Authors: Claudia Z. Springer
On July 23, 2019, the Senate Banking Committee heard testimony from both politicians and industry spokespersons about the dire need for traditional banking services in the cannabis industry. Amazingly, both Democrats and Republicans appeared to agree that the current situation is untenable.
Currently, cannabis businesses operating legally within their respective states do not have access to most banks and often operate on an all-cash basis. This situation has been shown to increase criminal activity and tax evasion, and harms not only the businesses themselves but also their employees and vendors.
Senators Cory Gardner (R-Colo.) and Jeff Merkley (D-Ore.) made introductory remarks that indicated their agreement that the current situation is unworkable and dangerous.
Senator Gardner remarked that while he was initially opposed to the legalization of cannabis in his home state of Colorado, much to his surprise, “the sky did not fall” when it was legalized and in fact, the legalization was accompanied by less crime in connection with cannabis use. Taxes raised from the sale of cannabis products support-- and largely pay for Colorado’s education budget each year. He also observed that polls show 93 percent of Americans support the legalization of medical marijuana and 65 percent support legalization of adult use.
The number of states that have legalized the use of marijuana for certain medical conditions and illnesses is 34 with up to 47 states having some form of legalized marijuana program (the only exceptions being Idaho, Nebraska and South Dakota), and 11 states and the District of Columbia allowing regulated adult use.
Gardner observed that the conflict between federal and state law in connection with the cultivation, sale and use of cannabis is unworkable in the banking industry, because under existing federal law, “the dollars involved are the proceeds of unlawful transactions under the federal money laundering statutes.” This not only implicates the cannabis businesses themselves but also ancillary businesses including those that serve cannabis entities such as plumbers, electricians, lawyers, accountants, landlords, etc. The result of this situation is that most traditional banks are not knowingly accepting proceeds from cannabis sales for fear of “regulatory action or federal forfeiture.”
Senator Merkley agreed with Gardner and also observed that the SAFE Banking Act, which we reported on in April, 2019, “would give legitimate businesses acting in compliance with state cannabis laws access to the banking system, including protection against prosecution or asset forfeiture solely for providing services to a state-sanctioned cannabis business.”
He further observed that “there is widespread support across local government, law enforcement, and industry to provide a safe harbor for cannabis businesses to access financial services….A large swath of the financial industry, including the Independent Community Banks of America, the Credit Union National Association, the Ohio Bankers Union League have endorsed the SAFE Banking Act as a mechanism for financial institutions to offer services to cannabis and cannabis affiliated businesses without violating the law. Finally the National League of Cities has endorsed passage of the SAFE Banking Act as a way to provide cannabis businesses access to the banking system.”
Among those that addressed the Committee were Rachel Pross of the Credit Union National Association (CUNA); Joanne Sherwood on behalf of the American Bankers Association (ABA), Ernest Martinez, director at large of the National Narcotic Officers’ Associations’ Coalition, John Lord, CEO and owner of Liv Well Enlightened Health, and Garth Van Meter, vice president of government affairs, Smart Approaches to Marijuana (SAM). All presenters other than Van Meter agreed that the need for banking options in the cannabis sector is critical and immediate and that this need is currently not being met.
Rachel Pross spoke on behalf of CUNA, which represents state and federal credit unions and their 115 million members across the United States. Her employer, Maps Credit Union, serves over 65,000 member owners in Oregon’s Willamette Valley. It has elected to serve cannabis businesses and claims that it is the only financial institution in the State of Oregon that has continuously served the cannabis industry since 2014. Today Maps serves 500 Oregon sanctioned cannabis businesses making it one of the largest cannabis “banks” in the United States. Pross quoted from a 2015 analysis conducted by Wharton School of Business Public Policy Initiative showing that because of the lack of banking services available in this industry, one in every two dispensaries had been robbed or burglarized. In 2017-2018, Maps received over $529 million in cash deposits from cannabis businesses and thus far in 2019 it has received another $169 million. The compliance framework Maps uses to serve cannabis businesses is based upon the FinCEN Guidance. This means that it “conducts a rigorous screening and compliance protocol and has invested considerably in the robust infrastructure required to appropriately monitor and maintain these high-risk accounts.” However, Maps is simply not able to deal with the volume of business in this sector.
