State Attorneys General Push Congress for Cannabis Industry Banking 'Safe Harbor'

Imagine a multi-billion dollar industry operating in numerous states throughout the country on a cash only basis, because there are no banks available to service the market.

Sounds far-fetched, right? Well, that is exactly what’s happening in the United States cannabis industry. New pressure being applied by numerous states attorneys general could soon change that dynamic.

But before we get to that, let’s take a moment to consider a bit more context.

In 1996, California became the first state to legalize medical cannabis, which over the next ten years, spread to a majority of states. In 2012, Colorado and Washington became the first states to legalize recreational use. 

Today there are 29 states, in addition to Washington, D.C. and several U.S. territories, that have legalized medical cannabis. As an aside, cannabis is the preferred term by those in the business, because “marijuana” is actually a loaded term.

Of those, 9 states and Washington, D.C. have fully legalized the use of cannabis.  Additionally, 13 states have decriminalized the recreational use of cannabis. As legalization of cannabis, not only for medicinal purposes, but also for recreational use, continues to spread, the banking industry is faced with uncertainty as to the extent of what role it can play in the field. 

Despite the trend in favor of legalization of both medical and recreational cannabis, the federal government has steadfastly kept cannabis a Schedule 1 drug on the Controlled Substances Act – placing it in the same forbidden territory as heroin and other narcotics.  This categorization places legitimate banks in an area of uncertainty. Because of this, banks have mostly avoided the industry, forcing cannabis businesses to operate on a primarily cash basis, which opens them up to problems with everything from basic accounting to paying local and state taxes to security

To that end, state attorneys general are asking Congress to pass a law allowing banks to work with cannabis companies. In January, a bipartisan mix of attorneys general from 17 states, D.C. and Guam, which have all legalized cannabis in some capacity, urged congressional leaders to pass legislation that would allow banks to do business with licensed cannabis businesses. 

Law enforcement officials say exempting banks that service cannabis businesses from federal criminal and civil penalties would provide safeguards for a multibillion dollar industry that currently operates largely on cash transactions. The end result would allow law enforcement to oversee these dealings and bring billions of dollars into the banking sector. 

The attorneys general also prompted that “compliance with tax requirements would be simpler and easier to enforce with a better-defined tracking of funds.” The result would be higher tax revenue for states.

The letter to Congress came less than two weeks after the Trump administration announced plans to give federal prosecutors room to enforce cannabis laws, reversing the Obama-era “hands-off” drug enforcement policy.

Although the federal government has previously issued guidance for how banks can work with cannabis companies, without a law on point, banks hesitate to enter the rapidly growing industry. Moreover, guidance is, in most cases, not enough for national banks who want real regulation. The letter from the state attorneys general asks Congress for legislation that would provide a “safe harbor” for financial institutions working with cannabis companies in states where the drug is legal in some capacity. 

Additionally, a bicameral bill was introduced last spring that would do just that. The bill, known as the Secure and Fair Enforcement Banking Act of 2017, or the SAFE Act of 2017, would prohibit a federal banking regulator from (1) terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate cannabis-related businesses; (2) prohibiting or otherwise discouraging a depository institution from offering financial services to such a business; (3) recommending, incentivizing, or encouraging a depository institution not to offer financial services to an account holder solely because the account holder is affiliated with such a business; or (4) taking any adverse or corrective supervisory action on a loan made to a person solely because the person either owns such a business or owns real estate or equipment leased to such a business. 

A depository institution would further not be liable or subject to forfeiture for providing financial services to legitimate cannabis-related businesses. The House Bill has been referred to the Subcommittee on Crime, Terrorism, Homeland Security in Investigations as of September, 2017. The Senate Bill has been referred to the Committee on Banking, Housing and Urban Affairs as of June, 2017.

Finding the Pot of Gold

Given the difficulty of finding a bank willing to lend money to a cannabis company in the current regulatory climate, investors are beginning to view the pot industry as a potential goldmine. 

Despite disparities between not only the federal and state governments, but among the various states themselves, investing in this arena is become ever-more popular. While investing in cannabis companies is far from safe and secure, the profits have the potential to be staggering. 

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