The US House of Representatives recently passed the Secure and Fair Enforcement (SAFE) Banking Act, H.R. 1595 (the Act), which, if it becomes law, would have far-reaching implications for financial institutions considering providing a slate of financial products and services to—or related to—marijuana-related businesses. Specifically, the SAFE Banking Act would create a safe harbor for depository institutions to provide banking services to state-licensed marijuana businesses, which the Act refers to as "cannabis-related legitimate businesses" (CRBs). But the Act's implications go beyond deposit accounts and payment processing services. Although the Act does not legalize or decriminalize marijuana at the federal level, it provides that proceeds from CRBs shall not be considered crime proceeds for purposes of the US money laundering or other federal laws and shields CRB loans and collateral from the risk of asset forfeiture.1 Accordingly, if the bill becomes law, it could meaningfully change the risk analysis for financial institutions that provide financial products and services involving CRBs.
It is too early to predict whether the SAFE Banking Act will be passed into law. To become law, the bill must pass in the Senate (where many commentators expect it may face greater opposition), and it must be signed into law by the president. But the House vote marks a major step in marijuana-reform efforts.
I. The US Legal Landscape2
In the United States, 46 states have legalized or decriminalized some form of marijuana use, but the manufacture, sale and distribution of marijuana nonetheless remain illegal under federal law. The Controlled Substances Act (CSA), 21 U.S.C. § 841, makes it unlawful to "knowingly or intentionally . . . manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense" marijuana. The CSA also criminalizes leasing or renting real estate to CRBs as well as advertising on behalf of such businesses. Conspiring to violate the CSA as well as aiding and abetting violations of the CSA are also crimes. See 18 U.S.C. § 1956(h) (conspiracy); see also 18 U.S.C. § 2 (aiding and abetting). Although the risk of enforcement appears low, by providing products or services to US marijuana-related businesses—even businesses operating pursuant to state law—financial institutions could be viewed as conspiring to violate or aiding and abetting a violation of the CSA because such services promote or facilitate the underlying marijuana business. See generally Michelle Nicole Diamond, et al., Developments in the Marijuana Industry and the Implications for Financial Institutions, WilmerHale (Feb. 7, 2019).
Transacting with proceeds from US marijuana-related businesses could also expose financial institutions to risk under the US money laundering laws. See 18 U.S.C. §§ 1956, 1957; see id. The US money laundering laws make it a crime to knowingly conduct a financial transaction with proceeds of "specified unlawful activity," provided that a defendant has the requisite knowledge and/or intent. See id. Proceeds from the manufacture, sale or distribution of marijuana in the US are considered proceeds from specified unlawful activity under the money laundering laws.
As a result, if a financial institution engages in a financial transaction knowing that the property involved represents the proceeds of US marijuana sales (i.e., crime proceeds) and its actions evidence intent to promote the carrying on of unlawful activity, the institution may violate the US money laundering laws. There is greater risk arising from transactions that exceed $10,000 because intent to promote the underlying activity is not required. See 18 U.S.C. § 1957. Rather, the government need only establish that the entity knowingly engaged in a monetary transaction in property derived from specified unlawful activity with a value greater than $10,000.
II. The SAFE Banking Act
In light of the potential risk under the US narcotics and money laundering laws of providing products and services to US CRBs, most federal financial institutions have refrained from providing direct banking services to such businesses. As a result, many CRBs operate on a cash-only basis and/or pay exorbitant fees just to have bank accounts at state-chartered banks. In response to the perceived need for CRBs to have access to financial services, as well as growing popular sentiment that marijuana should be decriminalized, several members of Congress have introduced legislation designed to change the status of marijuana-related commerce.3
B. Overview and Key Provisions
Representative Ed Perlmutter (D-Colo.) introduced the SAFE Banking Act on March 7, 2019, with the stated purpose of "increase[ing] public safety by ensuring access to financial services to cannabis-related businesses and service providers and reducing the amount of cash at such businesses."4 Representative Perlmutter has introduced legislation similar to the SAFE Banking Act in every Congress since 2013, but none of the previous measures made it to a floor vote. This time, the SAFE Banking Act received broad bipartisan support. The Act passed with 321 votes in favor to 103 opposed, garnering votes from 229 Democrats, 91 Republicans and one Independent.
