On September 25, 2019, the Secure and Fair Enforcement (SAFE) Banking Act of 2019 passed the U.S. House of Representatives by an impressive margin of 321 to 103. The U.S. Senate—once seen as a gauntlet of insurmountable obstacles to cannabis banking reform—has also seen some meaningful progress.

Senator Mike Crapo (R., Idaho), the influential chair of the Senate Banking Committee overseeing the SAFE Act in the Senate, previously expressed no interest in allowing the SAFE Act a vote out of committee that would enable the full Senate to vote on its passage. But now, Mr. Crapo has expressed interest in voting on the SAFE Act before year’s end. And Senate Majority Leader, Mitch McConnell, whose public comments on marijuana have been negative, recently met with marijuana industry executives in a move some see as potentially signaling McConnell’s eventual support for cannabis banking reform.

Following the Act’s passage in the House, and with an improving outlook in the Senate, financial institutions have been preparing for increased involvement with cannabis-related businesses. However, while many believe the SAFE Act is closer than ever to solving the country’s cannabis banking woes, we believe that the Act’s passage alone may not provide the cannabis industry with relief; at least not quickly.

We previously wrote about the Act and the solutions it offers to the cannabis industry’s banking conundrum. Here we scrutinize whether and to what extent the SAFE Act will truly alleviate the bank industry’s cannabis problem.

The Rub—the Bank Industry’s Barriers to Banking Cannabis-Related Cash

Banks’ reluctance to bank cannabis-related cash can be distilled into three primary problems. First, banks fear the stigma associated with the cannabis industry. For over seventy years, marijuana was illegal and most often associated with lowly street dealers and drug cartels. This long-lasting, negative stigma remains a powerful association that could drive public backlash.

Second, because marijuana remains an illegal Schedule I Controlled Substance, accepting cash related to firms that directly serve the cannabis industry or “touch the plant” presents significant legal risks. Most notably, banks face significant federal penalties and adverse regulatory action tied to the Bank Secrecy Act (BSA) and Anti-money Laundering (AML) statutes. Put simply, if bank regulators decide that a bank taking cannabis cash runs afoul of federal BSA and AML statutes, the penalties could be enormous.

Lastly, while Financial Crimes Enforcement Network (FinCEN) has already provided guidance that, in theory, authorizes banks to bank cannabis-related cash, the administrative cost and burden of complying with this guidance makes banking cannabis cash cost-prohibitive. Current guidance from FinCEN recommends banks implement burdensome due diligence tactics when working with cannabis-related businesses, such as verifying that the business is properly licensed and reviewing the company’s license application. Additionally, the guidance encourages banks to ensure that cannabis-related businesses are not violating any of the eight Department of Justice enforcement priorities as set forth in the notorious Cole Memorandum, and it creates ongoing monitoring obligations through a three-tier Suspicious Activity Report (SAR) filing system. Even after the SAFE Act passed the U.S. House, a major financial institution recently announced it would no longer bank “non-permitted” cannabis client cash—a move motivated by the burden of complying with current regulatory guidance.

So how and to what extent does the SAFE Act alleviate these concerns?

  1. Reputational Damage

The SAFE Act does nothing to alleviate the negative stigma a financial institution may face for banking cannabis-related cash. Presumably, however, the negative stigma associated with the cannabis industry will continue to fade as more lawful markets come online. Nearly 75% of all Americans are now living in a jurisdiction with some form of lawful marijuana—a clear indication that voters, banks, and the public can get over reputational risks.

  1. Fear of Adverse Regulatory Action

The SAFE Act endeavors to address financial institutions’ regulatory fears by providing safe harbors to those financial institutions that provide services to “cannabis-related legitimate businesses.” Whether the Act’s safe harbors actually resolve banks’ regulatory concerns, however, is questionable.

Section 2 of the Act attempts to encourage banks to work with the cannabis industry by prohibiting federal banking regulators from taking adverse actions against depository institutions “solely because” the depository institution provides financial services to cannabis-related legitimate businesses or service providers. Section 5(b) of the Act provides some additional clarification and protection, explicitly stating that the Act does not limit or otherwise restrict “the general examination, supervisory, and enforcement authority of the Federal banking regulators, provided that the basis for any supervisory or enforcement action is not the provision of financial services to a cannabis-related legitimate business or service provider.”

