Legislative update - status and implications of proposed federal cannabis statutes

Eversheds Sutherland (US) LLP
Contact

Eversheds Sutherland (US) LLP

For years, many have argued that the federal government should legalize marijuana. Despite a vocal minority advocating for legalization, such efforts have largely fallen on deaf ears. The 2018 Farm Bill, which was passed on December 20, 2018, arguably reflects shifting attitudes among federal lawmakers. The 2018 Farm Bill removed hemp from the Controlled Substances Act’s definition of marijuana and removed the Damoclean sword plaguing a large sector of the cannabis industry.

Federal lawmakers, recognizing a growing demand from constituents and the increasingly important cannabis industry to reform federal law pertaining to marijuana, have been busy in the first quarter of 2019 proposing legislation that impacts the business of marijuana in myriad ways. From bills that address medical marijuana and veteran access, to taxation, employee drug testing, and criminal justice reform, Congress is poised to consider legislation that significantly affects the burgeoning cannabis industry.

While blanket federal legalization of marijuana may be a bridge too far at this time, many of the proposed bills address particular issues or sectors within the cannabis industry, having the potential to significantly affect the industry as a whole.

  • Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. On April 4, 2019, Senators Warren (D-MA) and Gardner (R-CO) reintroduced the STATES Act in the Senate. Congressman Blumenauer (D-OR) introduced an identical version of the STATES Act in the House on the same day. If passed, the STATES Act would essentially act as a shield from federal intervention for those who are complying with state marijuana laws and regulations and would allow states to regulate marijuana in a manner they deem best.

Specifically, the STATES Act amends the Controlled Substances Act (CSA) to exclude its application to persons who are acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration or delivery of marijuana. The CSA still applies to persons who violate the CSA with respect to any other controlled substances and to persons who, although operating legally in one state, otherwise engage in conduct in another state that violates the marijuana laws of that other state. The STATES Act also does not shield from criminal liability any person or entity that employs or hires someone younger than 18 years old. Importantly, the STATES Act also makes clear that the proceeds from any transaction permitted by the STATES Act do not constitute the proceeds of an unlawful transaction under federal anti-money laundering (AML) laws. Thus, the STATES Act eliminates the threat of federal criminal liability and AML laws; two of the largest barriers for many contemplating entry into the marijuana industry.

The STATES Act also clarifies that persons who act in compliance with the STATES Act are not “trafficking in a controlled substance.” This provision has significant tax implications for marijuana businesses. Section 280E of the Internal Revenue Code prohibits the taking of tax deductions or credits for any business that consists of trafficking in controlled substances. Accordingly, marijuana businesses must pay taxes on all of their revenues without the benefit of being able to take standard business deductions to reduce their taxable income. The STATES Act has the potential to open access to significant tax benefits that the cannabis industry is currently precluded from using.

A nearly identical bill was introduced in both chambers of Congress in 2018, but failed to pass. The STATES Act has bipartisan support and President Trump has previously expressed his support for the bill. The prospect of passage, however, remains unclear. The bill, while short of legalization at the federal level, would have a dramatic effect on the cannabis industry. At least 33 states have legalized marijuana (either medicinally or recreationally) and more states are headed toward legalization. If the federal government steps out of the picture and allows states to regulate marijuana, the industry will be free from the specter of federal criminal and AML liability.

  • Secure and Fair Enforcement (SAFE) Banking Act. In March 2019, Representative Perlmutter (D-CO) introduced the bipartisan SAFE Banking Act in the House of Representatives. The purpose of the bill is to ensure access to financial services for cannabis-related businesses and service providers. Because marijuana is still illegal at the federal level, many financial institutions and banks are unwilling to do business with marijuana-related businesses, forcing the industry to operate almost exclusively in cash. As a result, cannabis 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 SAFE Banking Act would prevent federal regulators from punishing financial institutions who provide services to 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 marijuana-related businesses or take corrective supervisory action with respect to loans made to cannabis businesses or service providers.

Like the STATES Act, the SAFE Banking Act provides that the proceeds from transactions with a cannabis business or a cannabis-related service provider shall not be considered proceeds from an unlawful activity, which alleviates many of the regulatory hurdles for financial institutions with respect to AML laws and compliance.

The SAFE Banking Act was reintroduced in the current Congressional session after it failed to pass in last year’s session. On March 28, 2019, the House Financial Services Committee approved the bill by a vote of 45-15, signaling at least a measure of support. The bill is now before the House Judiciary Committee.

While there appears to be growing support for the SAFE Banking Act, the fate of the bill remains an open question. However, one thing is clear: the passage of the SAFE Banking 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 the Financial Crimes Enforcement Network, 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 marijuana-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.

  • Sensible Enforcement of Cannabis Act of 2019. H.R. 493, introduced by Rep. Correa (D-CA), proposes to direct the Attorney General to focus on certain enforcement priorities. Specifically, the bill would prohibit the Attorney General from prosecuting violations of the CSA where the underlying conduct concerns medicinal or recreational marijuana use that is legal under state law. The bill contains certain exceptions, including exceptions for distribution to minors, where revenue from marijuana activity goes to gangs or other criminal enterprises, diversion of marijuana to states where marijuana is illegal, where the conduct is a pretext for the trafficking of other illegal drugs, violence and the use of firearms in the cultivation or distribution of marijuana, drugged driving from marijuana use, the growing of marijuana on public lands, or marijuana use or possession on federal land. In essence, the bill codifies the guidance in the Cole Memorandum, which previously provided guidance to marijuana businesses and outlined the Department of Justice’s enforcement priorities. While the Cole Memorandum was not legally binding and was rescinded on January 4, 2018 by then-Attorney General Sessions, it provided meaningful guidance to marijuana-related business with respect to the likelihood of prosecution. The move to legislate these priorities speaks to the demand for concrete guidance with respect to prosecution risk. The bill is currently referred to the House Subcommittee on Crime, Terrorism, and Homeland Security.

Although the future of any of these bills is far from certain, the rate at which legislation that touches on cannabis issues is being introduced in Congress is evidence of an increasing desire of federal legislators to respond to the shifting societal attitudes regarding marijuana and the increasingly powerful potential of the marijuana business community. Thus, a congressional response to the tension between state and federal marijuana law seems to be a question of when and how, not of if.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Eversheds Sutherland (US) LLP | Attorney Advertising

Written by:

Eversheds Sutherland (US) LLP
Contact
more
less

Eversheds Sutherland (US) LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide