• Paul Peter Nicolai

The State of Cannabis Banking

Many marijuana-related businesses (MRBs) struggle to find a bank willing to provide basic financial services. This is because the legal status of marijuana as federally prohibited but a legal commodity under the laws of most U.S. states.


This state of legal limbo prevents many MRBs from getting banking services. It greatly increases the risks of these businesses because they must deal with vast amounts of cash, increasing the risk of robbery and making it difficult to pay bills and taxes. Cash businesses are also more readily exploited for money laundering and other purposes which undercuts the goal of creating legal markets. A reform effort is slowly chipping away at the blanket prohibition of marijuana at the federal level. Hemp and hemp-derived consumer products containing CBD are now legal under federal law.


Under Obama, the Department of Justice issued guidance called the Cole Memorandum that instructed federal prosecutors to focus enforcement efforts relating to marijuana on specific enforcement priorities, like preventing the distribution of marijuana to minors and ensuring that marijuana revenues did not go to criminal enterprises, and ensuring state-legal marijuana activity was not used as a cover for trafficking other illegal drugs. Other cases were de-emphasized. DOJ enforcement policy is subject to change at any time. It does not provide MRBs with legal certainty.


MRBs have extremely limited access to banking services. Many banks worry about violating federal anti-money laundering and other laws by engaging in transactions with the proceeds of federally illegal marijuana operations. There have been reports of MRBs unable to get banking services or having their banking relationships terminated due to involvement in the marijuana industry. None of the major US banks accepts MRBs as customers. The federal Financial Crimes Enforcement Network (FinCEN) reports that as of September 30, 2019 563 banks and 160 credit unions were providing banking services to MRBs. While this is a substantial increase from 375 banks and 111 credit unions as of September 30, 2018, they represent a small minority of the overall U.S. banking industry.

The data confirms that most banks and credit unions are not providing banking services to MRBs.


Some states have studied ways to encourage the provision of services to MRBs in their states, but no workable solution has yet been found. It is difficult to imagine a state-level banking system that could both achieve the scale needed to meet the rapidly growing industry’s needs and avoid implicating federal law. In light of these challenges, any lasting solution will require federal legislative action.


The primary federal law that affects the provision of banking services to MRBs is the Bank Secrecy Act of 1970 (BSA). BSA requires U.S. financial institutions to help federal government agencies detect and prevent money laundering. It requires banks to report suspicious activity that might signify money laundering, tax evasion, or other criminal activity. These reports are called SARs. Federal anti-money laundering statutes make it a crime to knowingly engage in monetary transactions involving proceeds of the sale of marijuana. Under these laws, all proceeds generated by MRBs (even legally) are unlawful. Financial transactions with such proceeds may be illegal money laundering.


FinCEN issued guidance in February 2014 on how banks could do business with MRBs. This guidance was based on the principles in the Cole Memorandum and was accompanied by additional guidance issued by the DOJ on the same day that effectively applied the enforcement priorities in the Cole Memorandum to the enforcement of the BSA. Despite Attorney General Sessions’ revocation of the Cole Memorandum, FinCEN has confirmed that its 2014 guidance remains in effect.


Although FinCEN guidance says how banks may do business with MRBs without triggering BSA enforcement by FinCEN, it does not legalize the activities, and it does not rule out enforcement action. The guidance requires banks to conduct extensive and ongoing due diligence on any MRBs they wish to provide banking services to in order to ensure their compliance with the Cole Memorandum principles and applicable state laws, and to file SARs for transactions related to MRBs. The due diligence and ongoing monitoring required under the FinCEN guidance are more far-reaching than the normal due diligence banks must conduct on customers. Moreover, FinCEN expects banks to file continuing activity reports to update a previously filed SAR if their ongoing monitoring indicates that marijuana-related activity is continuing.


Although the FinCEN red flags are understandable from a regulator’s view, they are extremely difficult for banks to assess and monitor in practice. This may be one reason why very few banks have begun providing banking services to MRBs.


