the listing agents would do, because they decide whether or not it is appropriate for plant-touching U.S cannabis operators to be listed on their exchanges,” said Havens. “However, I think it’s pretty clear to anybody who’s paying attention that if this were to pass and be signed into law, that the exchanges would have a lot more to think about than they do right now.”
I noted that the statement issued Wednesday by the Credit Union National Association in support of the new SAFER Act specifically mentioned that the bill would provide a “safe harbor” to them and their employees and members. “I’m glad you touched on that,” said Havens, “because what we have now is guidance from the Financial Crimes Enforcement Network of the Department of the Treasury, to say to these banks, ‘Look, if you follow all of these parameters, you can get into this space, but there’s no safe harbor, there’s no legal defensibility. There’s just what FinCEN is telling you if you want to be involved in the cannabis industry. But given the cost of a misstep, I think you’re seeing a lot of the bigger banks saying, ‘You know what, it’s not a big enough business and we’re just not sure that the safe harbors are there, so we’re not going to get involved.
“The ones that have decided to pursue the opportunity,” he added, “the smaller credit unions and banks, have built up cannabis compliance departments, and they have taken the risk, although they set up such robust regimes that I would say they’ve really mitigated and minimized the risk. But the credit union associations and those who are reacting to this are absolutely right. It’s necessary, and that’s why I go back to my previous statement that this isn’t just symbolic. There are material differences between what the law would say if this bill was passed and signed into law versus the current landscape that we have.”
The Role of Federal Regulators
The new bill also seems to emphasize the role of federal regulators and the limits applied to their ability to terminate bank accounts for state-sanctioned cannabis businesses, which remains but with the requirement that they have a “valid” reason for doing so. I asked Havens about the ongoing role of federal banking regulators as linchpins in this scheme.
“In talking about meaningfully expanding the opportunity for plant-touching cannabis businesses to bank,” he replied, “I don’t want to suggest that there aren’t great service providers in this space already. There absolutely are. But unlike if you’re in a non-cannabis business, where you really get your choice of whatever bank you want, assuming they want you as a client – which if you’re a robust business doing what these cannabis businesses are doing, you would think they would want you as a client – I think it expands the opportunity to bank with whoever you want, and it allows those who are waiting on the sidelines to get in and say, ‘Look, we’re here to participate in this pretty large sector in the United States.’
“So, I agree that the federal regulators are the linchpin, so to speak, for materially opening up access and service here. I would just say the state banks and local credit unions have done an amazing job in the complete absence of these larger banks participating and have provided a meaningful service. But I think some of the banks, and even the current banking solutions, are out of reach for certain customers. By having a safe harbor, it will open up opportunities in the space and allow those who are holding a lot more cash than they otherwise should be to have a banking relationship they could take full advantage of and make regular deposits and have lower fees and those sorts of things. I think it’s going to be beneficial for operators and banks alike.”
Section 10 of the SAFER Act, which addresses requirements for deposit accounts, also drew my attention because it is the lengthiest section with several subsections. Subsections (f), in particular, “Provides that no later than two years following enactment, that the Federal banking regulators, in consultation with State banking supervisors, the Secretary of Commerce, and the Secretary of the Treasury, promulgate tailored rules or guidance to increase access to deposit accounts for businesses and customers and to enable banks and credit unions to more effectively maintain customer relationships—especially for those in rural, low-and moderate-income areas, Tribal communities, and unbanked businesses and consumers.”
I asked Havens about its significance. “That’s some of the newer language included in the most recent iteration, and something that I’ve been getting a lot of questions about,” he replied. “On the one hand, you’re hearing people say, ‘That makes sense. We need more collaboration between states that have been really actively involved and Feds that have been completely hands-off.’ But some are saying this maybe seems a bit out of place and are wondering if this is in fact an attempt to make it so that it’s harder for banks if they don’t provide expanded opportunities to those in rural areas or low to moderate income areas.
“I view it more as, this system is just being built up, and it’s happened kind of ad hoc so far because of the federal illegality of cannabis, and the state and local credit unions and banks are paving the way for everybody else,” he added. “A lot remains to be seen about what these regulations will look like. Obviously, if the bill gets passed and signed into law, then within the bill, there are certain things that need to happen, like regulatory mandates for agencies of jurisdiction. So, it remains to be seen how that all plays out. What I’m hoping is that all it is saying is that as this space is further developed, we should make sure that there’s access not just for Mainstreet but also the marginalized communities.”
It does appear that they removed headers about diversity and inclusion, perhaps to de-politicize the bill while leaving the intent intact. “It’s tricky,” said Havens, “because while nobody in their right mind should or would think that social equity and social justice are not important measures to be tackled, or that the war on drugs has not had a horrible and disproportionate impact on communities of color, because of how narrowly divided the Senate is and how much support is needed to get a measure like this passed, in order to make anything cannabis-related palatable to members of the Senate who aren’t really that keen on supporting anything cannabis-related, even if it’s for narrow purposes like providing safe banking solutions to industry participants, I think it needs to be a pretty clean measure.
“So, we’re definitely going to be looking very carefully at what Majority Leader Schumer offers by way of amendments if and when this gets to the floor,” he added, “because as has happened in the past, his indications that it will also include criminal justice reform and social equity measures and social justice measures could undercut some of the broader base support that we’ve heard about recently. I think the bill is in a better spot now than it has been in the past couple of years, so I’m going to be watching very carefully to see how any amendments offered on the Senate floor, if any, by Schumer or anybody else that he’s working with on this, could impact the level of support for the bill.”
