Cannabis SAFE Banking: How Close Are We?
On July 21, 2022, Senate Majority Leader Chuck Schumer announced a new piece of priority legislation, the Cannabis Administration and Opportunity Act, which would remove obstacles to conventional banking. This legislation, when enacted, will bring cannabis – one of the highest growth sectors in America – out of the financial “dark ages” and into the 21st Century.
Since the first decriminalization of cannabis in 1996, the industry has struggled for access to traditional banking, forcing the growing sector to rely on cash-only transactions.This issue has been an ongoing fight, and while the news is encouraging, there may still be a long way to go before chartered banks can provide full access to financial services into the cannabis sector.
Why Can’t Cannabis-Related Businesses (CRBs) Use Banks?
The cannabis industry has consistently faced conflicting legislation and tremendous obstacles to banking access. In 2014, the U.S. Treasury provided regulatory guidance to chartered banks in the United States, notifying them that they could provide financial services to cannabis-related businesses (CRBs) under a set of very difficult compliance requirements.
In 2013, U.S. Department of Justice Deputy Attorney General James M. Cole drafted the “Cole Memo,” outlining how the Department of Justice (DOJ) should conduct both civil enforcement and criminal investigations of the cannabis business. The Cole Memo advised a more hands-off approach and de-prioritized use of federal funds to enforce cannabis prohibition under the Controlled Substances Act.
In 2014, The Department of Treasury Financial Crimes Enforcement Unit (FinCEN) published “BSA Expectations Regarding Marijuana-Related Businesses.” This regulation outlined that financial transactions involving cannabis businesses – including those properly licensed under state law – would generally involve funds derived from illegal activity, which would in most cases trigger a Suspicious Activity Report (SAR) filing.
What Steps Do Banks Have to Conduct Before Serving Cannabis Businesses?
It’s not impossible for banks to offer financial services to cannabis businesses. However, the compliance requirements are so stringent that even the largest and most established financial institutions in the country are unable to meet these standards.
In order to provide payment processing, bill payment, savings, and investment services to cannabis businesses banks must meet seven criteria:
(i) Verifying with the appropriate state authorities whether the business is duly licensed and registered.
(ii) Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business.
(iii) Requesting from state licensing and enforcement authorities available information about the business and related parties.
(iv) Developing an understanding of the normal and expected activity for the business.
(v) Ongoing monitoring of publicly available sources for adverse information about the business and related parties.
(vi) Ongoing monitoring for suspicious activity, including for any of the red flags described in [the] guidance
(vii) Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.
“Red flags” include any indications of criminal involvement, providing products to minors, and money laundering, among others. That means banks would be responsible for ongoing monitoring of the commercial activities of cannabis businesses. According to the Department of Treasury guidance, in the event that a business does violate laws, failure to monitor business activities could result in fines and charges against the financial institution. This liability has resulted in many banks shying away from the cannabis industry as a whole.
What Kind of Cannabis Businesses Are Underbanked?
It’s not just dispensaries that are unbanked. Any business handling plants or deriving revenue from services related to cannabis can also be restricted under federal banking regulations.
These types of companies include ancillary businesses and services like:
● Accounting
● Legal
● Construction
● Technological
● Delivery
● Commercial landlords
● Real estate agencies
● Trucking and logistics
● Quality control and safety testing
The underbanked cannabis sector also faces lending challenges that stifle the growth of independent cultivators and dispensaries. Cash-only cannabis businesses face increased risks of cash mismanagement, customer inconvenience, as well as safety liabilities for customers, staff, and business owners.
Crimes Against Cash-Only Dispensaries Rising Without Banking Services
While legislators have tried to restrict banking services to reduce organized crime, inadvertently, the imposed challenges have led to an uptick in theft and violent crimes that put business owners, employees, and even customers at risk..
According to Americans for Safe Access, in November and December of 2021 alone, over 25 Washington state dispensaries were robbed. Washington State officials reported that by May 2022, there were over 50 theft and robberies reported.
2021 Cannabis Administration and Opportunity Act (CAOA)
At present, any chartered bank offering depository or payment processing services to a cannabis business is vulnerable to federal prosecution. Providing protections for banks was the main goal of the 2021 SAFE Banking Act, making it easier for banks to safely serve the ever-growing cannabis sector.
In July 2022, Senate Majority Leader Chuck Schumer, Senator Ron Wyden (D-Oregon) and Senator Cory Booker (D-New Jersey) introduced the
“Discussion Draft: Cannabis Administration and Opportunity Act” (CAOA).Two bipartisan priorities regarding cannabis regulation are addressed in CAOA:
1) Additional funding for law enforcement and
2) Resources to find and prosecute unlicensed cannabis operators.
This legislation also provides for social equity lending for cannabis entrepreneurs to increase minority ownership. Additionally, this act proposes the mass expungement of criminal records for Americans with non-violent cannabis-related charges.
Cannabis Banking Reform Legislation Faces Significant Push-Back
Supporters of the legislation anticipate the Senate to push back against the proposed Cannabis Administration and Opportunity Act (CAOA). Current President Joe Biden has not yet commented on relaxing banking restrictions or federally rescheduling cannabis from Schedule 1 of the Controlled Substances Act. This means that changes to banking regulations may not happen as soon as the cannabis industry would like, and that the cannabis industry needs a solution to the cash problem they face.
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