The 2014 guidance issued by DOJ accompanying the FinCEN guidance emphasized that prosecution of a financial institution might be appropriate if the financial institution were to discover that a person to whom it was providing banking services was violating one of the Cole Memorandum priorities. The guidance also said prosecution might be appropriate if the financial institution were willfully blind to such illegal activity as a result of a failure to conduct appropriate due diligence of the customer’s activities. Consequently, the guidance places a potentially impracticable burden on banks to effectively discover the scope and nature of their customers’ MRB activities and to continually monitor those activities to ensure that they do not implicate any of the Cole Memorandum enforcement priorities.


Various bills have been introduced in Congress to legalize marijuana or to provide MRBs with access to services. The most prominent is the SAFE Banking Act which passed the House of Representatives in September 2019. It remains under consideration by the Senate Banking Committee, where its prospects dimmed based on a public statement issued by committee chairman. He had initially that he would hold a committee vote by the end of 2019, but on December 18, he issued a statement sharply criticizing the bill in its current form and demanding that it be amended. One particularly controversial element is his proposal to introduce a potency limitation of two-percent THC content on all marijuana products, a standard that many products currently on the market in legal states may not meet.


Notwithstanding its unclear chances of being enacted into law, the SAFE Banking Act represents a model of limited legislative action that seeks to facilitate specific commercial activities ancillary to the marijuana industry without addressing the fundamental (and politically more difficult) question of legalizing marijuana itself. The act would prohibit federal banking regulators from taking punitive measures against a bank solely because it provides or has provided financial services to a cannabis-related legitimate business or service provider. The range of financial services that protected under the act is broad, and cannabis-related legitimate business means any person that participates in any business legal under state law that involves cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products. It is crucial that the act includes protection of service providers like commercial landlords, construction companies, providers of hydroponic equipment, lighting systems. and the like, who are currently at risk of losing access to banking services if it becomes known that MRBs are among their customers. The act would also clarify that, for purposes of the federal anti-money laundering statutes, the proceeds of a transaction involving activities of a cannabis-related legitimate business or service provider are not proceeds of an unlawful activity and would provide that a bank or insurer that provides a financial service to a cannabis-related legitimate business or service provider may not be held liable solely for providing such a financial service or for further investing any income derived from such a service.


The act would also provide that a bank that has a legal interest in the collateral for a loan or other financial service to a cannabis-related legitimate business or service provider, or to an owner or operator of real estate or equipment leased or sold to such a business, would not be subject to criminal, civil, or administrative forfeiture of that legal interest pursuant to any federal law for providing such loan or service. Finally, the Act would call for FinCEN to issue new guidance for the submission of SARs for transactions with cannabis-related legitimate businesses or service providers that is designed to not significantly inhibit the provision of financial services to such businesses.


The SAFE Banking Act would be an important milestone toward the creation of a legal and regulated nation-wide marijuana market in the United States, but it would not be a panacea. Since the bill would not decriminalize marijuana under the Controlled Substances Act, MRBs and their officers, directors, and employees could still face federal criminal prosecution for violating federal law. If this were to happen to an MRB served by a bank, it could adversely affect the viability and creditworthiness of the affected MRB. This would mean heightened commercial risk for banks that elect to provide financial services to MRBs compared to customers in other industries. Moreover, banks would be responsible for ensuring their marijuana-industry customers operate in compliance with all applicable state laws since state-law compliance is a precondition to the legal protection the act affords. Bank compliance costs would likely be significantly higher when serving MRBs. This, combined with heightened commercial risks, may deter banks from taking advantage of the opportunity that Congress is seeking to create.

