Marijuana Legalization Trends Provide New Business Opportunities for Banks

July 30, 2019 Private: Matthew F. Winter Banking Law

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 subsequently expanded.

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 cannabis.

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, etc.

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 recreational marijuana.

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 cannabis products.

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.

Looking ahead, three cannabis-related bills are pending in Congress at the time of this writing:

  • the Secure and Fair Enforcement (SAFE) Banking Act,
  • the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, and
  • the Marijuana Opportunity Reinvestment and Expungement (MORE) Act.

Neither 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.

In 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 this point.

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 sales.

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 provide services.
  • “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 legitimate business.

With passage of the Act, regulators could not:

  • prohibit or discourage banks from providing financial services for those businesses;
  • impose penalties for being a service provider;
  • encourage or incentivize banks not to provide those services;
  • 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 Banking Act:

  • 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 level.

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 the CSA;
  • 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 measurable way.

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;
  • enabling 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
  • opening up Small Business Administration (SBA) funding for legitimate cannabis-related businesses and service providers.

The 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.