Revised July 30, 2019
Marijuana Legalization Trends Provide New Business Opportunities for Banks
The SAFE Banking Act and the STATES Act offer different routes to similar destinations, in which banks wishing to enter the legal marijuana industry may find it safe to do so.
This article is adapted from Matt Winter's
presentation to the Arizona Bankers Association on June 7, 2019, and has been
With respect to legal marijuana, the purpose of this
presentation is to update Arizona bankers regarding state regulation and to
describe what is happening in Congress.
Regulation in the Various States
The map below identifies states where marijuana is
legal in some form, as of mid-June 2019:
47 states and the District of Columbia have legalized or
decriminalized some form of cannabis product;
33 states and D.C. have legalized medical cannabis, not including
“limited access” (i.e., cannabidiol, or CBD, a hemp product that does not carry
the THC levels that can have a psychotropic affect); and
11 states have legalized both medical and recreational/retail
map to view detail
Decriminalization generally applies to small amounts of
marijuana, declassifying possession and use from a crime punishable by fines and
jail time to a civil penalty, something akin to a speeding violation.
In May 2019, the Arizona Supreme Court reversed a 2018
Court of Appeals decision in State v. Jones. The Supreme Court held that
the Arizona Medical Marijuana Act (AMMA) applies to and provides safe harbor for
the marijuana plant in its natural, unprocessed form and all derivatives
processed and extracted from the plant, including resin, oils, extracts, creams,
Developments at the Federal Level
In 2014 Congress passed the Rohrbacher-Blumenauer Budget
Amendment to the omnibus budget legislation, which prohibited the expenditure of
federal funds by the Department of Justice (DOJ) for the prosecution of state
law-compliant medical marijuana businesses and patients (the spending
prohibition did not include recreational marijuana businesses or users). That
budget amendment was renewed every year through 2018. On June 20, 2019, the
House of Representatives once again passed the amendment as part of a “minibus”
budget bill, but for the first time included recreational marijuana businesses
and users in the spending prohibition. In prior years, the Senate approved the
medical marijuana spending prohibition with bipartisan support. It remains to be
seen whether that bipartisan support will continue, given the inclusion of
A few conflicting government actions have occurred since
then, which is sort of the left hand and the right hand of the federal
government not agreeing with each other. Specifically, there appears to be
disagreement within the Executive Branch related to the medical application of
Since 1971, marijuana has been listed as a Schedule 1
drug under the Controlled Substances Act (CSA). Schedule 1 drugs are defined as
having no currently accepted medical application and a high potential for abuse.
However, in 2018, the U.S. Food and Drug Administration
(FDA) approved for prescription use the first CBD drug, Epidiolex, which is used
for severe seizure disorders. This is the first finding by the FDA (or any
agency of the U.S. government) of a medical use for a cannabis product.
Nonetheless, the DOJ and Drug Enforcement Administration
(DEA) subsequently refused to remove marijuana from Schedule 1, indicating that
the DOJ disagrees that there are accepted medical applications.
In Congress, last year the federal Agriculture
Improvement Act (the 2018 Farm Bill) legalized hemp, a strain of cannabis from
which CBD is derived (but which includes THC levels of no more than 0.3
percent), which is estimated to become a $50 billion-a-year business in the U.S.
Because hemp has been removed from the CSA and is now legal and no longer a
Schedule 1 drug, bankers are free to bank hemp businesses without fear of
negative responses by regulators.
three cannabis-related bills are pending in Congress at the time of this
the Secure and Fair Enforcement (SAFE)
the Strengthening the Tenth Amendment Through Entrusting
States (STATES) Act, and
Marijuana Opportunity Reinvestment and Expungement (MORE) Act.
the SAFE Banking Act nor the STATES Act legalizes cannabis on a federal level or
removes it from Schedule 1 of the CSA. However, neither bill would preempt state
law; in fact, both would defer to the states.
contrast, the MORE Act would remove cannabis from the CSA, and its passage would
generally supersede the SAFE Banking Act and the STATES Act.