Pross noted that because of the expense involved in providing the information required under the FinCEN Guidance, there are “numerous unscrupulous players trying to benefit from the severe shortage of legitimate financial services available to cannabis businesses, and concerns around criminal prosecution are only feeding those predatory players’ flames.” She observed that “the current rift between federal and state laws has left credit unions and other financial institutions trapped in a scenario where their mission, to serve the financial needs of their local communities, is directly pitted against the inability to have perfect information regarding every indirect business activity and the threat of federal enforcement action….Without banking services, cannabis businesses and the businesses indirectly related to them, are less able to obey the law, pay taxes, and follow state regulations. The public safety risks posed by these businesses are easily mitigated through access to mainstream banking service providers and keeping the cash off the streets.” Pross further pointed out that almost all large businesses derive some level of their revenues from cannabis related businesses and even if those businesses are operating legally in every state in which they exist, they run the risk that their banks will refuse to do business with them or their employees because of these sales.
While credit unions represented by CUNA do not take a position regarding the federal legalization of cannabis, they do overwhelmingly support passage of the SAFE Banking Act which offers federal protection for financial institutions providing credit or banking services to individuals and businesses engaged in the cannabis industry in states where such activity is legal so long as they are compliant with applicable laws and regulations.
In her address to the Committee, the ABA’s Joanne Sherwood noted that because there are so many businesses that serve the industry in one way or another, banks must “dedicate significant resources to develop a compliance strategy that allows them to continue to serve their communities in an environment where the letter of the federal law and the reality of the current marketplace are irreconcilable.” She pointed out that because cannabis businesses must pay their taxes in cash, they are unable to utilize the e-filing method regarding their tax returns and paper returns cost the IRS nearly seventeen times more to process than would e-filed returns. The cash payment method also necessitates additional security measures for local taxing authorities, also resulting in higher costs.
She noted that communities are struggling with the criminal activity caused by the existence of businesses that have large amounts of cash at all times. She pointed to Denver, where cannabis businesses make up one percent of all local businesses but have accounted for 10 percent of all reported business burglaries from 2012-2016.
Sherwood said that “allowing cannabis related businesses access to the regulated banking system would improve federal and state oversight of their financial activities.” This is because bank accounts are monitored in accordance with anti-money laundering and Bank Secrecy Act requirements and increased transparency would come from processing transactions through bank accounts instead of using cash. Sherwood acknowledged that a small number of banks have decided to accept the risks associated with banking cannabis businesses or ancillary businesses despite the current state of the federal laws, but that most financial institutions have elected to reject these businesses as customers. She agreed that passage of the SAFE Banking Act, while not the optimal solution, would go a long way to address the urgent banking problem associated with the cannabis industry.
A naysayer regarding the SAFE Banking Act and similar legislation was Garth Van Meter, the vice-president of government affairs of SAM. Van Meter and SAM are opposed to any law that would “promote and increase drug use”. SAM views the SAFE Banking Act as protecting those involved in the cannabis industry and thus would cause it to further prosper and expand. Van Meter believes that the studies regarding the public health ramifications of marijuana use are insufficient to date, and that legalization of this product is premature until further research is completed. In his view, any legislation that would enable its use should be tabled. He specifically attacked passage of the SAFE Banking Act, claiming that passage would promote further drug use of a product that his organization views as dangerous and habit forming. He further posited that passage of the SAFE Banking Act would promote cartel activity because drug cartels would use banks to store their cash.
While the Committee listened to each of the speakers and asked many questions, it appears the Committee agreed it cannot continue to ignore what is going on in our country--the rapid expansion of the cannabis industry and the cash it is producing. It seems clear, at least at the Senate Banking Committee, that Congress needs to promote legislation that will enable banks and other financial institutions to safely offer banking services to state sanctioned cannabis businesses.
We will continue to monitor Congressional activity in this sector and update you on new developments.
Client Alert 2019-186