As Ohio Legalizes Cannabis, the State’s Junior US Senator Opposes SAFER Banking for Industry

Ohio’s forthcoming adult-use cannabis market will soon be among the biggest in the nation, rivaling the likes of Michigan, where licensed dispensaries are on pace to record $3 billion in sales this year.

This means Ohio dispensaries will likely see an influx of cash in late 2024, when a commercial adult-use retail market is projected to launch via the state’s existing medical cannabis operators.

But Ohio’s junior U.S. senator who took office this year vehemently opposes banking reform for the industry that would provide for traditional financial services, like business loans, deposit insurance, cashless retail transactions, and direct deposit payroll.

Responding to a recent constituent letter, Sen. JD Vance, R-Ohio, said that he voted against advancing the Secure and Fair Enforcement Regulation (SAFER) Banking Act (S. 2860) during a Senate Banking Committee markup hearing Sept. 27 “due to several public safety-related concerns.”

Meanwhile, Ohio’s senior U.S. senator, Democrat Sherrod Brown, who chairs the committee, helped pushed the legislation through with a 14-9 vote. The legislation is an amended version of the SAFE Banking Act that passed the U.S. House seven times since 2019. It now awaits Majority Leader Chuck Schumer’s, D-N.Y., call for a floor vote.

RELATED: SAFE Banking Act: How We Got Here, What’s Next For SAFER

The Senate’s SAFER Banking Act, which has four Republican co-sponsors in the upper chamber, would provide protections for federally regulated financial institutions that serve state-sanctioned cannabis businesses, regardless of the plant’s federal classification as a Schedule I controlled substance.

Vance indicated that the upsides of the SAFER Banking Act are “overstated.”

“For one, financial institutions are already able to bank marijuana companies,” he wrote. “Although I acknowledge that the current system is resource- and capital-intensive for these institutions, hundreds of banks currently provide these services. The SAFER Banking Act could pave the way for more widespread marijuana use and federal legalization. The Department of Justice also noted that this bill could facilitate money laundering. I am worried that this could open the door for other illicit activities, like the trafficking of fentanyl and methamphetamines, to access depository insurance.”

Editor’s note: A copy of the constituent letter, sent Oct. 26 to Cannabis Business Times Associate Editor Tony Lange, is below.

The U.S. Department of Justice (DOJ) did issue a memo in late 2022, as reported by Punchbowl News, stating its concerns about the House-passed SAFE Banking Act last Congress.

“Because marijuana would remain illegal under federal law, Congress should ensure efforts to provide access to financial services for state-legal businesses does not unintentionally erect obstacles to prosecution of other illicit activity or activities involving money laundering of proceeds of other illegal drugs or sales of marijuana that do not comply with state requirements,” DOJ officials wrote.

But lawmakers backing the Senate’s 2023 SAFER Banking Act say these money laundering issues have been resolved in their revised legislation. Specifically, the revised bill includes anti-money laundering, counterterrorism and national security-related provisions.

Sen. Catherine Cortez Masto, D-Nev., addressed concerns over “loopholes” for money laundering and other types of illicit activity during the Sept. 27 committee hearing.

“I think we all have concerns about the movement of Fentanyl and across the country, including any type of money laundering and illicit gains,” she said. “But let me just make something very clear. This legislation does not open a loophole. It is already illegal to commingle any of those drugs .... There are ways for law enforcement to follow that money to already hold them illegal. This legislation is very narrow when it comes to legitimate marijuana businesses, and there is oversight with respect to the Banking Act, the Bank Secrecy Act and law enforcement.”

Vance is correct that hundreds of banks do provide financial services to the industry: A total of 812 banks (496), credit unions (177) and non-depository institutions (139) reported actively working with cannabis companies in the second quarter of 2023, according to the U.S Treasury’s Financial Crimes Enforcement Network (FinCEN), which compiles data based on Suspicious Activity Reports (SARs) required to be filed by these financial institutions.

But because cannabis remains illegal under federal law, most of these banks are local players not guaranteed safe harbor at the federal level without banking reform. The U.S. has a dual-banking system where banks and credit unions can choose a federal charter or a state charter, but both federal and state financial institutions must comply with federal anti-money laundering laws, according to the Congressional Research Service.

