Helping motor more than $17.5 billion of legal cannabis sales in the U.S. in 2020, there were 515 banks and 169 credit unions providing services to cannabis-related businesses at the end of last year, according to Financial Crimes Enforcement Network’s (FinCEN) quarterly cannabis banking update.
But those banks are not the “national associations” of the world. Big financial institutions, like JPMorgan Chase, Wells Fargo and PNC, are not going to get into the cannabis space directly, unless there’s more formalized federal reform, said Jonathan Havens, a partner at Saul, Ewing, Arnstein and Lehr’s Philadelphia-based law firm.
Counseling clients on regulatory, compliance, enforcement and transactional matters, Havens has companies in the cannabis industry turn to him for advice on how to get and keep their products on the market, where access to banking comes in handy.
According to the U.S. Department of Treasury’s FinCEN, banks can accept cannabis-related deposits, but there are several compliance steps those institutions need to take, such as filing Suspicious Activity Reports (SARs). When the FinCEN issued guidance in 2014 to clarify the expectations for financial institutions seeking to provide services to cannabis-related businesses, it opened the door for banks to jump into the space—but that door only opened so far.
“I think a lot of these bigger banks said, ‘You know what? The cannabis industry is just not big enough business to us. And, so, it’s not worth it to us,’” Havens said. “The risk isn’t worth it to them.”
Without banking reform, like the Secure And Fair Enforcement (SAFE) Banking Act, which was reintroduced by Rep. Ed. Perlmutter (D-CO) in the U.S. House of Representatives on March 18, financial institutions that work with cannabis clients have yet to receive full confidence in safe harbor at the federal level. According to Perlmutter, passage of SAFE Banking would allow cannabis-related businesses in states with some form of legalization and strict regulatory structures to access the banking system.
Read the full text of the bill below.
“SAFE is a win, win, win, for providers and their communities,” said Dr. Chanda Macias, the first vice chair of the National Cannabis Roundtable. “It will create more jobs, more opportunity and more public safety. We will work hard for passage of this key piece of bipartisan cannabis reform in this Congress.”
The SAFE Banking Act on 2019 overwhelmingly passed the House, 321-103, but it never saw the light of day in the Republican-controlled Senate. The House passed the measure once again in May 2020, as part of the second federal coronavirus relief bill, but it was stripped from the Senate version later in the year. As a result, state-legal cannabis companies don’t have full access to traditional banking options as they operate in a sector that is not federally legal.
But with Democrats now controlling both chambers of Congress and the White House, there’s optimism for banking reform to take shape, said Cresco Labs CEO Charlie Bachtell, who also serves as the chairman of the National Cannabis Roundtable. With legal expertise in corporate governance and regulatory compliance, Bachtell served eight years as the executive vice president and general counselor of Guaranteed Rate—the nation’s seventh largest mortgage bank—and was a leading attorney during the reform of the U.S. mortgage industry.
“There’s a feeling that some sort of banking reform is more likely than less,” Bachtell said. “And I don’t know that that was the case under the prior administration and with the prior makeup of the legislature. So, I think just as a starting position, optimism is key.
“As far as what we’re hearing on the ground, of substantive change, we are hearing that it looks likely that we’ll get something in the very near term that is some form of SAFE that has already been approved by the House on a couple of different occasions, but maybe in a slightly enhanced version of SAFE that will provide that level of clarity and safe harbor for the banking industry as it relates to state-licensed regulated cannabis operators.”
According to FinCEN, there were 55 fewer banks and credit unions providing services to cannabis-related businesses in 2020 than in 2019. But part of that decline coincided with the FinCEN’s release of regulatory guidance in December 2019, which stated financial institutions were no longer required to file SARs for legalized hemp producers.
Without passage of the SAFE Banking Act, Havens said the number of financial institutions servicing the cannabis industry likely won’t experience any major upticks. The banks and credit unions currently participating in the space, by and large, are local, state and regional institutions that are willing to take the compliance risks, he said.
“It’s not the larger banks,” he said. “It’s the banks that have said, ‘You know what, we’re going to get smart on this. We’re going to build up our compliance department. We’re going to charge a premium for accounts, and we’ll make that premium because these businesses are desperate for banks that will take their money. And we’re providing a service, but we know we’re taking some risk.’”
Can SAFE Banking clear the Senate?
Perlmutter has led the charge for cannabis banking reform for years. He was the author of the SAFE Banking Act in the last Congress, and he’s back in the driver’s seat this week with a group of bipartisan sponsors, including Nydia M. Velázquez (D-NY), Steve Stivers (R-OH) and Warren Davidson (R-OH), who reintroduced the bill with more than 100 co-sponsors on Thursday.
But the question remains: Does SAFE Banking have bipartisan support in the Senate to pass as a standalone bill?
The answer is likely yes, said Matthew Ginder, a partner in the cannabis law practice group at Greenspoon Marder, a national firm with more than 200 attorneys who have a presence in 25 cities across 11 states and the District of Columbia.
“I think there is bipartisan support for SAFE Banking to get to the finish line, and in both chambers,” Ginder said. “I don’t know, particularly in the Senate, whether the SAFE Banking Act will be swallowed up by a bill that covers broader reform. I know Schumer, Wyden and Booker are working on their bill to address cannabis reform.”