What about the credit card associations? Would passage of SAFER bring them back into the fold? “These are private services,” he replied. “They can make the decisions as they see fit. If they view it as being too risky, and they can’t do the compliance work to understand who’s a legitimate purchaser versus who’s using a credit card to purchase through someone who’s not licensed with the state, I think it would provide some much-needed comfort. But I don’t know that it’s fair to say that if SAFER passes, you’re going to get Visa, MasterCard, American Express all of a sudden wanting to participate in transactions in the space.
“That’s a question for them,” he added. “I don’t know what else they would need to see, but to me, saying that there are safe harbors when you’re dealing with state regulated cannabis businesses as opposed to state legal yet federally illegal actors I think would be a huge step to making the credit card companies feel much more comfortable being involved in the space.”
Markup Session
The markup session reportedly happening next Wednesday has not yet been posted to the Senate Banking Committee calendar, but Havens is confident that the session will take place. “I’m not reading too much into that,” he said of the missing calendar notice. “It’s not odd for committees to post things a few days out.”
Nor will it be a particularly ad hoc meeting. “A few things will happen,” said Havens. “The committee going to recommend this piece of legislation to the full Senate, and if it is recommended, should it be amended in a material way? Each committee also has its own procedures, but the first step is setting the agenda for the markup. We haven’t seen it on the website yet, but we’ve heard in many different ways that this markup is happening.
“I should note, the chair of the committee (Sherrod Brown) has a lot of discretion as far as determining the vehicle and how it’s presented,” he added. “It’s not necessarily marked-up line by line, but members of the committee do have an opportunity to offer amendments that the committee will then presumably consider. So, a lot can happen at the markup, and while it’s pretty standard, this is significant because this legislation has never made it out of committee. It has always died in Senate committee. In the House it’s been passed multiple times out of committee and down to the floor, but this would be a first in the Senate. And by the way, no one should be under the illusion that members are showing up fresh and this has never been discussed before. There have been a lot of discussions outside of the formal committee process between Sherrod Brown and the leadership of his caucus, and between Brown and Steve Daines.”
How likely is it then that we will see new or surprising amendments? “Seven days is a long time, and this is getting a lot of press attention,” Havens reminded me. “As members are getting questions about it, just because someone hasn’t thought of something by now doesn’t mean they’re not going to think of something. A lot of this happens at the 11th hour.”
I noted that there are some members of the committee that might want to be spoilers for a bill like this. “There are members who don’t want this,” agreed Havens, “but you don’t need 100 percent of the members, either in committee or on the floor. I tend to think, based on the reports that I’m hearing and conversations I’m hearing that are going on in DC and elsewhere, that there is more support than there has been in the past. Part of that is because of the current format of the bill, and part of that is because there are certain things that have been decided to be included that are appealing to a broader-based audience to get them to support it. And it doesn’t include other things that would discourage those or other members from not supporting it. So, I’m not saying this is a done deal, but I think the chatter right now is more positive than I’ve seen it in the past in terms of getting this to the floor. Now again, maybe I’m focused on the wrong thing, but I’m kind of curious to see what the amendment process stuff looks like on the Senate floor as much if not more than I am the committee amendment process.”
Because these banking bills have been poured over for so long, will opposition be along the lines of basic prohibition arguments? “It could be much more nuanced than that,” warned Havens. “I hear you when you say that the prohibitionists could come out and just throw up their arms and say the same things they’ve been saying, but what’s also possible is you get members who offer amendments that look like they’re legitimate ways to enhance the substance of the bill, when in fact they are offered to make it unpalatable to a certain segment, basically as a poison pill.
“But given how much this has been discussed,” he added, “I think the stakeholders and the positions are pretty well known. I mean, the SAFE Banking bill has been bandied about for several years now, and members of Congress change and senators change, but I think we know generally where people stand. Hopefully we’ll understand any such attempts and see them for what they are, but look, as with everything in D.C. now, it’s political, and so we’ll just have to pay close attention to what’s being offered.”
Politics aside, however, Havens opined that no one should criticize the banks for having taken a cautious stance with respect to cannabis banking over the years. “The banking industry is conservative by nature,” he said. “There’s risk involved, and it’s appropriate for them to evaluate and to mitigate risk as much as possible, because they don’t want to lose their ability to bank generally for their decisions to bank in one sector in particular. And so, I don’t think anybody blames the banking industry for being conservative with the regulators they have looking at what they’re doing. It’s natural.”
That conservative stance is especially warranted when banking in high-risk industries like cannabis, where the heightened risks are often rewarded with higher fees. “That’s why this piece of legislation is needed to expand access, to make it safer, and to level the playing field,” said Havens. “Far more than fifty percent of the United States is okay with cannabis, so these are legitimate businesses, and big businesses in many cases, that need sophisticated banking solutions. I think because of the lack of smoothness, so to speak, in the rules of the road or the guidance in terms of what banks are able to do, it’s made the cost of capital very expensive, and the cost of banking very expensive.
“I think the banks that are in this space now should be commended,” he added, “because with nobody telling them they had to, they offered a service that’s completely needed. It’s the states paving the way for cannabis and the operators who have invested the large sums of money and have taken a lot of risks to build an industry in the face of all this opposition from the federal government. So, it’s all necessary, and I don’t think we should forget about the role that these smaller banks have played, but there are safety issues, cost of capital issues, and other things, and it is just very needed legislation.”
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