On September 25, 2019, the House of Representatives overwhelmingly passed the bipartisan Secure and Fair Enforcement (SAFE) Banking Act with a vote of 321 in favor and 103 against. Notwithstanding widespread public support, its fate remains unclear as Senate Majority Leader Mitch McConnell has not indicated that he will bring the bill to a vote in the Senate. Proponents of the bill’s passage note that the bill has 33 cosponsors in the Senate, and certain recently-added provisions may make passage more likely in the Republican-controlled Senate.
The purpose of the bill is to ensure access to financial services for cannabis-related businesses and service providers. Financial services are defined to include the business of insurance, payment card services and money transmitting businesses. Because marijuana is still illegal at the federal level, many financial institutions and banks are unwilling to do business with cannabis-related businesses, forcing the industry to operate almost exclusively in cash. As a result, these businesses face serious risks to safety and security when handling and storing cash. Operating on a cash basis also presents logistical issues with respect to paying employees, vendors and even taxes.
The bill provides financial institutions with a safe harbor from federal liability for providing banking services to cannabis-related businesses, preventing federal regulators from punishing those service providers engaging with cannabis businesses that are operating legally under state law. In particular, under the Act, a federal banking regulator cannot terminate or limit deposit insurance for depository institutions, nor can a regulator prohibit or penalize depository institutions from providing services to cannabis-related businesses or take corrective supervisory action with respect to loans made to cannabis businesses or service providers. The bill further provides that the proceeds from a transaction involving activities of a cannabis-related legitimate business or service provider shall not be considered proceeds from an unlawful activity pursuant to the Money Laundering Control Act solely because, among other things, the transaction involves proceeds from a cannabis-related legitimate business or service provider. This provision alleviates many of the regulatory hurdles for financial institutions with respect to anti-money laundering laws and compliance.
The bill includes other important provisions for depository institutions and other entities providing financial services such as:
- protecting real estate owners leasing to legitimate cannabis-related businesses
- protecting insurers for providing financial services to legitimate businesses and investing income derived from the provision of those services
- allowing Federal Home Loan Banks to provide services to those depository institutions providing services to legitimate businesses or service providers, including holding an interest in collateral for a loan without the fear of prosecution or forfeiture of the legal interest
- requiring financial institutions to continue to comply with Financial Crimes Enforcement Network (FinCEN) guidance relating to the filing of suspicious activity reports
- ordering Federal banking regulators to issue guidance to financial institutions confirming the legality of hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products and the legality of providing financial services, including merchant processing services, to businesses selling these products
- mandating notice requirements when depository institutions are ordered to terminate a specific customer account with justification that must go beyond the reputational risk to the depository institution.
While the fate of the bill hinges on the Senate’s actions, it is clear that the passage of the SAFE Banking Act has the potential to lift a barrier inhibiting growth in the industry and, at the same time, open up a significant and growing market to financial institutions. As of December 31, 2018, per the FDIC, there were approximately 4,715 FDIC-insured commercial banks in the United States, while FinCEN, a bureau of the US Department of the Treasury charged with safeguarding against money laundering and illicit use of financial systems, reported that only 438 depository institutions were providing banking services to cannabis-related businesses. As more institutions are incentivized to provide services to cannabis businesses, credit will be more readily available, and businesses can transition away from cash-only operations and the logistical impediments inherent in that business model.
If the Senate chooses not to pass the SAFE Banking Act, then cannabis-related businesses will, at least for the near term, remain largely locked out of the banking system, which will continue to deny many of these businesses access to vital services required to operate optimally and manage risk. It will be important to monitor the signals coming from the Senate, including key Senate players, in the coming weeks to better determine whether passage of the SAFE Banking Act, in some form, is possible in 2019.
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