By: Brittany Michaud, Esq.
Although a majority of states have legalized certain marijuana-related activities, marijuana remains a federally controlled substance. This conflict between the status of marijuana under federal and state law presents significant challenges to banks and other financial institutions seeking to offer financial services to customers in the marijuana industry, as many financial institutions remain wary of violating federal money laundering laws or engaging in financial transactions involving funds derived from an illegal activity. Without broad legislative action that would provide solutions to these challenges, many financial institutions are choosing to stay out of cannabis banking.
In states where medical or adult use marijuana is permitted, banks providing financial services to marijuana-related businesses (“MRB”) must be mindful of the federal guidance on law enforcement priorities and due diligence obligations and other legal requirements under the Bank Secrecy Act (“BSA”). The BSA is the primary federal law regulating the banking industry and was intended to prevent money laundering and other financial crimes. To further that purpose, the BSA requires financial institutions to file Suspicious Activity Reports (SARs) when money laundering or other criminal activity is suspected. The U.S. Treasury Financial Crimes Enforcement Network (FinCEN) issued guidance in 2014 permitting banks to do business with MRBs, but the guidance also imposed onerous due diligence obligations on banks in order to ensure their MRB customers are in compliance with applicable federal and state laws. Although the FinCEN guidance was intended to clarify how banks may provide financial services to MRBs without violating the BSA, it does not remove marijuana as a federally controlled substance or eliminate criminal or civil liability on banks for providing such services.
Several bills have recently been introduced in Congress aimed at providing MRBs access to financial and other essential services. Most prominently of those bills is the Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act). The SAFE Banking Act was passed by the U.S. House Representatives in September 2019 but has since stalled in the Senate after being referred to the Senate Committing on Banking, Housing and Urban Affairs. As drafted, the bill generally prohibits federal banking regulators from taking punitive measures (such as terminating or limiting the deposit insurance or share insurance) against financial institutions for the sole purpose of providing banking services to a legitimate marijuana or hemp-related business. It also provides that a depository institution, Federal Reserve Bank, or other insurer has a legitimate interest in the collateral securing its loan to a MRB and will not be liable under federal law or subject to forfeiture of its collateral for providing such services. Finally, the bill provides that for purposes of federal anti-money laundering laws, the proceeds from a transaction involving activities of a cannabis-related legitimate business or service provider shall not be considered proceeds from an unlawful activity.
While the SAFE Banking Act would represent a significant step forward in allowing MRBs access to financial services, it fails to solve many of the existing obstacles for banks and MRBs. First, the SAFE Banking Act does not legalize or decriminalize marijuana under federal law, which means that banking customers and their companies would still be at risk of criminal prosecution for federal crimes. Second, banks would still be responsible for ensuring that their MRB customers are in compliance with applicable federal and state laws through strict due diligence efforts. Conducting on-going due diligence would require substantial resources and, in most cases, would be impracticable for financial institutions, which appears to be the reason few banks are currently offering financial services to MRBs.
Navigating the BSA and federal guidance on banking in cannabis can be difficult for banks and financial institutions. Thus, we encourage those seeking to offer financial services to MRBs to work with experienced legal counsel to ensure compliance. If you have any questions about the laws and regulations currently governing banking in cannabis, or about changes on the horizon, please do not hesitate to reach out to a member of our Licensing and Regulatory Compliance division.