SAFE Banking Act
The SAFE Banking Act has wide bipartisan support in the
House of Representatives. It has been placed on the Union Calendar, which means
it will come up to a vote on the floor of the House sometime in July. We can
assume it will pass out of the House, but the Act’s fate in the Senate is less
certain. While it appears to have sufficient bipartisan support in the Senate
for passage, it needs Senate Republican leadership’s support to proceed through
committee hearings and be put to a floor vote, and that is not guaranteed at
Again, the SAFE Banking Act does not remove marijuana
from Schedule 1, but one of the Act’s purposes is to improve public safety by
taking trunk loads of cash off the streets. Another benefit is that, in a cash
business, tax reporting is often inaccurate. Once a marijuana business is
removed from the “cash” category, state and local taxing authorities can have
more confidence that they are collecting appropriate tax revenues from marijuana
What does the SAFE Banking Act do for banks? In general:
It offers banks a safe harbor from negative federal regulatory
actions taken solely for doing business with legitimate, state law-compliant,
cannabis-related businesses or service providers.
Proceeds of a cannabis transaction that is state law-compliant
will no longer be considered proceeds of an unlawful activity under the Money
Laundering Control Act and other federal laws.
The Act provides banks with certain protections from liability for
involved entities under any federal law, and it provides protections for
insurers and other professionals providing services to the cannabis-related
legitimate business or service providers.
It would prevent forfeiture of a lender’s collateral merely as a
result of what would otherwise be a state law-compliant, cannabis-related
legitimate business activity.
Under the SAFE Banking Act, banks must continue to
comply with Financial Crimes Enforcement Network (FinCEN) guidance regarding
Suspicious Activity Reports (SARs), but the Act requires (i) FinCEN to ensure
that its guidance is consistent with the terms of the Act, and (ii) the Treasury
Department to confirm that consistency. In addition, the Act requires the
Federal Financial Institutions Examination Council (FFIEC) to create and publish
standard guidance and examination procedures, which should reduce or eliminate
region-to-region and examiner-to-examiner inconsistencies and ease the
examination process for banks.
By definition, the SAFE Banking Act covers depository
institutions that offer financial services to cannabis-related legitimate
business or service providers.
“Depository institutions” have the traditional statutory
definition that includes all Arizona banks, but it also applies to federal and
state credit unions.
“Financial service” includes taking deposits, lending money,
extending credit, etc.
The SAFE Banking Act also covers functions related to
transfers of funds. Its protections should extend to armored car companies,
electronic transfers, credit card and merchant services companies, etc.
A “cannabis-related legitimate business” is any company that is
directly involved in legally handling the cannabis product. This would include
state law-compliant companies that grow, produce, cultivate, extract, process,
package and deliver cannabis products.
“Service providers” includes professionals and companies –
including financial institutions – that do not actually touch the product but
“Cannabis product” is a very broad term that includes any item
containing cannabis. This catch-all definition includes edibles, tinctures,
extracts, creams, etc.
Regulatory Safe Harbors. Bankers will appreciate having a little more detail on
the SAFE Banking Act’s safe harbors. The Act prohibits federal regulators from
terminating or eliminating deposit insurance or taking any other adverse action
against a financial institution solely because it is banking cannabis-related
legitimate businesses or service providers. If a bank is state law-compliant,
its customer is state law-compliant, and the bank is meeting its other
regulatory and financial requirements, regulators would be prohibited from
taking action against the bank solely for doing business with a cannabis-related
With passage of the Act, regulators could not:
prohibit or discourage banks from providing financial services for
impose penalties for being a service provider;
encourage or incentivize banks not to provide those
take any adverse actions on loans to cannabis-related legitimate
businesses, persons involved in those businesses, or owners of real estate or
equipment that lease property to those businesses, meaning that loan collateral
would not be in jeopardy as long as all parties are state law-compliant.