The “solely because” language, which appears repeatedly through the Act, is problematic because it leaves the door open for federal banking regulators to generate a pretext for adverse regulatory action. What’s to stop a federal regulator from penalizing a banking institution for minor infractions and for banking cannabis-related dollars?

Moreover, the Act only protects financial institutions that work with “cannabis-related legitimate businesses,” defined, in Section 14 of the Act, as businesses engaged in activities involving cannabis pursuant to a law legalizing cannabis in their state. This language appears to impose a duty on financial institutions to ensure that cannabis-related businesses are legitimate, i.e., following the laws of their state. Presumably, then, Sections 2 and 5 of the Act would do nothing to preclude adverse regulatory action against a financial institution if the proffered basis for that action is that one or some of the financial institution’s banking clients did not meet the definition of a “cannabis-related legitimate business.”

  1. Administrative Burden and Compliance Costs

The SAFE Act also does little, at least in the short term, to address financial institutions’ concerns regarding burdensome compliance costs associated with attempting to service the cannabis industry. Indeed, the Act calls for no less than three different forms of new regulatory rules and guidance. First, Section 6 of the Act provides that financial institutions filing SARs on cannabis-related legitimate businesses must comply with the appropriate guidance issued by FinCEN. The Act requires the Secretary of the Treasury to ensure that FinCEN’s guidance is consistent with the purpose and intent of the Act and that it does not “significantly inhibit” the provision of financial services to cannabis-related legitimate businesses. The Act does not address whether FinCEN’s current guidance on SARs is “significantly inhibitive” to the provision of financial services.

Second, Section 7 of the Act provides that the Financial Institutions Examination Council (FIEC) will “develop uniform guidance and examination procedures for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers” no later than 180 days after the Act’s enactment.

Third, Section 11 of the Act complicates the compliance problem by creating separate guidelines for financial institutions working with businesses involved in the sale of hemp products. Section 11(b) provides that the Federal banking regulators will issue guidance to such financial institutions confirming the legality of hemp and recommending best practices. According to the Act, this guidance will come from a different group of regulators than those for banks working with cannabis-related businesses, and such guidance will, bizarrely, be issued 90 days after the enactment of the Act instead of 180 days.

While the substance of the foregoing tiers of rules and guidance is not yet known, presumably it will have to clarify what financial institutions must do to verify that clients are either (i) “cannabis-related legitimate business” (i.e. a business engaging in authorized cannabis activities pursuant to an established state regulatory program), or (ii) hemp businesses authorized under the 2018 Farm Bill (i.e., businesses producing hemp containing no more than 0.3% THC and in compliance with a United State Department of Agriculture-approved state regulatory plan). Getting such verification will not be easy since every state has different regulatory programs in place for both marijuana and hemp (to the extent that a state has such a regulatory program in place at all).

As noted above, the protections afforded by the Safe Act don’t apply at all if the cannabis or hemp businesses aren’t legitimate as set forth in the Act. And even if financial institutions are able to verify that clients are legitimate under the Act, there are still ongoing SAR compliance requirements that are yet to be issued by FinCEN (which may be similar to current, burdensome FinCEN guidance).

At best, the Act’s various mandates for additional rules and guidance will take time to implement in a manner in which financial institutions can reasonably rely on the Act’s protections. At worst, the additional rules and guidance could create an even more burdensome set of complex regulations that drives up the administrative burden for financial institutions intending to service the cannabis industry. This is bad news for the cannabis companies too, as financial institutions, faced with higher administrative costs associated with serving the cannabis industry, will likely be forced to pass at least some of this additional cost on to the cannabis and hemp clients in the form of higher banking fees.

CONCLUSION

Although the SAFE Banking Act is a step in the right direction towards providing legitimate cannabis and hemp businesses access to financial services, it is not a perfect solution. We predict that cannabis and hemp businesses may face significant wait times, assuming the SAFE Act passes to begin with, before they will have meaningful access to banking services. And if the additional guidance to be issued under the Act proves to be onerous, then cannabis and hemp businesses will likely see high costs associated with banking their cash if they can get access to banks at all.

Perhaps it is time to temper our expectations about the SAFE Act and refocus on the true cause for the cannabis industry’s difficult regulatory environment: that marijuana remains a Schedule I drug under federal law.