Yesterday, the House of Representatives passed the SAFE Banking Act, aimed at enabling depository institutions to provide financial services to cannabis-related businesses in states that have legalized marijuana. What does that mean for Michigan banks and credit unions?
By a vote of 321 to 103, the House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act). The SAFE Banking Act would create safe harbors from federal laws and regulations regarding marijuana so that depository institutions – including banks and credit unions – can provide financial services to cannabis-related businesses and service providers in states that have legalized marijuana. The SAFE Banking Act will now go to the Senate for consideration. However, even if it passes the Senate, there are still quite a few unknowns about what kinds of regulations would accompany the SAFE Banking Act. Below are answers to important questions about banking cannabis-related businesses under the current SAFE Banking Act.
1. What is the SAFE Banking Act designed to do?
The stated purpose of the SAFE Banking Act is to “increase public safety by ensuring access to financial services for cannabis-related legitimate businesses (CRLBs) and service providers and to reduce the amount of cash at such businesses.” Cannabis remains illegal as a Schedule I drug under the Federal Controlled Substances Act. Most banks and credit unions are therefore unwilling to work with cannabis-related businesses. Because of the lack of access to banking services, cannabis-related businesses are forced to conduct business primarily in cash. Cannabis-related businesses have to transport and store large amounts of cash, making them tempting targets for theft and other potential criminal activity. Moreover, the lack of records for cash-based transactions makes it difficult to ensure that taxes are accurately collected from dispensaries and other cannabis-related businesses.
2. Would the SAFE Banking Act make marijuana legal at the federal level?
No. The SAFE Banking Act would not alter the status of cannabis as a Schedule I controlled substance under federal law. In fact, the Act defines “cannabis” by referencing the Controlled Substances Act, which lists marijuana as a Schedule I drug, the same status as heroin or cocaine. Federal law still prohibits growing, transporting, distributing or prescribing cannabis for medicinal or other purposes. The SAFE Banking Act does, however, provide a safe harbor from federal laws and regulations for certain banks and other entities if they work with CRLBs in jurisdictions where cannabis has been legalized.
3. What is a “cannabis-related legitimate business” and a “service provider”?
The SAFE Banking Act defines a “cannabis-related legitimate business” to mean a manufacturer, producer, person or company that participates in a business or organized activity handling cannabis or cannabis products pursuant to a state’s law legalizing cannabis-related business or activities. This includes businesses that cultivate, produce manufacture, sell, transport, display, dispense, distribute or purchase cannabis or cannabis-related products. With limited exceptions, the SAFE Banking Act’s provisions also apply to hemp and hemp-derived products, such as cannabidiol (CBD).
Under the SAFE Banking Act, “service providers” would include businesses, organizations, or people that are not themselves engaged in handling cannabis or cannabis products, but that sell goods or services to a cannabis-related legitimate business. The SAFE Banking Act specifically defines service provider to include a business, organization, or person that sells or leases property to CRLBs, provides legal or other licensed services to them, or provides any other “ancillary service” relating to cannabis.
4. How would the SAFE Banking Act protect a depository institution that provides financial services to a CRLB or CRLB service provider?
The SAFE Banking Act would provide three basic protections to depository institutions: protection from federal liability, protection from certain adverse regulatory actions and protection from forfeiture.
First, the SAFE Banking Act would provide that a depository institution or entity that performs a financial service for, or in association with, a depository institution (as well as its officers, directors and employees) may not be held liable under any federal law or regulation solely for providing a financial service to a CRLB or CRLB service provider or for investing any income derived from providing that financial service.
In addition, a federal banking regulator would not be permitted to do the following solely because the depository institution provides or has provided financial services to a CRLB or CRLB service provider:
• Terminate deposit insurance;
• Prohibit or discourage a depository institution from providing financial services to states and political subdivisions exercising jurisdiction over CRLBs;
• Recommend or incentivize a depository institution to deny financial services to CRLBs, CRLB service providers or their employees, owners or landlords;
• Take adverse action on loans made to CRLBs, CRLB service providers or their owners, employees or landlords; or
• Prohibit or penalize a depository institution for, or discourage it from, providing or engaging in a financial service to a CRLB or CRLB service provider.
The SAFE Banking Act also restricts federal banking regulators from requesting or ordering a depository institution to terminate an individual account unless the agency has a valid reason for such request and the reason is not based solely on reputational risk.
Finally, the SAFE Banking Act would protect from criminal, civil, or administrative forfeiture a depository institution’s interest in collateral for a loan (or other financial service) provided to (1) an owner, employee, or operator of a CRLB or CRLB service provider, or (2) an owner or operator of real estate or equipment that is leased or sold to a CRLB or CRLB service provider.
