By: Christopher Wisniewski and Ryan J. Udell
On May 15, 2020, the House of Representatives passed the Economic Recovery Omnibus Emergency Solutions (HEROES) Act. Coming in at over 1,800 pages, there are sure to be a few surprises tucked into such a massive piece of legislation. One such financial services component is the reintroduction of the Secure and Fair Enforcement (SAFE) Banking Act. Ostensibly, as a response to the COVID-19 crisis, the stated purpose of the SAFE Banking Act is to “increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses.”
Disconnect between the federal designation of marijuana as a controlled substance and the various states’ legalization of marijuana has been well-documented. Effectively, the current federal position prevents federally chartered financial institutions, which most banks are, from providing services to cannabis-related businesses (CRBs). Financial institutions risk loss of their charter — or worse, civil and criminal penalties (including for money laundering) — merely by providing banking services to CRBs.
In 2013, financial institutions were given a little comfort from the Cole Memorandum, which instructed federal prosecutors to focus enforcement efforts on, among other things, preventing the sale and distribution of cannabis to minors and not legitimate CRBs. Unfortunately for these businesses and institutions, the Cole Memorandum is not law and was subjected to the vagaries of the standing Attorney General (AG) — which occurred when former AG Jeff Sessions rescinded it and, most recently, when current AG William Barr reinstated it. This “ping pong” approach is not the level of comfort that banks and other lenders are looking for. In short, in order to alleviate the uncertainty given to financial institutions, the SAFE Banking Act aims to provide federal banking services to legitimate cannabis-related business.
The SAFE Banking Act provides a safe harbor in two ways. First, it prohibits a federal banking regulator from taking any adverse action against a cannabis-related legitimate business solely because the business is cannabis-related. Secondly, it provides affirmative protection to institutions, stating:
“With respect to providing a financial service to a cannabis-related legitimate business or service provider within a State, political subdivision of a state, or Indian country that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of cannabis pursuant to a law or regulation of such State, political subdivision, or Indian Tribe that has jurisdiction over the Indian country, as applicable, a depository institution, entity performing a financial service for or in association with a depository institution, or insurer that provides a financial service to a cannabis-related legitimate business or service provider, and the officers, directors, and employees of that depository institution, entity, or insurer may not be held liable pursuant to any federal law or regulation—
a. solely for providing such a financial service; or
b. for further investing any income derived from such a financial service.”
Senate Majority Leader Mitch McConnell (R-KY) is an opponent of cannabis reform and the SAFE Banking Act (as well as other bills floating around in Congress) are unlikely to pass in the Senate. Nonetheless, it is encouraging for CRBs that the issue is still at the forefront of the discussion and cannabis businesses have been deemed “essential” by many states during the pandemic, including in Pennsylvania. With more than 30 states having some form of marijuana legalization, the growing public safety risks with cash-only businesses are only increasing. There is also the recognition that cash-based businesses face growth restrictions due the lack of access to credit facilities. While the SAFE Banking Act may not pass in 2020, the attention drawn to this issue is a step in the right direction in expanding the cannabis sector. We will continue to monitor the HEROES Act in general and the SAFE Banking Act components in particular, as the Senate considers it (and other similar bills regarding the ability of CRBs to use the federal banking system like every other legitimate business).
If you have any questions or would like more information about the HEROES Act or the SAFE Banking Act, please reach out to Chris Wisniewski (firstname.lastname@example.org; 856.317.3649) or Ryan Udell (email@example.com; 215.864.7152).