This advisory contains analysis of draft legislation that has not been passed by Congress or signed into law.
On February 13, the House Financial Services subcommittee held its first hearing on a draft bill that could have a significant positive effect on the legal cannabis industry. The Secure and Fair Enforcement Banking Act of 2019 (the “SAFE Banking Act,” or the “Act”), introduced by Congressman Ed Perlmutter (D – Colorado), would provide legal protections for banks providing financial services to cannabis businesses.
Although the legal cannabis industry has been growing rapidly, banks have been reluctant to serve the industry, partly due to a concern that providing financial services to cannabis businesses could violate federal criminal laws and financial regulations, and non-cannabis businesses have operated under the shadow of potential exposure to federal civil or criminal action. The SAFE Banking Act attempts to address these concerns.
The Act would prohibit certain federal banking regulators from taking adverse actions against banks and credit unions that provide services to “cannabis-related legitimate businesses,”—which the Act defines to include persons or companies operating pursuant to state law in either the handling of cannabis or cannabis products or the provision of financial services, business services (including the sale, lease or license of property—real and otherwise), legal services or any other ancillary services related to cannabis—solely because of the company’s participating in the cannabis industry.
With respect to financial institutions that provide services (i.e. loans or deposit accounts) to cannabis-related legitimate businesses, the Act would prohibit federal banking regulators from (1) terminating or limiting the FDIC or FCUA insurance maintained by banks and credit unions, respectively; (2) prohibiting, penalizing, or discouraging banks or credit unions from providing financial services to cannabis-related legitimate businesses; (3) recommending, incentivizing or encouraging banks or credit unions to downgrade existing services to, or refuse to offer services to, cannabis-related legitimate businesses; and (4) taking any adverse action on a loan made to cannabis-related legitimate businesses.
The Act would also shield businesses and financial institutions from some civil and criminal liability for serving cannabis-related legitimate businesses. First, the Act would provide that proceeds from a transaction with a cannabis-related legitimate business are not “proceeds from an unlawful activity” under the federal money laundering statutes (18 U.S.C. §§ 1956 and 1957) or “all other provisions of law.” Currently, certain transactions involving proceeds of unlawful activity, including violations of the Controlled Substances Act, can constitute criminal money laundering. The money laundering statutes have not regularly been used against those providing otherwise lawful services to state-legal cannabis businesses, but many businesses, and especially those in the heavily regulated financial sector, fear that the federal government could take the position that any person or business engaging in a transaction with a cannabis business—even something as simple as selling advertising services, leasing agricultural machinery, or licensing software—is committing a money laundering offense. The SAFE Banking Act, if passed into law, would respond to this fear by clarifying that the money laundering statutes don’t make regular transactions for lawful products or services criminal, just because one of the parties is a state-legal cannabis business.
Second, the Act would shield banks and credit unions from liability arising from “any federal law or regulation” solely for providing financial services to a cannabis-related legitimate business or for further investing income derived from such financial services. Importantly, the law additionally shields officers, directors, and employees of financial institutions from such liability, but it would not expressly provide that shareholders or equityholders of financial institutions receive the same liability shield. The Act would further provide that collateral pledged by cannabis-related legitimate businesses in connection with secured financings by banks and credit unions shall not be the subject of criminal, civil, or administrative forfeiture “pursuant to any Federal law” solely on the basis that the credit was extended to a cannabis-related legitimate business.
Finally, the Act would direct the Financial Institutions Examination Council and federal banking regulators to develop additional guidance for banks and credit unions, consistent with the policy of the SAFE Banking Act. In particular, the Act would relax requirements on financial institutions to file Suspicious Activity Reports (“SARs”) for transactions with cannabis-related legitimate businesses, such that that they do not “inhibit the provision of financial services” to them.
The SAFE Banking Act bill is similar to other bills proposed unsuccessfully in recent years in response to the growth of the domestic legal cannabis industry. Its passage through the House Financial Services subcommittee signals the continued pressure to reform federal law to reflect the growth of the state-legal cannabis industry. The SAFE Banking Act would be a significant step towards ensuring better access to financial services (e.g., deposit accounts, loans) for the cannabis industry, while eliminating the threat of federal civil and criminal sanctions for non-cannabis businesses engaging in routine business transactions with state-legal cannabis businesses.