In the Nov. 8 midterm elections, voters in both Maryland and Missouri approved legalization of cannabis for adult use, while voters in Arkansas, North Dakota and South Dakota voted no on legalization.
With the passage in Maryland and Missouri, 21 states as well as the District of Columbia have now legalized cannabis for adult use, and another 16 states permit cannabis for medical use.
Despite the fact that nearly half of all states have now legalized cannabis for adult use, it remains illegal under the federal Controlled Substances Act as a Schedule I drug, along with drugs like heroin and LSD. Such a classification means that cannabis has a high potential for abuse and has no acceptable medical use, despite research to the contrary.
Among the many challenges created by this split between state and federal law, none is more frustrating to the rapidly growing cannabis industry than the lack of meaningful access to banking, lending and capital markets.
Because cannabis remains federally illegal, most traditional financial institutions will not conduct business with cannabis enterprises due to heightened and burdensome reporting requirements and fear of federal prosecution for aiding and abetting illegal activity and money laundering.
However, as discussed in this article, a stalled bill that would address these issues may have a chance at passing in Congress in this fall's lame-duck session.
Under the federal Bank Secrecy Act and related laws and regulations, financial institutions are required to keep records and report activities that may indicate money laundering and other financial crimes, such as terrorist financing.
While the BSA provides a basic framework, it also directs the Financial Crimes Enforcement Network of the U.S. Department of the Treasury to issue anti-money laundering regulations.
The detailed requirements of the BSA are found in FinCEN's BSA/AML regulations, which include suspicious activity reporting requirements.
In addition to its regulations, FinCEN has issued clarifying guidance on certain topics, including suspicious activity reporting with respect to marijuana-related businesses.
In its guidance, FinCEN directs that, regardless of any state law that legalizes marijuana-related activity, financial institutions still have the obligation to perform customer due diligence and ongoing monitoring, including with respect to marijuana-related businesses.
Financial institutions are also required to file suspicious activity reports if the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA, or (iii) lacks a business or apparent lawful purpose.[1]
Further, the Money Laundering Control Act prohibits "monetary transaction[s] in criminally derived property."
Although the U.S. Department of Justice has not made it a priority to prosecute banks for providing services to cannabis-related businesses, most traditional banks and financial institutions are nonetheless wary of doing so without a change in federal law.
As a result, while legal recreational and medical cannabis sales nationwide are expected to reach $33 billion this year,[2] most cannabis companies still conduct their business entirely in cash and must use cash to meet payroll obligations and pay taxes, causing serious public safety concerns.
Because they deal mostly in cash, cannabis businesses have been the target of burglars and armed robbers, and many of their employees have been assaulted and even killed. Many cannabis businesses are forced to hire private security for this reason, at a high cost.
While there are some financial institutions that offer credit or debit card systems to cannabis enterprises, their services are limited in that they do not provide loans or other traditional banking services.
Recent developments may finally close this gap and allow cannabis businesses more access to the banking system, credit cards, lending and capital markets that other types of businesses enjoy.
The Secure and Fair Enforcement Banking, or SAFE Banking, Act would prohibit federal regulators from taking adverse actions against financial institutions that provide banking services to legal cannabis-related businesses and ancillary service providers, including, but not limited to, landlords, accountants and law firms.
The SAFE Banking Act has passed the U.S. House of Representatives a total of seven times after first passing in 2019, but has not yet made its way to the Senate despite support from at least 21 state governors, the American Bankers Association, several other banking and insurance industry groups, and the general public.
In the past year, Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Cory Booker, D-N.J., held off on supporting the SAFE Banking Act in the Senate in favor of introducing their own, more comprehensive cannabis legalization and social equity bill, the Cannabis Administration and Opportunity Act in July.
In addition to permitting cannabis companies to access the banking system, the CAOA would have legalized and decriminalized recreational cannabis with an eye toward supporting communities that have been most affected by the war on drugs.
After failing to receive enough support from their Republican colleagues, in late summer Schumer and Booker began to soften their respective positions on the SAFE Banking Act, stating that they would be open to passing a version of the bill if it contained added social equity and expungement provisions.
On Oct. 6, President Joe Biden took executive action and announced that he would issue pardons for all prior federal offenses of simple possession of marijuana, and urged state governors to do the same.
As part of his executive action, Biden also directed the secretary of health and human services and the attorney general to "initiate the administrative process to review expeditiously how marijuana is scheduled under federal law."
At the time, many observed that this executive action could usher in cannabis banking reforms in the lame-duck session between the November election and the swearing-in of the new Congress on Jan. 3, 2023. This is because it was unclear which party, if any, would control Congress in 2023, and the Democrats want to secure a victory on cannabis reforms before the new Congress begins.
After Biden's announcement, Booker said he was hopeful that Congress would pass federal legislation in the lame-duck session. On that front, Booker alluded to "bipartisan movement" due to "problems in the banking industry" that many think refers to a version of the SAFE Banking Act that is colloquially referred to as SAFE Banking Plus or SAFE Plus.
While SAFE Banking Plus has not yet been introduced, it would likely include some key provisions from the CAOA, such as ensuring equitable access to financial services for minority-owned cannabis businesses, allowing small business loans, requiring financial institutions to prove compliance with anti-discrimination laws, expungements of criminal records, reinvesting marijuana tax revenue in economic opportunities for communities disproportionately affected by the war on drugs, and access to medical cannabis for veterans.
In the run-up to the election in late October, Schumer said Congress was getting "very close" to introducing and passing a bill that would allow banking access for legal cannabis businesses and expungements of past convictions, referring to positive conversations he had with a "bunch of Republican senators."[3]
Now that the midterms are over, Democrats will retain control of the Senate, and it appears that Republicans will assume control of the House, leaving Congress divided.
Since the House will also need to introduce its own version of the SAFE Banking Act in order to make its way to the president's desk, Democrats in Congress are motivated to pass a bill before the end of the year while they still retain a narrow majority in both houses.
However, cannabis reform is just one of the many Democratic priorities, and there are only six weeks left in the term.
In an interview on Nov. 13, Booker said that Democrats must enact cannabis reform now or likely wait until "many years from now" when the Democrats are in control of Congress again.[4]
If the Senate passes a version of the SAFE Banking Act this year, then the House will need to vote on its own companion bill. If there are no differences between the Senate and House versions that need to be worked out via conference committee, then it would go to the president's desk for signature.
If the bill is not passed this year, then it will be up to whomever is elected speaker of the House to schedule a vote on a House version of the bill.
House Minority Leader Kevin McCarthy, R-Calif., won the Republican nomination for speaker, but faces a challenge from far-right members when a full vote is taken in January.
Although McCarthy voted in favor of the SAFE Banking Act in the House in 2019 and 2021, if he ultimately becomes speaker it is unlikely that he will make cannabis reform a priority.
In light of the above, Democrats seem more motivated than ever to pass some version of the SAFE Banking Act before the end of the year. However, given the number of issues on Democrats' priority list, it may prove difficult to get it over the finish line in the next six weeks.
Deanna Lucci is an associate at Duane Morris LLP.
Notes
[2] https://fortune.com/2022/04/11/legal-marijuana-sales-33-billion-2022/.
Reprinted with permission of Law360.
