Twenty years ago only one-third of Americans supported legalizing marijuana for recreational use. Today, 30 percent believe it should be legal only for medical reasons and another 59 percent think it should be legal for both medical and recreational use.
As is so often the case, the winds of change may have swept through public opinion, but federal law has not followed.
Marijuana remains a Schedule I substance under the federal Controlled Substances Act. That means it is still a federal offense to possess and distribute marijuana. Indeed, marijuana possession is punishable by up to a year in jail and a minimum fine of $1,000 for a first conviction. Three convictions for possession carries a 90-day mandatory minimum sentence and a fine of up to $5,000. Manufacture or distribution of 100 kilograms (around 220 pounds) of marijuana carries a penalty of five to 40 years in prison and a fine of $2-$5 million.
That’s very interesting and all, but why are we focused on it? Well, as you might imagine, the Schedule I classification conflicts with marijuana legalization laws in an increasing number of states. This conflict has created havoc for banks and other financial services providers, which, if regulated by the federal government, cannot do business with companies involved in the cannabis industry.
Congress is poised to try to tackle that problem and this week we’ll explore how. But, first, let’s look closer at how we got here.
A quick history of marijuana legalization
California was the first state to legalize marijuana use for medical purposes. In 1996, voters approved Proposition 215, which as Ballotpedia has explained, exempted “patients and defined caregivers who possess or cultivate marijuana for medical treatment recommended by a physician from criminal laws which otherwise prohibit possession or cultivation of marijuana.”
Today, the marijuana industry contributes nearly $18 billion to California’s economy annually, but that number is expected to increase in the coming years. That’s big money, even for a state as large as California. For context, mining and oil and gas extraction contributed about $14 billion to the state’s economy in 2022.
Today, most states have followed California’s lead. In fact, only a handful of states — Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Nebraska, North Carolina, South Carolina, Tennessee, Texas, Wisconsin, and Wyoming — do not currently allow marijuana even for medical uses.
On Jan. 1, 2014, Colorado became the first state to allow marijuana for both medical and recreational use. More than 20 states, including traditionally Republican-leaning states like Missouri and Montana, followed and have completely legalized marijuana. (In Missouri, cannabis distribution is a $4 billion industry; in Montana, it provides a nearly $1 billion boost to the state’s domestic product.)
In 2020, Americans bought $18.3 billion in cannabis products, a $7.6 billion increase from 2019. Bank of America Securities has estimated cannabis sales increased to $25 billion in 2021.
Marijuana sales, in other words, are big business. Still, it is hard for legal distributors, dispensaries and other businesses in the industry to open a checking account at, get a loan from, or otherwise engage with banks and other financial services providers since so many of them are regulated by the federal government.
How the feds control distributors’ access to financial services
As DLA Piper noted, “Financial institutions willing to provide services to cannabis businesses that sell marijuana must navigate” a host of federal laws.
The first, and perhaps most simple, is the Controlled Substances Act (CSA) – that law referenced above that classifies certain drugs and regulates the possession and distribution of them. Institutions that provide banking account, electronic payment, and other financial services to marijuana businesses do not typically possess, distribute, or manufacture marijuana — so they are not generally prosecuted under the CSA.
As DLA Piper explained, the Bank Secrecy Act (BSA) and its anti-money laundering regulations are where financial services companies truly can run afoul of federal law. The BSA subjects financial institutions to enforcement actions and, potentially, to significant civil monetary penalties if they violate the BSA. In fact, entities that have willfully violated the BSA are subject to civil and criminal fines of up to $250,000 per violation and/or five years in prison for executives complicit in the crime.
The BSA also requires financial institutions to have policies and procedures in place to ensure their clients are not engaging in unlawful behavior (like selling marijuana), and to aid law enforcement by reporting potentially illegal or suspicious activity. Violations can result in severe civil or criminal penalties, asset forfeiture, and administrative enforcement actions by federal financial regulators.
According to marijuana distributors, financial services providers, and some policymakers, the BSA and other federal laws have impeded the growth of the cannabis industry.
In a 2019 paper, the Congressional Research Service, or CRS, the nonpartisan research arm of the U.S. Congress, said, “Because of the legal risks under federal law, many financial institutions reportedly are unwilling to provide state-authorized marijuana businesses common banking products and services, such as debit or credit card payment services, electronic payroll services, and checking accounts.” Those legal risks have “stifled growth of state-authorized marijuana businesses and forced these businesses to operate exclusively in cash, raising concerns about, among other things, public safety and tax collection compliance.”
