As the House Financial Services Committee takes up a pot banking bill with broad bipartisan support, the legal barriers preventing state-sanctioned marijuana growers and dispensaries from accessing the financial system may soon go up in smoke.
The pot banking bill is one of five scheduled for committee markup Tuesday, and with 143 co-sponsors — including 12 Republicans — it’s the one with the most support. First proposed by Colorado Democratic Rep. Ed Perlmutter in 2013, this version was introduced by Perlmutter and Washington Democrat Denny Heck, as well as Ohio Republicans Warren Davidson and Steve Stivers.
Stivers couched his support as a pragmatic response to the dangerous realities facing state-authorized cannabis companies under existing federal law, rather than approval of the underlying drug.
“My support for the SAFE Banking Act is not an approval of marijuana businesses. It is based on the dangers of these businesses having to store massive volumes of cash, making them prime targets for violent robberies and money laundering schemes,” Stivers said. “In addition, having banking relationships creates an auditable trail for these businesses, which is important.”
The bill would offer a regulatory safe harbor to firms providing financial services to “cannabis-related legitimate businesses.” It would also exempt such companies’ proceeds from federal money laundering laws, which effectively deputize banks and credit unions to investigate when customers make shady-looking transactions. While that is designed to insulate pot businesses and their banks from criminal prosecution, the financial institutions would still be required to file suspicious activity reports with the Treasury Department’s Financial Crimes Enforcement Network.
Stivers is expected to offer an amendment during the markup to expand the safe harbor protections from criminal prosecution to insurance companies.
The bill would also direct the Federal Financial Institutions Examination Council to develop uniform guidance and examination procedures for depository institutions working with legitimate marijuana businesses.
The bill has wide support among the financial industry, winning the backing of the American Bankers Association, the Credit Union National Association and the Independent Community Bankers of America. The nascent cannabis industry also backs the proposal.
Banks, credit unions and other financial institutions that accept deposits from illegal activities, as federal law deems the production and sale of marijuana, face potential prosecution for violating federal banking laws. Few financial firms have decided to adopt those risks, forcing many state-sanctioned dispensaries and growers to operate entirely in cash. That makes the cash-laden companies tempting targets for theft. Keeping businesses out of the banking system also increases their appeal as vehicles for money laundering.
Watch: Wait, there’s a Cannabis Caucus? Pot proponents on the Hill say it’s high time for serious policy debate
Decriminalization by states
To date, 47 states and the District of Columbia have decriminalized or legalized marijuana in some form, representing more than 97 percent of the U.S. population. Americans overwhelmingly say Congress should legalize marijuana: 66 percent now support it, including 53 percent of Republicans, according to a Gallup poll in 2018. But cannabis remains listed as a dangerous Schedule I drug under the federal Controlled Substances Act. Some opponents of the bill have called it an attempt to indirectly legalize weed without actually changing its federal designation under the CSA.
But a bill to do that has only attracted seven cosponsors, none of whom are Republican. Last year, a Senate bill that would amend the CSA to allow states to legalize weed — but not actually remove cannabis from Schedule I — attracted a handful of Republican cosponsors, including Gardner, and Sens. Rand Paul of Kentucky, Lisa Murkowski and Dan Sullivan of Alaska. Gardner will face a Democratic opponent in 2020 in a state that legalized recreational marijuana in 2014 and has drifted leftward in the years since.
While some oppose the pot-banking bill simply because they oppose pot, others say the proposal isn’t fully baked yet, and would make an already complicated area of law that much more tangled. That includes Joseph Lynyak, an attorney at Dorsey & Whitney LLP who represents cannabis businesses in California. While Lynyak calls the bill “a good start,” he’s worried it contains loopholes and ambiguities that will ultimately keep most financial firms from working with cannabis companies.
According to Lynyak, the bill would still allow a zealous federal prosecutor to go after individual investors in a cannabis business for aiding and abetting the transfer of funds to promote a criminal activity. While the bill provides safe harbor for firms that take a state-licensed pot business’s deposits or facilitates transactions, it does not explicitly protect individuals or firms that might buy shares in a dispensary or issue loans to a grower.
In its current form, the bill wouldn’t address a risk that only affects conglomerates, says Lynyak. Because it relies on the Dodd-Frank law’s consumer-focused definition of “financial service” in creating its safe harbor, the bill could be read as excluding holding companies from the regulatory risk protections. A bank could take deposits or provide loans directly to a subsidiary firm directly engaged in selling or growing weed, but offering those services to a parent holding company might still lead to civil liabilities, Lynyak argues. That would potentially create the rare barrier to entry that benefits smaller firms over deep-pocketed corporate giants.
In response, Woodbury said the bill’s definition of a “cannabis-related legitimate business” was broad enough to include a parent company. “If not, that’s the kind of technical change that can be easily made on the way to the floor,” he said. “There’s certainly no intent to exclude these corporate structures.”
Woodbury said that the bill’s sponsors weren’t trying to address regulatory issues that might arise in capital formation or securities offerings, but argued that the bill’s shield against criminal prosecution should cover investors. “I don’t think there’s any criminal exposure,” he said.
Lynyak admitted his loophole concerns only matter in so far as federal prosecutors might seek to exploit the gaps he’s identified. Even though Attorney General Jeff Sessions was publicly opposed to marijuana and rescinded Department of Justice guidance against prosecuting state-sanctioned cannabis operations, he did not bring any enforcement actions during his tenure.
“Banks like certainty,” says Lynyak. “My concern is if a bank says: ‘Are we completely in the clear?’ The answer, under this legislation, is: ‘You’ve got less legal risk, but . . . ’”
Members of Congress shouldn’t let the perfect get in the way of the good, though, said Woodbury. “I’m hopeful that, even though this is not a perfect bill and not the most elegant solution — the most elegant solution is de-scheduling marijuana — they recognize this is the best bill that has a chance of passing.”
Perlmutter added a section to the bill since its introduction, in the form of a substitute amendment, that would direct federal banking regulators and the Government Accountability Office to prepare annual reports on access to financial services among minority-owned and women-owned legit cannabis businesses.
Since Democrats took control of the House, the Financial Services Committee has spent significantly more time discussing diversity and inclusion concerns, creating a new subcommittee to look into them. At a hearing on the pot banking bill, Corey Barnette, the African-American owner of a Washington, D.C.-based dispensary, testified that the lack of access to banking created a barrier that impacted less wealthy, minority entrepreneurs harder.
“Restrictions on banking serve to create a barrier to entry that only the wealthy can overcome,” Barnette said.