Bloomberg Law: SAFE Banking Act & NCUA Interim Guidelines: Obstacles to Cannabis Industry Financing
Reproduced with permission. Published October 2019. Copyright © 2019 The Bureau of National Affairs, Inc. 800.372.1033. For further use, please visit: http://bna.com/copyright-permission-request/
Private equity clients and funds show continued interest in partnering with regional and national farmers to provide capital to a vertically integrated agricultural industry. The need for capital is strong; however, the current guidelines and laws are suppressing the growth of an industry that could change the agricultural landscape significantly. If and when an avenue is created to allow cannabis and cannabis-related businesses to have access to banks and the financial markets, the growth and capital will follow.
As of Aug. 2019, 47 states have legalized medical and/or recreational cannabis and, as a result, the cannabis industry is making about $40 billion in annual sales, a number that is expected to reach $80 billion by 2030. Almost all of it is conducted in cash because there are very few ways for businesses to legally handle the transactions.
Financial institutions (mainly state and federal banks) and credit unions are hesitant to provide financial services to cannabis-related businesses because the use and sale of marijuana remains illegal at a federal level. The trickle-down effect can also be seen in businesses that do not directly “touch the plant,” like critical service providers—equipment suppliers, power companies, and landlords—as each is reluctant to serve cannabis-related businesses in fear of risking prosecution for furthering criminal activities. Furthermore, cannabis-related business employees are sometimes paid in cash to avoid difficulties related to accessing credit or renting homes when their sources of income are disclosed on applications.
This article addresses the obstacles to financing cannabis businesses and the current status of relevant legislation and guidance aimed at reducing the obstacles faced by the industry, including the SAFE Banking Act bill.
Despite the legalization of cannabis on the state level, financial institution managers have concerns that providing banking services to cannabis companies (or cannabis-related companies) could lead to allegations of money laundering or aiding and abetting federally illegal operations. Current federal anti-money laundering requirements affirmatively enlist financial institutions to aid in the investigation and prosecution of those who violate federal laws, including the Controlled Substances Act, 21 U.S.C. §801 et seq. Financial institutions generally must file suspicious activity reports regarding financial transactions suspected to be derived from specified illegal activities, including the sale of marijuana.
Depository institutions and certain other financial institutions also must establish and maintain anti-money laundering programs, designed to ensure that the institutions’ officers and employees have sufficient knowledge of their customers and of the businesses of those customers. This means that each and every account that is opened at a financial institution must comply with all the federal government mandated disclosure requirements.
The Financial Crimes Enforcement Network issued guidance with respect to cannabis-related financial crimes in Feb. 2014 to attempt to alleviate burdens on financial institutions with respect to cannabis-related businesses; however, things took a step backwards when the Department of Justice issued a memorandum in Jan. 2018 that took an opposite position regarding marijuana enforcement and the Bank Secrecy Act.
Even though FinCEN guidance remains valid (pursuant to the Department of Treasury response to the DOJ memorandum), the competing viewpoints have created substantial uncertainty and leave financial institutions reluctant to serve cannabis- related businesses for fear of uncertain and unclear guidelines. The hesitation on the part of financial institutions has resulted in the growing cannabis industry operating on a cash basis, leading to many financial and safety concerns.
SAFE Banking Act
In 2019, lawmakers worked to enact legislation that would provide concrete guidelines for financial institutions in the form of the Secure and Fair Enforcement Banking Act of 2019. H.R. 1595. The SAFE Banking Act would harmonize federal and state law by preventing federal banking regulators from discouraging, prohibiting or penalizing depository institutions (and their employees) that serve cannabis-related businesses.
Permitted “financial services” and products under the SAFE Banking Act would include deposit-taking, lending, check cashing and debt collection, among others. There have been multiple iterations of the SAFE Banking Act bill and the June 5, 2019 markup added protection for insurance, money transmitters, and payment processing services as well.
Specifically, the SAFE Banking Act would:
- Provide a safe harbor for depository institutions who provide financial services to legal cannabis-related businesses by precluding federal banking regulators from inhibiting or discouraging those services.
- No longer treat the proceeds of transactions conducted by cannabis-related businesses, which are operating in accordance with state-specific cannabis laws, as proceeds from an unlawful activity for purposes of taxation.
- Immunize employees of depository institutions that provide services to legal cannabis-related businesses from being held liable under any federal law or regulation.
