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Marijuana Banking: The Prospects for Legal Protection

As New York considers legalizing the recreational use of marijuana, Congress is taking steps to address the issue of marijuana banking. Regardless of one’s views about the merits of marijuana legalization, this should come as welcome news to the New York financial industry. With 33 states and counting that have legalized some form of marijuana, financial institutions can ill-afford to ignore the legal, regulatory, and policy realities surrounding marijuana banking.

The SAFE Banking Act

On March 28, the House Financial Services Committee voted overwhelmingly to approve the Secure and Fair Enforcement (“SAFE”) Banking Act, which would for the first time provide a level of legal protection for financial institutions serving marijuana-related businesses (“MRBs”). The heart of the problem is that so long as marijuana remains illegal at the federal level, all proceeds derived from marijuana-related commerce are considered criminal proceeds for purposes of federal anti-money laundering and Bank Secrecy Act (“AML/BSA”) laws, even in states where marijuana has been legalized.

The result is a multi-billion industry that continues to operate primarily in cash due to a scarcity of legitimate banking and payment options.

History of Cannabis Banking Regulations

The SAFE Banking Act is not the federal government’s first attempt to expand banking access to the marijuana industry. In 2014, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued guidance to financial institutions for how to permissibly bank MRBs consistent with their AML/BSA obligations. (The Department of Justice concurrently issued similar guidance to federal prosecutors, but that document was rescinded last year by then Attorney General Jeff Sessions.) The message of the FinCEN guidance is that so long as financial institutions and their MRB customers comply with the FinCEN guidance and relevant state law, they will not face regulatory or criminal sanction solely for serving MRBs.

FinCEN also established a Suspicious Activity Report (SAR) regime exclusively for financial institutions serving MRBs. Five years after it was issued, the FinCEN guidance has to be considered a qualified success in bringing some measure of banking access to the marijuana industry. FinCEN releases quarterly results about Marijuana SAR reporting, the most of recent of which revealed that nearly five hundred financial institutions have filed some form of a Marijuana SAR.

Banking Marijuana-Related Businesses

While not all those institutions are actively and openly accepting MRB customers –anecdotally that figure is less than 50 – it does reflect a functional system offering some banking relief to the marijuana industry. The inherent limitation of the FinCEN guidance, however, is that it is policy prescription to a legal problem. For the vast majority of financial institutions, even an effectively “hands off” federal policy is insufficient protection to take on MRB accounts so long as marijuana remains federally illegal. The result is that the demand for MRB banking continues to outstrip supply, leaving much of the marijuana industry frozen out of the U.S. financial system.

The SAFE Banking Act attempts to remedy this problem in a number of ways. First and foremost, it removes the threat of regulatory or criminal sanction against financial institutions and their officers, directors, and employees “solely” for providing financial services to MRBs and ancillary businesses. It addresses the AML/BSA problem by exempting marijuana-generated proceeds from the definition of “criminal proceeds” from federal money laundering laws. The bill retains the FinCEN SAR reporting regime, and requires the Federal Financial Institutions Examination Council to develop uniform guidance and examination procedures for financial institutions serving MRBs.

Reaction to the SAFE Banking Act

The bill has garnered broad support among the financial industry, including the American Bankers Association, the Credit Union National Association, and the Independent Community Bankers of America. While the SAFE Banking Act is expected to comfortably pass the full House, its fate will be decided in the Republican-controlled Senate.

Many Republicans continue to oppose any form of marijuana legislation and may be reluctant to support a measure that would enable the industry to continue to expand. Others may attempt to expand the scope of the SAFE Banking Act to prevent improper regulatory interference against banking relationships in general, not just the marijuana industry. The goal would be to prevent a repeat of DOJ’s controversial Operation Choke Point during which federal regulators targeted the bank accounts of certain politically disfavored industries. Whatever form eventually emerges, the primary mission of the SAFE Banking Act is unique if not historic – to provide legal protection for banks to serve a federally illegal industry.

Whether that ultimately proves to be a bridge too far for this Congress remains to be seen. But the fact that it is a viable possibility is testament to the ever-growing influence of, and support for, the U.S. marijuana industry.

This article was written by John Vardaman, Hypur’s General Counsel, and originally appeared on New York League of Independent Bankers 

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