5. How would the SAFE Banking Act protect an insurer that provides insurance to a CRLB or CRLB service provider?
On March 28, 2019, the House Financial Services Committee adopted an amendment to the SAFE Banking Act that includes insurers in some of the protections of the Act. The amendment protects insurers from liability under federal laws or regulations for offering financial services or investing income derived from offering financial services to CRLBs or CRLB service providers. The amendment also changes the definition of “financial service” to include “the business of insurance.” Insurers would have the same protection from federal liability for offering insurance to CRLBs and CRLB service providers that depository institutions have for offering financial services. The protections from federal banking regulators and forfeiture of loan collateral would not apply to insurers.
6. Would the SAFE Banking Act protect those who do business with a CRLB or CRLB service provider?
The SAFE Banking Act would provide that for purposes of the Money Laundering Control Act of 1966 and “all other provisions of federal law,” the proceeds of a transaction conducted by a CRLB or CRLB service provider will not be considered as the proceeds from an unlawful activity solely because the transaction was conducted by a CRLB or CRLB service provider. As drafted, this provision applies only to the proceeds of a transaction and not the underlying conduct of the ancillary business. In other words, while the money is no longer tainted for purposes of federal law, the SAFE Banking Act does not expressly shield an ancillary business from potential liability for violating federal laws that still broadly prohibit distributing or helping to distribute marijuana.
7. What kinds of financial services would depository institutions be able to offer CRLBs under the SAFE Banking Act?
Under the SAFE Banking Act, a depository institution would be able to provide CRLBs financial products and services as defined by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Dodd-Frank Act definition of financial services includes accepting deposits, extending credit, leasing transactions, check cashing, online financial services, financial advising (in some circumstances) and debt collection, among other services.
Financial services under the Dodd-Frank Act also include the business of insurance, payment processing and clearing, money transmission services, and armored car services for processing and depositing funds with a depository institution or the Federal Reserve System.
Notably, though, because of the cross-reference to the Dodd-Frank Act, which focuses primarily on consumer issues, some key financial services are probably not covered by the current SAFE Banking Act. For example, the cross-reference to the Dodd-Frank Act may exclude wholesale activities, capital markets, broker-dealer activities, asset management and other important services from the protection of the SAFE Banking Act.
8. Where would the SAFE Banking Act apply?
The SAFE Banking Act provides protection to depository institutions and other entities in states, political subdivisions of states (like counties and cities), or Indian country that have passed legislation or regulations allowing the cultivation, production, manufacture, transportation, display, dispensing, distribution, sale or purchase of cannabis.
9. What compliance measures must a depository institution take to safely work with CRLBs under the SAFE Banking Act?
Even though the SAFE Banking Act creates a safe harbor from some federal laws and regulations, depository institutions that choose to serve CRLBs will still have significant due diligence responsibilities. CRLBs will remain high-risk customers.
Depository institutions will still need to file suspicious activity reports regarding transactions by CRLBs in accordance with the guidance issued by the Financial Crimes Enforcement Network. The SAFE Banking Act requires the Secretary of the Treasury to ensure that the guidance is consistent with the purpose of the Act and does not “significantly inhibit the provision of financial services to a cannabis-related legitimate business or service provider....”
In addition, the SAFE Banking Act requires the Financial Institutions Examination Council to issue guidance and examination procedures for depository institutions providing financial services to cannabis-related legitimate businesses, within 180 days of enactment.
10. Would the SAFE Banking Act require depository institutions or insurers in Michigan to provide services to CRLBs or CRLB service providers?
No. The SAFE Banking Act specifically provides that nothing in the Act should be read to require covered depository institutions or insurers to provide financial services to cannabis-related legitimate businesses or service providers.
11. What are the next steps for the SAFE Banking Act? Is it likely to become law?
The SAFE Banking Act will next move to the Senate for consideration. Its prospects there are uncertain. Senate Banking Committee Chair Mike Crapo recently told Politico that he would like to see a committee vote on banking marijuana by the end of the year, but reportedly he is considering drafting his own bill rather than considering the SAFE Banking Act. So, the situation is very fluid. The American Bankers Association, all 50 state banking associations, the National Association of Attorneys General, and the National Association of State Treasurers have all indicated their support for legislation allowing the banking of cannabis businesses.
This summary is not intended to cover all aspects of the SAFE Banking Act, but highlights some of the more common questions and answers associated with the new law. If you have any other questions or wish to discuss this issue further, please contact your Warner attorney or the authors of this eAlert, Rodney Martin at rmartin@wnj.com or Bob Hendricks at rhendricks@wnj.com.