As long as financial institutions are filing their SARs, auditing their clients, and those clients can prove they’re operating in a state-authorized cannabis space, then the risk of federal enforcement is lower, Jonathan Havens, a partner and co-chair of Saul Ewing LLP’s Cannabis Law practice, told Cannabis Business Times in 2021.

Reiterating Vance’s point, this system is resource- and capital-intensive for these financial institutions, which must perform their due diligence and be willing to take on the compliance risks. This extra cost of doing business is often passed onto cannabis companies.

But big institutions, such as JPMorgan Chase, Wells Fargo and PNC, are not going to get into the cannabis space directly unless there’s more formalized federal reform, Havens said.

“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,’” he said. “The risk isn’t worth it to them.”

Mastercard Inc., the second-largest payment-processing corporation on the planet, serves as a prime example of a big institution steering clear of the cannabis industry. Mastercard warned payment firms and financial institutions in July to cease allowing state-regulated cannabis transactions on its debit cards. Visa issued a similar warning in December 2021 barring its network from being used in the cannabis industry.

This presents a risk to cannabis retail businesses that are forced to operate primarily in cash, and a barrier and extra hurdle patients and consumers must take to purchase products.

In the Buckeye State, 112 medical dispensaries (and counting) could convert to adult-use operations as soon as September 2024. And under Ohio’s voter-approved Issue 2, another 50 dispensary licenses will be issued to social equity applicants. These operators, too, could have a cash target on their stores that attract robberies, theft and sometimes violent crime.

One example of this targeting took place over several days in late 2021 in Oakland, Calif., where armed robbers forced their way into more than 25 licensed cannabis dispensaries to steal millions of dollars of products.

RELATED: Bay Area Cannabis Mayhem: 175 Shots Fired, Products Worth Millions Stolen

But reducing these threats to cash-heavy cannabis businesses, their workers and customers were not specifically mentioned in the constituent response letter from Vance. The Ohio senator expressed concerns over protections for other industries.

“The original SAFE Banking Act also included protections for politically disfavored industries—such as oil, natural gas, and firearms—from targeting by the federal bank regulators,” Vance wrote. “Many of these protections were left out of the version advanced out of the Banking Committee, the SAFER Banking Act.”

The senator from Ohio is referring to Section 10 of the bill, which was added to the SAFE Banking Act before its first House passage in 2019 to help suppress the concerns of Republicans who felt the legislation would allow federal regulators to unjustly target other industries. These concerns stemmed from an Obama-era initiative commonly referred to as “Operation Choke Point,” which many of the former president’s political adversaries say put unjust pressure on banks to break ties with certain “high-risk” industries like firearm manufacturers and payday lenders.

This section of the legislation was at the center of monthslong negotiations before the Senate Banking Committee took up the SAFER Banking Act in September. Ultimately, Section 10 of the revised bill states that financial institutions should have processes in place to perform due diligence on individual customers “rather than decline to provide banking services to categories of customers” in high-risk industries altogether.

https://giecdn.blob.core.windows.net/fileuploads/document/2023/11/22/jdvance_safe.response.pdfSetting out certain conditions for termination of banking services, the SAFER Banking Act states that “reputational risk” is not a valid reason for federal regulators to request or require a financial institution to cut off a specific account or group of accounts, regardless of if the account is related to a state-licensed cannabis company or other industries.

Still, Sen. Mike Crapo, R-Idaho, reinforced his longstanding concern during the Banking Committee hearing that federal banking regulators could unjustly target certain industries under the revised legislation. Vance indicated in his constituent letter response that he shares this concern.

While at least nine Republican senators backed the original SAFE Banking Act, only four have signed on for co-sponsorship to the SAFER Banking Act. And although Schumer vowed in late September to bring the new bill to the Senate floor for a vote “as quickly as possible,” he indicated this month that he wouldn’t be doing so until he had “those 10 or 11 Republican votes” needed to reach the 60-vote threshold to avoid a possible filibuster, Yahoo News reported.

As the SAFER Banking Act is currently written, Vance doesn’t appear to be a candidate for one of “those 10 or 11” votes needed.

“While I understand the arguments in favor of this legislation, because of the reasons outlined, I opposed the legislation in committee,” he wrote.