As of last count, 37 states have legalized the use of cannabis for medicinal purposes and 18 states for adult recreational use. With a few exceptions, cannabis and cannabis-related businesses lack access to banking services.
Because cannabis remains a Schedule I Controlled Substance with the likes of heroin, and government studies have concluded it has no valid medical uses, it is still a violation of federal law to manufacture, possess or distribute cannabis or any of its forms. As a result of this continued controlled substance classification, a majority of national and state charted banks and credit unions refuse to allow any cannabis industry businesses to bank with their institutions.
Banks and credit unions will also close down the accounts and default existing customers under their loan agreement if the bank or credit union learns that its customer is a cannabis business or does business with a cannabis-related business. For example, a bank learns its commercial real estate client rents space to a tenant that manufactures lighting for cannabis growers in a building that is being used as collateral for a loan to the bank’s customer and defaults its customer under the loan documents as engaging in an illegal activity.
The reason for the banks’ concern, the Money Laundering Statute, Unlicensed Money Transmitter Statute and Bank Secrecy Act, all of which remain in effect with respect to cannabis related conduct. Violations of these statutes could result in banks and credit unions facing significant fines, shutdown and even criminal prosecution of bank personnel.
The Cole Memo
On Aug. 29, 2013, then U.S. Attorney General James M. Cole issued a memorandum to all U.S. attorneys that was published through the Department of Justice and has since become known as “The Cole Memo.” The Cole Memo was a response to states looking to the federal government for guidance on how to deal with the fact that cannabis for medical use was legal in some states but still illegal under federal law. The Cole Memo provided that, while still a violation of federal law, prosecutors and law enforcement should focus their prosecutorial efforts only on the following priorities related to state-legal cannabis operations:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property.
The Cole Memo applies to all justice department enforcement of federal laws related to cannabis within the states.
Following The Cole Memo, on Feb. 14, 2014, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department published expectations of the Bank Secrecy Act to clarify matters for financial institutions contemplating doing business with cannabis and cannabis related businesses. The FinCEN guidance was to provide financial institutions clarity as to how they could provide services to cannabis-related businesses consistent with their obligations under the Banking Secrecy Act, consistent with federal and state law enforcement priorities.
Concurrently with the FinCEN guidance, Deputy Attorney General Cole issued supplemental guidance directing that federal prosecutors also consider the same enforcement priorities contained within The Cole Memo in respect to federal money laundering, unlicensed money transmitter, and the Bank Secrecy Act offenses based on cannabis-related violations of the Controlled Substances Act.
The FinCEN guidance provided that each financial institution considering conducting business with a cannabis-related business, should conduct extensive customer due diligence that includes: (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, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (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; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
FinCEN also directed financial institutions to consider whether a cannabis-related business implicated any of the Cole Memo priorities or violated state law. Consideration of this crucial information would provide the financial institution with information needed to comply with required reporting under the Bank Secrecy Act as related to law enforcement’s priorities as set forth in The Cole Memo. If the financial institution opted to provide financial services to a marijuana-related business, they would be required to file suspicious activity reports (“SARs”) as outlined by FinCEN.
On Jan. 4, 2018, then Attorney General Jeff Sessions rescinded the Cole Memo. However, this action soon proved to be more symbolic, having little impact on the enforcement activities of the U.S. Attorney’s Office as a result of the Rohrabacher-Farr Amendment.
The Rohrabacher–Farr Amendment
The Rohrabacher–Farr Amendment (aka The Rohrabacher-Blumenauer Amendment) became law in December 2014 and prohibited the Department of Justice from using federal funds to interfere with the implementation and enforcement of state medical cannabis laws. The amendment does not change the legal status of cannabis as it remains a Schedule I Controlled Substance under the Controlled Substance Act of 1970, and the amendment must be renewed each fiscal year in order to remain in effect. Currently, it is in effect through Sept. 30, 2021. Current Attorney General Merrick Garland has stated that his department will not pursue cases against Americans complying with the laws of states that have decriminalized the use of cannabis under a state regulatory scheme.
Secure And Fair Enforcement Banking Act of 2021 (“Safe Banking Act of 2121”)
Although the number of banks and credit unions serving cannabis-related businesses is growing, the majority of banks and credit unions have refused to serve this fast-growing industry and the business owners are forced to walk and travel city streets with loads of cash, resulting in a public safety issue. Criminals are aware of the lack of access to banks for this industry, and business owners report they and their employees are at risk with their businesses being robbed
With the stated purpose to increase public safety by ensuring cannabis businesses and their service providers access to banking services, the Secure And Fair Enforcement Banking Act of 2021 (SAFE Banking Act) was introduced by Congressman Ed Perlmutter of the 7th District of Colorado. If passed into law, the SAFE Banking Act would prohibit a federal banking regulator from penalizing banks for providing financial services to a legitimate cannabis business or service providers for the same, which are regulated under state law. Further, proceeds from a transaction generated from a legitimate cannabis business would not be considered unlawful.
The pending legislation protects bank personnel and insurance carriers and their personnel from criminal prosecution for merely providing financial or insurance services to legitimate cannabis and cannabis-related businesses and further investing the income derived from the services provided to these customers. The foregoing protections extend to a Federal reserve bank and Federal Home Loan Bank. The SAFE Banking Act also removes the concern of forfeiture of collateral for loans to legitimate cannabis businesses and their service providers. It requires the financial institution to continue to file the SAR’s in compliance with the FinCen guidelines.
The SAFE Banking Act passed in the House of Representatives on a 321 - 101 vote on April 19, 2021. It moves on to the Senate, where it is reported to have significant support.
If the SAFE Banking Act passes in the Senate, this will be a huge boost to curb the public safety issues caused by these businesses and their owners being in possession of large amounts of cash. However, there is a significant amount of due diligence that is required in order for a financial institution to provide services to this industry so it would be naïve to think the passage of this legislation would immediately open the flood gates for all financial institutions to serve this industry. It will take time for financial institutions to put their cannabis-related business compliance plans and systems in place. Further, some financial institutions may simply make a decision that cannabis is not a space they want to be in and decline to provide such services.
On July 14, 2021, Senate Majority Leader Chuck Schumer proposed legislation that would legalize cannabis at the federal level. In broad strokes, The Cannabis Administration and Opportunity Act would remove cannabis from the Controlled Substances Act and would regulate and tax cannabis products. Further, it would expunge federal records for nonviolent cannabis offenders and allow current prisoners to file a petition for a resentencing based on current pending legislation. Schumer’s proposed legislation is expected to face stiff opposition in the Senate. However, the SAFE Banking Act appears to have greater bipartisan support.
For those banks and credit unions that do have an interest in providing banking services to the cannabis industry but are waiting for some statutory protections from the federal level, they should be researching the due diligence they will need to conduct and be ready to move once those protections come to fruition.
Kelli L. Baker is a partner in Plunkett Cooney’s Grand Rapids Office, who has particular expertise in the areas of loan workouts, loan origination and title insurance.
Before returning to Michigan in 1997, Ms. Baker practiced law ...
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