Creating a safer system for financial services providers
Lawmakers in the House and Senate have introduced competing bills for many years that would make it easier (and legal) for federally regulated financial services providers to serve the burgeoning cannabis industry.
You can be forgiven if you confuse the two pieces of legislation that are currently being considered: the Senate’s bill is the SAFER Banking Act. The House version is simply the SAFE Banking Act. (A quick way to remember which bill is which: the SAFER Banking Act was only introduced in the Senate last week. It is newer … and therefore it is saf-ER than the House version, which has been around for nearly seven years.)
The SAFE Banking Act started out as a bicameral bill. It was first introduced in Congress in May 2017 by Sen. Jeff Merkley (D-Ore.) and former Rep. Ed Perlmutter (D-Colo.). In 2021, it was reintroduced with Rep. Perlmutter and Sen. Merkley as the chief sponsors, along with a Republican, Sen. Steve Daines of Montana.
The SAFE Banking Act would prevent federal banking regulators from:
Prohibiting, penalizing, or discouraging a bank from providing financial services to a legitimate state-sanctioned and regulated cannabis business, or an associated business (such as a lawyer or landlord providing services to a legal cannabis business);
Terminating or limiting a bank’s federal deposit insurance primarily because the bank is providing services to a state-sanctioned cannabis business or associated business;
Recommending or incentivizing a bank to halt or downgrade providing any kind of banking services to these businesses; or
Taking any action on a loan to an owner or operator of a cannabis-related business.
As the bill’s sponsors explained, the SAFE Banking Act also would:
Create a safe harbor from criminal prosecution and liability and asset forfeiture for banks and their officers and employees who provide financial services to legitimate, state-sanctioned cannabis businesses;
Protect hemp and hemp-derived cannabidiol (CBD) related businesses.
Extend the safe harbor to Community Development Financial Institutions and Minority Depository Institutions to ensure they can also serve cannabis businesses; and
Require banks to comply with current Financial Crimes Enforcement Network (FinCEN) guidance while allowing FinCEN guidance to be streamlined over time as states and the federal government adapt to legalized medicinal and recreational cannabis policies.
The SAFE Banking Act has been approved by the House seven times over the last six years, but has never made it through the Senate.
The bipartisan SAFER Banking Act was written by Senate Banking Committee Chair Sen. Sherrod Brown (D-Ohio) and Sens. Merkley and Daines (yes, the same senators who helped write the SAFE Banking Act).
As the law firm Troutman Pepper has explained, like the SAFE Banking Act, the Senate’s SAFER Banking Act aims to create a safe harbor for depository institutions that wish to provide financial services to state-sanctioned marijuana businesses or service providers. But the SAFER Banking Act would go further than the House bill by:
Addressing concerns around potential bad actors;
Establishing guardrails in case federal regulators want to pressure banks to not service certain customers, such as “marijuana-related businesses” or other high-risk industries;
Making it clear federal banking agencies have a duty to ensure the depository institutions supervised by those agencies are operating in a safe and sound manner and have processes and procedures in place to identify fraudulent or illegal activity, whether activity occurs at a depository institution or through vendors or customers with which a depository institution has a relationship;
Providing guidelines for assessing risk, and encouraging banks to “take a risk-based approach in assessing individual customer relationships rather than decline to provide banking services to categories of customers without regard to the risks presented by an individual customer or the ability of the depository institution to manage the risk”; and
Prohibiting federal regulators from requesting that a bank terminate an account or group of accounts without valid reason, and specifying under which circumstances a bank must, or must not, give a problematic customer notice that their accounts will be terminated.
The Senate Banking Committee is set to vote on the SAFER Banking Act later this morning. Will this legislation be a bright spot in a week that is otherwise marked by partisan fighting and inertia? We could know in just a few hours.
But thus far House Republicans have poured cold water on the notion that the Senate bill could move quickly on the other side of the Capitol. To wit: a senior House Republican on the Financial Services Committee, Rep. Blaine Luetkemeyer, had this to say about the SAFER Banking Act earlier this week: “The Senate’s rewrite … throws out carefully crafted bipartisan work and crams in gross overreach to potentially crush industries not in line with the president's agenda. As it's currently written, it is dead on arrival in the House.”
So the cannabis and banking industries may have to wait a bit longer yet.