The SAFE Banking Act creates protections for depository institutions that provide financial services to CRBs—meaning state-licensed businesses and persons that engage in the cultivation, manufacture, sale or distribution of marijuana—and indirect businesses that provide goods and services to CRBs (which the bill refers to as "service providers").5 The bill provides protections to financial institutions in several ways:
- First, it limits financial regulators' ability to penalize depository institutions for providing financial services to CRBs. Section 2 of the Act generally prohibits regulators from "prohibit[ing], penalize[ing], or otherwise discourage[ing] a depository institution from providing financial services" to CRBs and their service providers. It also imposes specific prohibitions on regulators. Importantly, the Act prohibits bank regulators from terminating or limiting a financial institution's deposit insurance under the Federal Deposit Insurance Act or the Federal Credit Union Act solely because it provides financial services to CRBs or their service providers. It also prohibits bank regulators from taking adverse or corrective supervisory action on loans made to CRBs, their owners and employees, or real estate and equipment leased to CRBs.6
- Second, the bill creates a safe harbor from prosecution under the US money laundering statutes based on transactions involving proceeds from CRBs—a current risk that prevents financial institutions from operating in this space. Section 3 of the SAFE Banking Act provides that the proceeds from CRBs "shall not be considered proceeds from an unlawful activity solely because the transaction was conducted by a cannabis-related legitimate business" for purposes of prosecution under Section 1956 and Section 1957 of the US money laundering laws, as well as under any other provision of federal law.7
- Third, the Act provides that financial institutions will be protected from criminal, civil and administrative forfeiture of any collateral interest in loans or other financial services provided to CRBs or owners of real estate or equipment leased or sold to CRBs.8
- Fourth, the SAFE Banking Act mandates that FinCEN provide written guidance and examination procedures for financial institutions that provide services to CRBs.9 It further requires that FinCEN ensure that its guidance "does not significantly inhibit the provision of financial services" to CRBs.10
- Fifth, due to lingering "confusion" about the legal status of hemp and cannabidiol (CBD), the Act clarifies that hemp and CBD are legal pursuant to the Agriculture Improvement Act of 2018 (more commonly known as the 2018 Farm Bill) and protects depository institutions that provide financial products and services to hemp- and CBD-related businesses and their service providers.11
The Act also contains provisions concerning diversity and inclusion in the marijuana industry. Section 8 of the bill requires bank regulators to issue an annual report to Congress describing the availability of financial services for minority-owned and women-owned CRBs as well as recommendations for expanding access to financial services for such businesses.12 Section 9 requires the Comptroller General to conduct a study and develop recommendations regarding barriers to market entry, including access to licenses and financial services, for minority-owned and women-owned CRBs.13
Notably, the SAFE Banking Act does not legalize or decriminalize the manufacture, sale or distribution of marijuana. Rather, it provides a safe harbor for financial institutions to provide financial services to CRBs and their service providers despite the fact that marijuana remains a Schedule I narcotic under federal drug laws.
C. Implications for Financial Institutions
If the SAFE Banking Act becomes law, it would reduce the potential risk of providing a wide range of financial products and services to both state-licensed marijuana businesses and indirect businesses. The Act authorizes depository institutions to provide direct banking services (e.g., deposit accounts, payment processing and money remitting services) to CRBs—services most federal financial institutions currently refrain from providing to CRBs due to the risk under the US narcotics and money laundering laws. Given the significant increase in state-licensed CRBs,14 the Act opens the door for federal financial institutions to engage a broad new customer base. It would also expressly shield from forfeiture any loans to or collateral secured by CRBs, which could change the risk profile of a variety of customers for financial institutions whose mortgage and credit policies do not count marijuana-related assets or accept them as collateral.
Perhaps more significant for the broader financial markets—as well as a myriad of other businesses that offer products or services to CRBs—is Section 3, which provides that funds from CRBs would no longer be considered proceeds from specified unlawful activity (i.e., crime proceeds) under the US money laundering or other federal laws. Section 3's safe harbor provision expressly applies to "ancillary businesses," meaning it is not limited to depository institutions. As a result, the Act could reduce the risk under the US money laundering laws of engaging in a slate of business activities not expressly addressed in the Act, including certain capital markets activity, brokerage services and investments. For example, many financial institutions do not permit secondary-market trading of state-licensed marijuana-related securities due to the potential that receiving or transferring dividends from those businesses could expose the financial institution to risk under the US money laundering laws. But by providing that proceeds from CRBs are not crime proceeds, the SAFE Banking Act would reduce (if not eliminate) that risk.
Section 3 could also reduce the risk of doing business with indirect businesses that cater predominantly to marijuana-related clients. For example, if a financial institution extends credit to a company that manufactures packaging materials used predominantly in marijuana dispensaries, there is a risk that the packaging manufacturer will repay its loan with proceeds from sales to marijuana dispensaries (i.e., with funds likely derived from illegal marijuana sales). Because proceeds from US marijuana sales are currently considered crime proceeds, the receipt or transfer of those funds could expose the financial institution to liability under the US money laundering laws (provided the financial institution has the requisite knowledge of the manufacturer's marijuana-related client base). But if proceeds from CRBs are no longer deemed crime proceeds under federal law, there would be little to no risk under the US money laundering laws of transacting with indirect participants whose customers are CRBs.
The SAFE Banking Act, however, would not entirely eliminate the risk of doing business with CRBs. Because the Act does not remove marijuana from Schedule I of the CSA, providing products or services that materially aid a CRB's business could still expose the financial institution to risk of aiding and abetting a violation of federal narcotics law. Assessing the potential risk will require careful, fact-based analysis of the financial institution's activities and those of the CRB.
