Cannabis Banking: Analyzing The SAFE Banking Act 2.0

In September 2019, the U.S. House of Representatives passed the “Secure and Fair Enforcement (SAFE) Banking Act of 2019”, the first stand-alone cannabis legislation to be approved by the House. However, the bill died in the Republican-controlled Senate.

Two years later, the House passed an updated piece of the legislation. Dubbed the “Secure and Fair Enforcement (SAFE) Banking Act of 2021” (and nicknamed the Safe Act 2.0),it was passed on April 19, 2021 on a significantly bipartisan basis, with 106 Republicans joining the 215 Democrats. The bill is now headed to the Senate, where it enjoys broad support and is expected to pass.

In this article, we analyze this legislation, and highlight its key provisions.

The Safe Act 2.0’s bipartisan support is hardly surprising. Legalization of medicinal and recreational cannabis products has been a growing trend at the state level. To-date, 18 states and Washington D.C. have legalized recreational cannabis, and an additional 19 states have approved medicinal marijuana. Despite this, cannabis remains illegal on the federal level under the Controlled Substances Act, which was signed into law by President Richard Nixon in 1970. The CSA established U.S. federal drug policy and served as the national implementing legislation for the Single Convention on Narcotic Drugs, an international treaty aimed to combat drug abuse by coordinated international action. Under the CSA, the cultivation, distribution, and possession of cannabis remains federally illegal, regardless of state legalization. In addition, cannabis-related activities can serve as a basis for the prosecution of other crimes, including money laundering and the unlicensed transmission of money under 18 USC 1956 and 1960.

As a result of this conflict between state and federal laws, as well as conflicting policy statements over the years from the U.S. Department of Justice regarding federal prosecution of cannabis related offenses occurring in legal states, financial institutions have generally refused to accept money from cannabis-related legitimate businesses (CLBs). In addition to the risk of potential federal prosecution, institutions have been concerned with losing FDIC and NCUA insurance. With no banking access, CLBs have been forced to operate largely on a cash basis (e.g., payroll, overhead expenses, taxes – all generally paid in cash), which has complicated their business model and subjected CLBs to targeting by thieves. It is common to see armored trucks frequently drive the streets of cities where CLBs are popular and booming.

Like its predecessors, the Act provides that financial institutions can deal with CLBs by providing that proceeds from such transactions are not considered proceeds from an unlawful transaction. Therefore, these transactions do not constitute money laundering and are not subject to forfeiture. In addition, the Act permits insurance companies to write insurance for marijuana businesses and their service providers. Moreover, the bill would prohibit “federal banking regulators” from, among other things:

* Terminating or limiting deposit or share insurance, or taking any adverse action against a “depository institution,” solely because the institution provides, or has provided, “financial services” to CLBs or service providers of a CLB;

• Prohibiting, penalizing, or discouraging a depository institution from providing financial services to a CLB or service provider;
• Recommending, incentivizing, or encouraging a depository institution not to offer financial services to an account holder because of the account holder’s connection to a CLB; or
• Taking any adverse or corrective supervisory action on a loan made to a CLB or service provider (or their employees, owners, and operators), or to the owner or operator of real estate leased to a CLB or service provider.

Additionally, the bill would protect businesses that perform a financial service for or in association with a depository institution. Such institutions could facilitate payments and act as a money transmitter that uses a depository institution to facilitate a payment for a CLB or service provider. Insurance companies also would be authorized to write insurance for CLBs and their service providers. If ultimately passed by the Senate, the law will require revised regulatory guidance, including changes to the Financial Crimes Enforcement Network (FinCEN) rules related to mandatory suspicious activity reports (“SAR”). More specifically, the Act requires FinCEN to update its February 14, 2014 SAR guidance titled ‘BSA Expectations Regarding Marijuana-Related Businesses’ within 180 days’ of the Act’s passage in a manner that is consistent with the Act’s purposes and does not significantly inhibit the provision of financial services to a CRLB. The Act also updates the Federal Financial Institutions Examination Council’s (FFIEC) examination procedures for depository institutions.

Now that the SAFE Banking Act 2021 has passed in the House, it will move on for consideration by the Senate. While Sen. Sherrod Brown (D-OH), who now chairs the Senate Banking Committee, has indicated a willingness to advance the legislation, it will face a tougher climb in the upper chamber where Democrats will need all 50 of their members, along with the support of 10 Republicans to overcome the filibuster. Notably, when introduced, the Senate version of the legislation was co-sponsored by 29 senators, including 6 Republicans. This increased support from legislators is not surprising given the overwhelming support from organizations and businesses, including the American Bankers Association, the American Financial Services Association, the Credit Union National Association, the American Council of Life Insurers, the American Property Casualty Insurance Association, and the American Association of Realtors. This steady growth of support over the past few years has led to an expectation that 2021 will be the year cannabis banking reform finally becomes law.

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