- Amend the requirements under which depository institutions must provide suspicious activity reports related to legal cannabis-related businesses.
- Add protections for ancillary businesses providing products or services to a cannabis-related legitimate business.
Under the SAFE Banking Act, financial institutions would not risk termination of deposit insurance merely due to providing financial services to a cannabis-related business, and the SAFE Banking Act would remove the risk that collateral could be subject to forfeiture under federal law when financial institutions provide loans to individuals or companies involved in any business directly or indirectly related to the cannabis industry.
Further, the SAFE Banking Act grants the power to FinCEN to promulgate suspicious activity report guidance to financial institutions operating in the cannabis industry and directs the Federal Financial Institutions Examination Council to develop uniform guidelines for examining depository institutions that provide financial services to legitimate cannabis-related businesses.
Ultimately, the SAFE Banking Act would provide a uniform set of rules for the financial industry to create oversight and promote transparency; however, the benefits would extend beyond the financial industry. From a public safety perspective, the SAFE Banking Act would decrease the susceptibility of cannabis-related businesses (and their employees) as targets of violent crimes due to their current operation as cash-only businesses. Taxing authorities would be able to better monitor cannabis-related businesses if such businesses were able to access the regulated banking system, due to the inherent difficulties in tax monitoring of cash-intensive businesses. Overall, the SAFE Banking Act would be a significant win for the cannabis industry and can be viewed to have as much or more of an impact as the Agriculture Improvement Act of 2018 (the 2018 Farm Bill) did for the hemp industry (enacted Dec. 20, 2018).
Comptroller of the Currency Joseph Otting stated his support for congressional resolution of the current conflict between state and federal laws that inhibit banks from serving cannabis-related businesses. Similarly, three Federal Reserve Bank presidents called for clarity on the rules for providing banking and financial services to cannabis businesses, stressing the need for a legislative solution to the growing gap between state and federal marijuana laws. Treasury Secretary Steve Mnuchin called on Congress to provide a permanent legislative fix for the cannabis industry's banking issues, stating that there is not a Treasury or regulator solution, and Congress must be the one to resolve the discrepancy between state and federal law. A bipartisan group of attorneys general from 33 states and five U.S. territories sent a letter to congressional leaders urging passage of the SAFE Banking Act, because excluding the multi-billion dollar cannabis industry from traditional financial and banking services “makes it more difficult to track revenues for taxation and regulatory compliance purposes, contributes to a public safety threat as cash-intensive businesses are often targets for criminal activity, and prevents proper tracking of billions in finances across the nation.”
Credit Union Guidance on Hemp
Under the 2018 Farm Bill, on a federal level, a cannabis sativa plant that is less than 0.3% THC and all of its associated parts (including all cannabinoids and extracts) are classified as ”hemp” and regulated by the USDA as a legal agricultural commodity. The National Credit Union Administration has a long history of providing financial services to agricultural businesses. On Aug. 19, 2019, the NCUA released interim guidelines that allow credit unions to provide banking services, including loans, to legally operating hemp businesses. While credit unions will still need to comply with certain federal laws applicable to financial institutions, under the NCUA's guidance, suspicious activity reports and other regulatory requirements need not be filed simply to report on the banking activities of hemp-related businesses operating lawfully. Because the USDA has not yet issued regulations under the 2018 Farm Bill, credit unions will need to ensure that their hemp-related business members are in compliance with the applicable state and federal laws, regulations and agreements under the 2014 Farm Bill; then, these guidelines will be updated, if needed, once the U.S. Department of Agriculture issues forthcoming regulations and guidelines as required by the 2018 Farm Bill.
Credit unions must maintain the appropriate level of due diligence procedures for hemp businesses and adjust their ongoing due diligence and reporting needs accordingly. In particular, credit unions must: verify that the member is a licensed cultivator under the 2014 Farm Bill pilot program; that the member's customers are authorized to purchase or transport hemp; and that the products sold by their members do not violate the FDA's current position, and are not asserting health claims in their marketing and labeling. Given the ever-evolving nature of the federal and state regulation of the hemp industry, it is important that credit unions stay current with the constant changes to ensure they are serving their members while also remaining compliant with federal and state regulations. Importantly, this guidance is not intended to be a requirement of credit unions to provide services to hemp businesses and does not address financial services for other cannabis-related businesses.