D. Prospects for Becoming Law
Although the House vote is a significant step toward marijuana-reform legislation, the SAFE Banking Act still has significant hurdles to overcome before it can become law. The Act must still pass the Senate and be signed into law by the president. Many commentators expect the Act will face greater opposition in the Senate from both Republicans and Democrats. Senate Majority Leader Mitch McConnell (R-Ky.) has been an outspoken critic of marijuana-related legislation. And many Democrats, including presidential candidates Bernie Sanders (I-Vt.), Cory Booker (D-N.J.) and Kamala Harris (D-Calif.), have said they prefer comprehensive marijuana reform.15
The bipartisan vote in the House may, however, increase pressure on the Senate to act. Senate Banking Committee Chairman Mike Crapo (R-Idaho) has said that he wants to advance a companion version of the SAFE Banking Act that was introduced on April 11, 2019, by Senators Jeff Merkley (D-Ore.) and Cory Gardner (R-Colo.).16 That bill, S.1200, currently has 33 cosponsors.17 On July 23, 2019, Chairman Crapo held a hearing to explore the challenges for marijuana and banking, at which Senators Gardner and Merkley testified in support of their legislation. The panel also heard from various stakeholders supporting efforts to make it easier for banks to serve legal marijuana businesses.
Although it is too early to predict whether the SAFE Banking Act will pass in the Senate, the current text of the Senate bill appears to be identical to that of the House bill. As a result, if the Senate were to pass S.1200 as it is currently written, the bill would go directly to the president's desk for signature. If, however, the Senate amends its bill, further revisions and/or a conference may be necessary to work out any differences between the House and Senate versions.
Although the SAFE Banking Act could significantly change the risk calculation for financial institutions and other businesses considering providing financial products and services to CRBs, the fate of the bill remains uncertain. With no bill yet passed into law, financial institutions should continue to enforce established policies and procedures that minimize the risk of violating current US narcotics and money laundering laws.
1 The SAFE Banking Act defines "cannabis" as having the "meaning given the term 'marihuana' in section 102 of the Controlled Substances Act (21 U.S.C. 802)." This article uses the terms "marijuana" and "cannabis" interchangeably.
2 For a more detailed overview of the US narcotics and money laundering laws and analysis of the risk in providing financial products and services to marijuana-related businesses, see Michelle Nicole Diamond, et al., Developments in the Marijuana Industry and the Implications for Financial Institutions, WilmerHale (Feb. 7, 2019).
3 On February 13, 2019, the House Financial Services Subcommittee on Consumer Protection and Financial Institutions held a hearing titled "Banking Access for Cannabis-Related Businesses." Witnesses at the hearing testified that, without the SAFE Banking Act, financial institutions lack clarity about whether and how to bank CRBs, CRBs are targets of crime and violence because they are forced to operate all-cash businesses, and owners and employees of CRBs have inadequate access to banking for professional and personal needs. Witnesses testified that the SAFE Banking Act would help decrease violence stemming from dealing purely in cash proceeds, and help legitimate businesses have access to banking for such basic needs as paying salaries, servicing customers using credit cards, accessing work capital loans, and bill-pay services. They further articulated that the Act would increase transparency and prevent tax evasion and other white-collar crimes, and avoid pushing legitimate cannabis proceeds into the underground economy. The panel also made clear that all these benefits would come with the additional benefit that law enforcement would have more intelligence because financial institutions would file suspicious activity reports, where due, on CRB-related transactions.
4 H.R. 1595, § 1.
5 H.R. 1595, § 7.
6 H.R. 1595, §§ 2–4.
7 H.R. 1595, § 3.
8 .R. 1595, § 4.
9 H.R. 1595, § 7.
10 H.R. 1595, § 6.
11 H.R. 1595, § 11.
12 H.R. 1595, § 8.
13 H.R. 1595, § 9.
14 See, e.g., Ed Keating, The Explosive Marijuana License Growth in the United States During 2018, Cannabizmedia (Dec. 13, 2018), https://cannabiz.media/the-explosive-marijuana-license-growth-in-the-united-states-during-2018/.
15 Natalie Fertig & Zachary Warmbrodt, Marijuana expected to get traction in the Senate—as a banking bill, Politico (Sept. 26, 2019, 5:03 AM), https://www.politico.com/news/2019/09/26/marijuana-senate-banking-001391.
16 Viktor Reclaitis, House passes cannabis-banking bill, but getting Senate's OK still looks tricky, MarketWatch (Sept. 28, 2019, 4:02 PM), https://www.marketwatch.com/story/house-expected-to-pass-cannabis-banking-bill-but-getting-senates-ok-still-looks-tricky-2019-09-24.
17 See S. 1200, 116th Cong. (Apr. 11, 2019), https://www.congress.gov/bill/116th-congress/senate-bill/1200/all-info.
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