The banking industry has a cannabis problem—it cannot bank cannabis related businesses.

Despite the fact that over 35 states have legalized medical cannabis in some form and more than 10 others have recreational cannabis laws, the mainstream banking industry has been largely unable to provide services to lawful cannabis companies. That is because federal law still views cannabis as an illegal Schedule I drug subject to the Controlled Substances Act—on par with drugs such as heroin.

This complex federal overlay has prevented the banking industry from being able to service not only cannabis companies, but also non-plant touching ancillary businesses working with cannabis companies. Consequently, banks are forced to sit on the sidelines while cannabis companies try to figure out what to do with their growing cash reserves.

In light of the Senate Banking Committee’s surprising decision to schedule a hearing on the Secure and Fair Enforcement (SAFE) Banking Act, set for July 23rd, this article provides a brief overview of the regulatory framework currently in place that largely prevents banks from serving cannabis clients and explores how the SAFE Banking Act would address the current uncertainty. We also provide a brief update on where the SAFE Banking Act stands in Congress.

The Regulatory Framework: why is serving cannabis companies so challenging for financial institutions?

The crux of the problem facing the banking industry when it comes to serving cannabis related businesses is the complex and burdensome regulatory environment governing banks’ obligations. These regulations stem mostly from the Bank Secrecy Act (“BSA”) and Anti-money Laundering (“AML”) statutes. In addition, a number of government regulatory authorities have some kind of jurisdiction that could impact banks serving cannabis clients.

In 2014, FinCEN issued guidance that (i) provided a checklist of items for financial institutions to assess when deciding whether to serve cannabis related businesses, and (ii) articulated filing procedures for Suspicious Activity Reports (SARs) related to cannabis businesses. The guidance also provides that if a financial institution determines it can serve a cannabis related business, then the financial institution must comply with ongoing monitoring and reporting obligations that are both burdensome and complex.

The FinCEN guidance was largely based on DOJ guidance famously set forth in the Cole Memorandum, which laid out eight enforcement priorities the DOJ would consider in making prosecutorial decisions related to cannabis companies. In early 2018, however, then Attorney General Jefferson B. Sessions rescinded the Cole Memorandum in a terse, one-page statement. FinCen has not, to date, altered its 2014 guidance. But because that guidance was based on the DOJ’s Cole memorandum, it is hard to say whether compliance with FinCEN’s provides any meaningful protection.

As if this all weren’t confusing enough, state-level regulators have weighed in on the cannabis banking issue, further muddling the waters. For example, New York and California regulators have worked on state level solutions that would pave the way for financial institutions in those states to serve lawful cannabis businesses. Other states such as Utah, however, have taken the polar opposite approach, suggesting that any state level financial institution would be cited for serving lawful cannabis clients.

The Secure and Fair Enforcement (SAFE) Banking Act.

The Secure and Fair Enforcement (SAFE) Banking Act, promises some relief from the current regulatory environment by providing federal protection for banks and other financial institutions that serve lawful state-level cannabis businesses. This would include both plant touching and non-plant touching (ancillary) cannabis businesses.

Specifically, the bill clarifies the regulatory landscape significantly by prohibiting a federal banking regulator from taking certain actions against financial depository institutions (e.g. taking adverse or corrective supervisory action or terminating the institution’s deposit insurance) that offer services to cannabis businesses that are lawful on a state level. The bill would also require FinCEN to develop guidance on how to prepare SARs for cannabis related businesses that would be tied to the goals and guidance provided in the SAFE Banking Act (as opposed to the now rescinded Cole Memorandum).

Beyond clarifying the regulatory landscape, the bill expressly provides for what activities financial institutions can support. For example, Section 3 of the SAFE Banking Act addresses AML statutes directly, providing that transactions conducted with cannabis related businesses will not be considered proceeds from unlawful activity solely because the transaction is connected to a lawful cannabis business. Section 4 of the bill protects financial institutions’ interest in collateral that any banking client uses in the cannabis business by immunizing financial institutions from civil and criminal forfeiture provisions.

Finally, Section 7 of the bill requires the Financial Institutions Examination Council (“FIEC”) to develop procedures and policies for depository institutions to follow when conducting business with lawful cannabis operators. Federal banking regulators would then be required to issue guidance and examination procedures that are consistent with the FIEC’s framework.

Where does the SAFE Banking Act stand now?

Currently, the SAFE Banking Act has 206 co-sponsors in the House and 31 in the Senate. The bill has passed the House Financial Services committee and the Senate Banking Committee scheduled a hearing on the companion bill set for July 23rd.

While a full vote in the House and Senate are not likely to happen in the immediate future, the growing support for a cannabis banking solution is sure to continue picking up steam.