One thing that the Act does not do is require
financial institutions to provide services to any cannabis-related legitimate
business or service provider. If the board of directors does not wish to enter
that market, the Act will not force them to.
SAFE Banking Act, Post-Passage. Here are some other potential results of the SAFE
Because the FinCEN guidelines will remain in place, in some form,
so will banks’ SAR reporting, and the expenses incurred from a regulatory
perspective will continue.
Banks will continue to need to perform their due diligence with
respect to their customers.
The Act would reduce the cash-dependent nature of marijuana
businesses, allowing for credit card and non-cash transactions.
The Act would protect your security interest in collateral you may
have taken for your loans, as it would allow your customers to purchase
sufficient insurance on that collateral. For now, some insurance companies will
not insure a piece of real or personal property being used in a cannabis-related
business, and the Act should resolve that issue.
The STATES Act is based on the states’ rights argument
rooted in the Tenth Amendment to the U.S. Constitution, which states:
“The powers not delegated to the United States
by the Constitution, nor prohibited by it to the States, are reserved to the
States respectively, or to the people.”
As the argument goes, because the Constitution is silent
as to regulating cannabis, the legality of a cannabis-related business is not a
federal issue, but rather a state issue that should be regulated at the state
The STATES Act creates a carve-out for state
law-compliant marijuana transactions, exempting them from the Controlled
Substances Act. Marijuana would remain a Schedule 1 drug under the CSA at the
federal level, but a marijuana business conducted in a state law-compliant
manner would no longer violate the CSA.
In short, the STATES Act amends the CSA such that
anything that has to do with marijuana and that is compliant with state law or
tribal law is no longer within the purview of the CSA.
Impact on Banks: In a Nutshell. Marijuana-related activity conducted in compliance with
the STATES Act and state (or tribal) law, and the proceeds of such activity:
would not be unlawful;
would not constitute trafficking of a controlled substance under
could not be the basis for criminal or civil forfeiture of real or
personal property; and
would not be deemed the proceeds of an unlawful transaction under
the MLCA or any other federal law.
If either the STATES Act or the SAFE Banking Act becomes
law, banks doing business with state law-compliant marijuana businesses
generally would no longer be viewed as engaged in money laundering, subject to
certain exceptions. There is no protection for prohibited marijuana-related
business activities, such as:
distributing to people under the age of 21;
conducting marijuana-related activities in violation of the laws
of the applicable state or tribe; or
employing or hiring a person under the age of 18.
The STATES Act is silent with respect to FinCEN
guidance, SARs, or other banking-specific regulatory concerns, so it is unclear
whether a bank’s customer due diligence requirements would change in a
A final warning: A bank’s compliance with the STATES Act
is not the only requirement for protection under the Act. If a banking customer
violates the Act or applicable state law, that customer will fall back into
jeopardy under CSA and MLCA, likely dragging the bank with it even if the bank
is not aware of the violation. The key is that a bank has to know its customer
and perform its diligence work on a consistent and continuing basis.
The third piece
of federal legislation mentioned above, the MORE Act, was introduced in July
2019 and has by far the broadest scope of the three.
Among its many provisions are items that
would interest bankers seeking to enter the cannabis business market, including:
decriminalizing marijuana at the federal level by removing it from the
Controlled Substances Act;
states to set their own policies related to marijuana;
authorizing a 5% federal sales tax on marijuana and marijuana products to
create an Opportunity Trust Fund, which would provide funding for the
Community Reinvestment Grant Program, the Cannabis Opportunity Grant
Program, and the Equitable Licensing Grant Program; and
Small Business Administration (SBA) funding for legitimate cannabis-related
businesses and service providers.
MORE Act likely faces a steeper climb than the SAFE Banking Act or even the
STATES Act, because it actually removes marijuana from the Controlled Substances
Act. As was mentioned earlier, due to its much broader scope, if the MORE Act
becomes law, the SAFE Banking Act and the STATES Act would become moot.