Once upon a time in the U.S. cannabis was not legal or illegal, it was somewhat under the radar, until in 1911 Massachusetts became the first state to prohibit its use.  Several other states enacted similar bans until finally in 1937 the Federal Government enacted the Marihuana Tax Act which imposed a tax on the sale of hemp.  It was a roundabout way to regulate the drug but it may have been a lobbying effort by the likes of Andrew Mellon and Randolf Hearst to limit the size of the hemp industry, which was in direct competition as a natural fiber producer with their own production of paper using timber.

It wasn’t until 1970, though, that the Controlled Substances Act was enacted listing marijuana a Schedule I drug.

The definition of a Schedule I drug:

1. The drug or other substance has a high potential for abuse.
2. The drug or other substance has no currently accepted medical use in treatment in the United States.
3. There is a lack of accepted safety for use of the drug or other substance under medical supervision.

Almost immediately there was public pushback with several states moving to decriminalize marijuana.  In 1996 California became the first state to legalize cannabis for medical use.

That was an important moment in cannabis time.  With legalization for medical use comes production and sale which means legitimate cannabis businesses opening.

But what do you do if you are a business that is not allowed to open a bank account?  Well, you have to manage in cash.  Or find a bank that is willing to work with your business which is not so easy.  See our article on banking for cannabis industry on our website here. 

With an ever increasing acceptance of the legalization of marijuana, a recent Pew Research Center poll put approval of legal use of the substance at 62% of Americans, the question Congress is now attempting to tackle is how to facilitate industry growth.

Without a banking relationship a business can’t do things like take credit card payments from their customers, take out a loan, or pay their vendors using electronic methods.  In lieu of banking, cannabis businesses have been operating in cash, which can be dicey, and without a way to invest cash into a financial product, it has been a de facto ceiling on growth.

What the proposed SAFE Banking Act of 2019 would do is to give financial institutions and ancillary businesses that work with cannabis companies more security in conducting those banking relationships.  For instance, currently the Financial Crimes Enforcement Network (FinCEN) under the Department of Treasury which is tasked with preventing money laundering by criminals and terrorists can shut down a bank account of a customer simply if it suspects the funds in the account were derived by the cannabis industry.  And more importantly, it can deny a banking institution its FDIC coverage and/or levy a fine.  What’s more, FinCEN can go after employees of cannabis companies, denying them access to financial products like home loans and credit cards; it can target ancillary companies like insurance companies, landlords, and accounting firms that work with cannabis with closure of their bank accounts, etc.  All this leverage has been, since the events of 9/11, one of the Federal government’s big guns against terrorist organizations and organized crime, following the money, as you will, to get to the criminals.

Under Obama

But what of State’s rights and their ability to govern and make their own laws?  Well, this is certainly a tenet of our democracy, but it has put cannabis businesses and the banks that want to work with them in a sticky wicket.  As States began legalizing the use of marijuana, it became clear that there had to be a way for the Federal government not to step on State toes and allow them their own laws.  So, in 2013 U.S. Deputy Attorney General James M. Cole issued guidance (Cole Memo) on how the U.S. Attorney General’s office would/would not prosecute cannabis companies in States where use, cultivation, and distribution had been made legal.  A year later FinCEN issued guidance to banking and other financial institutions on how to conduct themselves in their relationship with the cannabis industry. (See our article on banking for the cannabis industry here for more information) 

So, all settled, right?  Not so much. 

What makes it SAFE

Congress decided that with an ever increasing number of States jumping on board, and the need to allow the industry to grow – thus provide tax revenues not only to the States but to the Federal government – they introduced the SAFE Banking Act which lays out further parameters how banking and other financial institutions and ancillary businesses can work with legitimate cannabis businesses without fear of their accounts be shut down, seized, or themselves being fined or prosecuted simply for working with the industry.

Where We Are Now

The House passed the SAFE Banking Act in September 2019.  Now the Senate needs to pass a compatible bill before it can go to the President’s desk for either signing or veto.  Even if the Senate passes their bill there is no guarantee that the President will be inclined to sign it into law.  Public opinion not withstanding, many in Washington don’t approve of legalization and/or believe that the Federal government should ways trump State’s rights.

To wit, the Trump administration rescinded the Cole Memo and there is fear that they may also rescind the FinCEN guidance as well throwing the industry back years.  The fear is that if this happens the U.S. Attorney General’s office will begin prosecutions of legitimate cannabis businesses in States where it is legal.

There have also been murmurings that the GOP in Congress is interested in opening a debate on rescheduling cannabis which is not a bad thing in itself (after all legalizing medical use gives the lie to criteria B in Schedule I), but it would probably mean putting off any vote in the Senate on the SAFE Banking Act, a vote that has yet to be scheduled as of this writing. 

In addition, critics believe that because of the reporting requirements of the Act and the obligation banks and financial institutions would find themselves under may make administrative costs untenable, costs that would certainly be passed along to the cannabis industry – already heavily weighed down by local licensing requirements and costs, and heavy local, state, and federal tax burdens – essentially making legitimate banking too expensive.

So, on the face of it the SAFE Banking Act is a step in the right direction for the industry.  But the unknowns point to a neither positive nor negative outcome, at this point, leaving the industry, financially speaking, just as it was before SAFE.