Sens. Chuck Schumer (D-NY), Ron Wyden (D-OR) and Cory Booker (D-NJ) issued a joint statement on cannabis reform legislation last month, in which they said ending federal cannabis prohibition is necessary to right the wrongs of the failed war on drugs.
“We are committed to working together to put forward and advance comprehensive cannabis reform legislation that will not only turn the page on this sad chapter in American history, but also undo the devastating consequences of these discriminatory policies,” they said. “The Senate will make consideration of these reforms a priority.”
That Democratic trio’s intentions might be more along the lines of the Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2019, which would have removed cannabis from the list of scheduled substances under the Controlled Substance Act and eliminated criminal penalties for an individual who manufactures, distributes or possesses cannabis.
“If they include aspects of the MORE Act, which decriminalizes cannabis, then the need for SAFE Banking becomes less,” Ginder said. “The whole issue with banking and why it’s challenging is because marijuana is considered a Schedule I controlled substance.”
While broader-based reform, like the MORE Act, might be what some stakeholders prefer, Havens said he thinks smaller reforms, like SAFE Banking, are going to be a lot easier of a road to hoe.
Sen. Sherrod Brown (D-OH), the newly seated chair of the Senate Banking, Housing and Urban Affairs Committee, told Cleveland.com he’s willing to consider SAFE Banking but only if it’s complemented by sentencing reform in the Senate Judiciary Committee. The effects of pairing banking reform with sentencing reform in regard to attracting bipartisan support remain to be seen.
With a 50-50 makeup of the Senate, the Democrats do have the tiebreaker vote in Vice President Kamala Harris, but that’s more relevant for reconciliation bills, which can be passed on spending, revenue and the federal debt limit. For non-reconciliation measures, passage involves a 60-vote super majority to invoke cloture if a piece of legislation is partisan and draws a filibuster from opponents.
“I think when it comes to cannabis reform in the Senate, people shouldn't be thinking about 51 votes necessarily,” Havens said. “They should be thinking about 60 votes and are there 60 votes. And as far as cannabis banking reform, or the SAFE Banking act, there might be 60 votes.”
Are cannabis stakeholders compliant?
In the 2017 motion picture “Molly’s Game,” attorney Louis Butterman (played by Michael Kostroff) tells lead actress Jessica Chastain, “There’s a saying in my business—don’t break the law when you’re breaking the law.”
While the movie was about a high-stakes poker game, a parallel to the cannabis industry revolves around stakeholders not wanting to expose themselves to more risks than they’re already exposed to. For example, if a state-legal cannabis business is compliant toward federal guidance and regulations, then there are fewer risks involved.
The state-legal cannabis industry supported more than 320,000 U.S. workers in 2020, and the majority of stakeholders in the industry are compliant with government mandates, Bachtell said.
“The only way that you can create change that we need for this industry is by showing the legislators, the people holding the pen that could make that change happen, that we’re all good actors, that this is a great professional industry that they should be able to rely on and get behind,” he said.
Like any industry, there still could be some bad apples.
Last month, Eaze Technology’s former CEO James Patterson pled guilty in a federal case accusing the online cannabis company of tricking banks into processing $100 million worth of credit-card based cannabis payments.
The fact that someone would need to develop workarounds to be able to simply engage in transactions with customers who want to participate in a regulated and licensed marketplace is indicative of the fact that the cannabis industry needs some changes that will allow for traditional banking and traditional transactions to take place, Bachtell said.
When it comes to concealing the true nature of credit card payments from banks, that’s where trouble lies, Ginder said.
“Something like that is where you’ll see issues in the space,” he said. “So, misrepresenting or masking the nature of what kind of business you’re conducting.”
More legalization means more pressure for reform
As more states come online with medical or adult-use cannabis legalization, there may be a state bank, a regional bank or a credit union that would seize the opportunity to service that market. State-by-state legalization alone, however, would not induce a huge national uptick in cannabis banking institutions, Havens and Ginder said.
But anytime a new state adopts a medical or adult-use cannabis program, that puts more pressure at the federal level for reform, Ginder said.
“If you’re a senator or a representative and your constituents in your state are now allowed under state law to conduct medical marijuana or adult-use activity, then that representative should be advocating for their constituents to do so in a manner that doesn’t create a risk at the federal level,” Ginder said. “So, I think any time you see another state legalize marijuana, that is just one additional pressure point for reform at the federal level.”
In the previous Congress, the chairman of the Senate Banking Committee was Mike Crapo, a Republican from Idaho, which has neither a medical nor adult-use program. Former Senate Majority Leader Mitch McConnell, of Kentucky, also had a say in SAFE Banking’s holdup in the upper chamber through his inaction of calendaring it for debate.
With the turnover of leadership, however, the optimism for banking reform may be more prevalent to some cannabis operators than others, Havens said. Having worked with several multistate operators, he said he’s never come across any of them that do not have at least one bank they’re banking with, and sometimes they have multiple banks.
“I think it might be harder for maybe the standalone operators who aren’t affiliated with a multistate outfit,” Havens said. “Maybe they don’t have enough business to support the fees that are needed to bank, maybe they’re not making enough revenue where it makes sense. Maybe they’re just, you know, sitting on their own money. But I don’t want to say that I think there’s a lot of businesses out there that just have their own safes and are storing a bunch of cash.”