As of March 2019, a majority of states have legalized the use of cannabis products in some capacity, but cannabis-related businesses operating within the bounds of state law are still largely without access to basic financial services. The litany of problems that stem from these businesses operating on a cash basis has been recited time and time again in news stories and congressional hearings: excess cash on hand creates safety issues; tracking income for accounting and tax-computation purposes is challenging; making payments for basic expenses like rent and payroll becomes difficult (the list goes on). And the restrictions do not end with the businesses themselves – any person or entity that does business with, is employed by, or otherwise accepts funds from cannabis businesses can be equally tainted in the eyes of a bank. Many bankers would welcome the opportunity to engage customers operating legitimate cannabis businesses – an untapped (and growing) market segment that represents billions of dollars in deposits, payment services, lending, and cash management services. As long as the activities of cannabis businesses remain illegal under federal law, however, most banks remain unwilling to take the risk.
Arguments on the merits of legalizing cannabis products aside, banks, cannabis businesses, and state governments alike have been clamoring for the federal government to address the issue, and the legislative gears are finally (albeit slowly) turning. This article discusses the impact of recent federal law changes on banks’ approach to cannabis businesses, pending legislation intended to create a safe harbor for banks servicing legitimate cannabis businesses, and how banks should proceed in the meantime.
The 2018 Farm Bill
What it does:
Cannabis. Marijuana. Hemp. Tetrahydrocannabinols. Cannabidiol. As with most areas of law, definitions matter when it comes to the federal regulation of cannabis. Under the Controlled Substances Act (21 U.S.C. 802, et seq.) and the regulations promulgated thereunder (CSA), “marihuana” is listed as a Schedule I substance. The former CSA definition of “marihuana” included all parts of the plant Cannabis sativa L., as well as the seeds, resin, and any compound or derivative thereof (with some specific carve-outs). Notably, this definition applied irrespective of the level of delta-9 tetrahydrocannabinol (THC) present in the substance.
The 2018 Farm Bill overhauled this definition to distinguish between “marihuana” and “hemp” and to specifically exempt hemp from the definition of “marihuana.” Hemp is now defined under the agricultural statutes as any part of the Cannabis sativa L. plant containing a THC concentration of not more than 0.3%. This distinction and descheduling of hemp means that financial institutions are no longer barred from banking customers operating legitimate hemp businesses, though this permission is not quite carte blanche.
Hemp production and use is still tightly regulated. The Farm Bill establishes a regulatory structure, administered by the U.S. Department of Agriculture (USDA), that requires hemp businesses to provide the USDA with certain information regarding the land on which the hemp is grown, test the crop for compliance with permitted THC levels, effectively dispose of any noncompliant plants, and perform annual inspections. The new statute also includes an enforcement mechanism to deal with violations. States or tribes, in place of the USDA, can become the primary regulator of hemp production in its territory by submitting a plan to the USDA to monitor and regulate such production.
What it does NOT do:
The Farm Bill does not decriminalize all cannabis products. Activities involving marijuana or other compounds or derivatives containing a THC concentration of more than 0.3% – whether medical or recreational – are still not permissible under federal law.
One unique twist is cannabidiol, known colloquially as “CBD,” which typically contains THC concentrations of less than 0.3%. CBD has recently gained popularity in a variety of applications, including pain relief, skincare, and mental wellness. While the Farm Bill removed CBD from Schedule I, CBD is still prohibited from human consumption without the approval of the U.S. Food and Drug Administration (FDA). CBD is separately regulated by the FDA as an active ingredient in a drug used to treat epilepsy. Given this, financial institutions who choose to bank customers engaging in CBD businesses should perform sufficient due diligence to ensure the customer’s use of CBD is compliant with all applicable laws, not only the Farm Bill and the CSA.
Additionally, the Farm Bill does not specifically address banking considerations. Banks that decide to accept hemp business customers will need to keep abreast of the federal and state-specific requirements relating to the customer’s business and perform sufficient ongoing customer due diligence to ensure the customer is maintaining compliance with those requirements.
