Two bills currently making their way through Congress suggest 2019 might be the year when Congress finally prevents U.S. law enforcement and regulatory agencies from enforcing federal prohibitions on marijuana in states where cannabis is legally cultivated and sold in commerce.
The SAFE Act
On March 28, 2019, the House Financial Services Committee voted to advance a revised version of the SAFE Banking Act, otherwise known as the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”) to the full House of Representatives for a vote. Further, on June 5, the Committee issued a report on the bill reinforcing its earlier recommendation that the bill progress to a vote. With 150 sponsors, it is expected the SAFE Act will soon emerge from the Committee and come up for a vote by the full House of Representatives.
Currently, federal money laundering statutes define as illegal any transaction involving proceeds from the manufacture, distribution or sale of marijuana, even if the transactions are legal within the state or country in which they occur. Current banking regulations prohibit depository institutions from entering into financial transactions or accepting account relationships involving such illegal proceeds.
Given the lack of access to banking services, cannabis has been largely a cash business. As a result, piles of currency sit in dispensaries and are carted around by armored trucks for delivery to warehouse vaults and other sites, at significant risk to those persons responsible for storing the money. Cash transactions also invite a lack of transparency. It’s impossible for the federal and state governments to ascertain whether all revenue is being accurately reported for tax purposes in these booming businesses.
If passed, the SAFE Act would provide a safe harbor from federal money laundering and regulatory prosecutions for federally insured depository institutions that provide financial services to cannabis-related legitimate businesses and their service providers. The SAFE Act would prohibit federal banking regulators from terminating deposit insurance or penalizing or even discouraging depository institutions from providing financial services to a cannabis-related legitimate business or service provider.
The majority of the bill is focused on “depository institutions,” which is in turn defined to mean FDIC-insured banks, thrifts and credit unions. However, the bill will also directly or indirectly benefit other types of financial institutions. For example, the bill gives relief to entities performing a financial service for, or in association with, a depository institution.
Even more significantly, the bill would effectively amend the federal anti-money laundering laws by providing that the proceeds of a cannabis-related legitimate business are not considered proceeds from an unlawful activity. This would protect, among other activities, real estate finance of marijuana properties, broker-dealer custody of cannabis-related stocks, and the receipt of dividends paid on those stocks. Moreover, while not entirely clear, it seems logical that if money flowing out of a cannabis-related business is not considered proceeds from an unlawful activity, then otherwise legitimate money flowing into a cannabis-related business would also not be deemed proceeds of unlawful activity.
If enacted, banks and other financial institutions would no longer be at risk of prosecution for money laundering if they service cannabis-related businesses. Many industries have grown up around legal cannabis businesses, and more will likely emerge as laws and regulations on these industries loosen. If that is the case, investment activity in these ancillary businesses is likely to explode.
Large national and international banks have balked at entering the cannabis-finance space. The SAFE Act should ease the reluctance of banks to provide certain financial services. Surely, a huge beneficiary of the proposed legislation will be service providers to cannabis-related legitimate businesses. The landscape for service providers has been particularly fraught, with their access to banking severely limited no matter how far from the cannabis plant the service in question might have been. The extension of the safe harbor to those businesses should give banks additional comfort that these businesses can be accepted as customers.
The bill directs the General Accounting Office (“GAO”) to study the marijuana-related suspicious activity reports filed to date, and assess the effectiveness of such reports in identifying bad actors. Finally, the bill requires the federal banking regulators to report to Congress annually on specified matters and requires the GAO to study barriers to marketplace entry and access to financial services by minority-owned and women-owned cannabis-related legitimate businesses.
The STATES Act
On April 4, 2019, a group of bipartisan legislators re-introduced companion versions of the Strengthening the Tenth Amendment Through Entrusting States Act (“STATES Act”) in the Senate and House.
This Act would amend the Controlled Substances Act (“CSA”) to restrict federal enforcement against cannabis activities legalized in the several states. In particular, the bill prevents the application of the CSA to individuals or companies acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marijuana. The law would also prevent the forfeiture of any assets derived from legal marijuana businesses and exempt those businesses from the definition of “specified proceeds of illegal activity” under the money laundering laws.
The STATES Act would be a significant step toward eliminating some of the issues created by dueling federal and state laws on cannabis. Not only would the Act state that the CSA does not apply to legalized state cannabis activities, it would also clarify that federal money laundering and asset forfeiture laws do not apply to funds derived from such activities.
If enacted, this law would go further than any other bill introduced to date, including the SAFE Act, to remove the significant hurdles that exist for state-compliant businesses and individuals to expand their cannabis businesses. It would likely remove a number of issues for all financial institutions – not just depository institutions or their affiliates – that have, to date, prevented many financial service providers from engaging in transactions with cannabis businesses. Although the STATES Act does not specifically mention the Bank Secrecy Act, it is likely that the current suspicious activity reporting regime for marijuana-related businesses would become moot and these reports would only be required in the case of non-state compliant cannabis business activities.
Where Do We Go From Here?
It remains to be seen if either bill will come to the House floor for a vote. The Judiciary Committee still needs to weigh in on the SAFE Act. The STATES Act has not been scheduled for a hearing. Even assuming passage in the House, there is still the Senate, which seems less inclined to pass either bill. With 47 states and the District of Columbia having legalized cannabis in some way, it seems hard to imagine that one or both of these bills will not advance.
It is important to note that neither bill fully legalizes cannabis. Both apply their safe harbor and exemption prohibitions exclusively to state-legitimate or state-compliant businesses. Thus, even with the safe harbor firmly established, banks and service providers are permitted to service only “legitimate” cannabis-related businesses.
The level of diligence required to establish that a cannabis-related business is legitimate so as to qualify for the safe harbor protections is uncertain, and it’s currently unclear whether the standards for compliance under the Bank Secrecy Act would apply. This would require, at a minimum, that a financial institution take measures to investigate whether its client is operating within the bounds of local law.
With numerous highly technical state and local laws governing individual cannabis businesses, ascertaining a cannabis-related business’ compliance with those laws will present a challenge going forward, but likely one that is worth the effort. Recent estimates suggest that within a few short years, the domestic legal cannabis industry could generate tens of billions of dollars in annual revenue.