In addition to the SAFE Banking Act, several bills have been proposed that would address the federal prohibition itself either by legalizing marijuana at the federal level or by requiring the federal government to abide by any state-level legalization. None of these bills have made it through the congressional committee process

The likelihood of passage of any of these attempts to legalize marijuana federally or to facilitate the provision of services to the marijuana industry is unclear and may depend on the results of the 2020 presidential and congressional elections. Although a Democratic takeover of the White House and the Senate would not ensure passage of full federal marijuana legalization, the recent linking of social justice measures with legalization may go a long way to garner broad support among otherwise reluctant Democratic lawmakers.


In the meantime, expect that any substantive federal action on marijuana will come piecemeal in amendments to federal appropriations bills. One amendment that was included in the federal funding bill that signed into law by President Trump on December 20, 2019, prohibits DOJ from using funds appropriated to enforce the federal marijuana prohibition against state-legal medical marijuana businesses and users. President Trump attached a signing statement to the bill that suggested DOJ may disregard this rider to the extent he believes it interferes with his constitutional responsibility to faithfully execute the laws of the United States. Several other marijuana-related riders were included in the House version of the spending bill but they did not make their way into the final legislation.


Hemp is a close relative of marijuana. Under the 2018 Farm Bill, hemp may not have a THC concentration of greater than 0.3 percent on a dry-weight basis, and cannabis or derivative products with THC in excess of this threshold are legally classified as marijuana.


In connection with the legalization of hemp, the 2018 Farm Bill requires the U.S. Department of Agriculture (USDA) to issue rules governing the industrial cultivation of hemp. Any hemp produced in accordance with the 2018 Farm Bill and USDA rules, and products derived therefrom (like consumer products containing CBD), will not be deemed to be controlled substances under the Controlled Substances Act. Although the 2018 Farm Bill does not require states to remove any existing legal prohibitions or limitations on hemp or its derivative products, it does prohibit state or tribal constraints on the inter-state movement of hemp, essential to aiding the formation of a nation-wide hemp industry. The 2018 Farm Bill also aims to promote industrial-scale hemp cultivation by making hemp producers eligible for federal crop insurance programs and USDA grants and development programs.


The USDA issued its interim final rule on October 31, 2019, establishing the initial parameters for commercial hemp production. Although the public comment period was initially scheduled to end on December 30, 2019, the USDA extended that period to Jan. 29, 2020 to provide stakeholders with more time to submit comments. To date, over 1,800 comments have been posted. The USDA intends to issue its final rule by late 2021.


Under the interim final rule, states and Indian tribes may submit plans for approval by the USDA for the production of hemp in their respective territories. If a state or tribe declines to submit a plan, or if their plan is not approved by the USDA, then the USDA’s rules will govern hemp production in those states and tribal territories. Any commercial hemp production operations must be approved under a USDA-approved state or tribal licensing regime or directly by the USDA. Licenses for hemp production will be nontransferable and must be renewed every three years, and criminal background checks will be required for all key participants in hemp businesses.


Following hemp legalization, U.S. senators requested guidance on hemp banking from federal regulators. The senators noted urged them to issue public guidance that would provide banks and credit unions with greater clarity on the scope of permissible banking activities and any specific requirements applicable to such services.

NCUA issued a statement in August 2019. It said credit unions that wish to provide banking services to hemp businesses should implement an anti-money-laundering compliance program that mirrors the 2014 FinCEN guidance, including filing SARs, but that no SARs will be required for legal hemp-related transactions. NCUA said an adequate risk assessment requires credit unions to understand the specific state laws governing each customer’s hemp business.


The others responded by issuing a joint statement on December 3, 2019, that took note of hemp legalization and provided guidance for banks to engage in banking relationships with hemp-related businesses. It said that because hemp is no longer a Schedule I substance under the Controlled Substances Act, banks are not required to file SARs solely because a customer engages in the growth or cultivation of hemp in accordance with applicable laws and regulations. It also said that banks are expected to follow standard SAR procedures, including filing a SAR if indicia of suspicious activity warrant, when serving hemp-related customers. The guidance emphasized compliance with applicable regulatory requirements for customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information for customers that are legal entities, when electing to serve hemp-related businesses.