SAFE Banking Act
What it does:
While there are multiple measures concerning the legalization of cannabis products moving through the legislature, the Secure and Fair Enforcement (SAFE) Banking Act of 2019 was introduced with the specific intention of alleviating some of the concerns of financial institutions wishing to bank “cannabis-related legitimate businesses” (CLBs). This term is defined to include manufacturers, producers, and others who participate in any business involving the handling of cannabis or cannabis products, including cultivation, manufacturing, transportation, selling, and purchasing, in states where such activities have been legalized. The bill ties the definition of “cannabis” to the CSA definition of “marihuana.” In short, the bill would:
- Prohibit the federal banking regulators from penalizing or taking supervisory action against (including terminating deposit insurance) a financial institution solely because it provides financial services (including payment services) to a CLB or CLB service provider. Federal regulators also may not discourage a bank from providing such services or encourage a bank to take adverse action against such an account solely because the customer is or is associated with a CLB.
- Protect banks, CLBs, and their service providers by carving out proceeds derived from CLB activities from federal criminal statutes regarding money laundering and proceeds from unlawful activity.
- Protect banks and their officers, directors, and employees from liability under federal law for providing financial services to CLBs.
- Protect banks’ interest in collateral pledged in CLB relationships.
- Require banks to comply with existing law and guidance regarding suspicious activity reporting, and require the Secretary of the Treasury to ensure guidance is consistent with the intent of the Act.
- Require the Federal Financial Institutions Examination Council (FFIEC) to develop uniform guidance and examination procedures for banks that provide services to CLBs, and require the federal banking regulators to issue their own guidance and examination procedures consistent with that of the FFIEC.
As of March 2019, the bill had cleared the House Financial Services Committee but had not yet gone to the full House for consideration. Industry groups remain cautiously optimistic, but as anyone who remembers “Schoolhouse Rock!” knows, the Act has a long road ahead before becoming the law of the land.
What it does NOT do:
The SAFE Banking Act would not decriminalize marijuana on a federal level. It only offers protections to banks who engage customers operating in states where such activity is legal. Banks are still responsible for ensuring they only engage CLB customers who are operating in compliance with applicable state and federal law, and carefully monitoring (and reporting, where appropriate) the activities of such customers.
The SAFE Banking Act also would not require banks to do business with CLBs. Banks should still employ a careful risk-based analysis in deciding whether to offer services to CLBs and thoroughly vet any potential CLB customers.
What Should Banks Do Now?
- Know your customer, know your state. Banks who wish to engage legitimate hemp businesses as customers should develop a thoughtful approach to customer due diligence tailored to the particular risks associated with the cannabis industry. Banks should have a thorough understanding of their customer’s business operations and mechanisms for ensuring compliance with both state and federal law. Customers should be able to demonstrate to the bank’s satisfaction that their crops and/or products do not contain impermissible THC levels, that the products are being sold for permissible uses, and that they have sufficient compliance policies, procedures, and controls in place. Banks will also need to maintain awareness of the applicable state’s regulatory structure and licensing requirements. Remember, the law of the state(s) in which the customer operates will likely control with respect to the customer’s activities, and thus banks may need to familiarize themselves with multiple states’ requirements, as well as those of the USDA.
- Develop a compliance program and report suspicious activity. Any bank aiming to do business with a cannabis business should develop a comprehensive compliance program tailored to the specific risks of such industry. The regulatory requirements concerning suspicious activity monitoring and reporting have not changed. Legitimate cannabis businesses come with a unique and heightened set of risks, and banks need to be on the lookout for any suspicious behavior from such customers, their stakeholders, and their employees.
- Watch legislative and regulatory movements closely. Even though the Farm Bill legalizes hemp products, the statutory changes are still in their infancy and have not yet been thoroughly digested by regulatory agencies, including the U.S. Drug Enforcement Agency, the FDA, the USDA, and the various banking regulators. Banks looking to take advantage of these new opportunities should be on the lookout for new regulations, interpretations, and guidance from the powers that be. Similarly, the SAFE Banking Act, while promising, is not yet law. Final rules and guidance for both measures will take time to develop and may evolve as their application is tested in practice.
As before, whether to bank a customer that is directly or indirectly engaged in the cannabis industry remains a decision that banks should not make lightly or without significant due diligence and compliance planning. Some doors may have opened with the passage of the 2018 Farm Bill, but the future of the SAFE Banking Act is still uncertain. Until legislation is passed, final rules are published, and the new regulatory scheme is tested, banks should proceed with caution regarding cannabis-related businesses.