Blog: Federal Cannabis Banking Reform: What Happened? – – United States – Mondaq

United States:

Federal Cannabis Banking Reform: What Happened?

18 November 2022

Sheppard Mullin Richter & Hampton

To print this article, all you need is to be registered or login on

This article was originally published in the November/December
issue of ELFA’s Equipment Leasing & Finance

In mid-July 2022, the United States House of Representatives
passed provisions that would allow legitimate cannabis-related
businesses to access federally regulated financial services. This
marks the seventh time the House has approved a version of the
Secure and Fair Enforcement (SAFE) Banking Act. The original
version of federal cannabis banking reform was introduced nine
years ago by Rep. Ed Perlmutter (D-Colo). The passage of the SAFE
Banking Act, either as stand-alone legislation or as amendments
attached to must-pass bills, would prohibit federal banking
regulators from penalizing a federally regulated depository
institution for providing banking services to cannabis businesses.
Presently, cannabis businesses are essentially deprived of
federally regulated financial services, which include the ability
to raise capital, obtain loans and process payment.

It is expected that this most recent attempt by the House to
implement cannabis banking reform, which came in the form of an
amendment to the 2023 National Defense Authorization Act, will once
again face significant hurdles in the Senate where all prior
attempts have failed. With Rep. Perlmutter’s impending
retirement likely occurring without cannabis banking reform, those
in the cannabis space are left questioning the reason for the
hold-up. The proponents claim that without reform, the cannabis
industry, which is estimated to exceed $30 billion to 2022, will be
forced to operate primarily in cash or through a few state
chartered banks and credit unions for a premium. Others in the
space are not troubled by the lack of progress in securing access
to federally backed financial institutions. These differing
opinions question raise the question of whether reform is necessary
and, if so, why has it stalled?

Does federal bank reform matter?

Election Day 2022 will mark the 10-year anniversary since the
first states in the union—Colorado and
Washington—decriminalized or legalized cannabis operations
within their respective jurisdictional boundaries. Today, 39 states
permit cannabis operations and use in some capacity, with more
anticipated following the upcoming 2022 election. Similarly, a
November 2021 Gallup poll found that 68% of the American public
supports cannabis legalization. Despite these growing numbers, the
federal government has been hesitant to take formal action on
legalizing cannabis. The repercussions of the federal
government’s failure to act are so apparent that Supreme Court
Justice Clarence Thomas—one of the Supreme Court’s most
conservative justices—issued a statement in Standing
Akimbo, LLC et al. v. United States (2021)
594 U.S. that
federal cannabis laws may be outdated due to the government’s
“piecemeal approach” to regulation.

Despite remaining a federally illegal product, the existing
federal policy on cannabis does not prohibit financial institutions
from providing services to businesses in the industry. Instead,
most financial services providers are voluntarily opting not to
participate in the market due to the multiplicity of legal risks
and compliance costs. Indeed, presently, only about 700 of the
5,000+ commercial banks in the United States provide financial
services to cannabis operators. More specifically, currently, in
order to offer banking services to cannabis operations, financial
institutions must navigate a labyrinth of anti-money laundering
laws. For instance, under the Bank Secrecy Act (BSA), financial
institutions are subject to various recordkeeping and reporting
requirements and must file a Suspicious Activity Report (SAR) to
the Financial Crimes Enforcement Network (FinCEN) whenever there is
a suspected case of money laundering, fraud or use of funds
stemming from federally illegal activities—like a cannabis
operation. The regulations under the BSA, Controlled Substances Act
(CSA) and other federal statutes also subject financial
institutions to enforcement actions and severe civil monetary fines
for providing services to federally illegal enterprises. Compliance
with these laws require banks and other financial institutions to
essentially function as drug enforcement agencies if they choose to
provide banking services to cannabis operations.

Recently proposed banking reform would alleviate many of the
financial institutions’ concerns regarding transacting with
cannabis-related businesses by providing several protective
measures, including:

  • Prohibiting federal bank regulators from restricting,
    penalizing or discouraging a financial institution or depository
    institution from providing banking services to a legitimate
    cannabis-related business;
  • Establishing that transactions involving proceeds from
    legitimate cannabis-related businesses are not proceeds of unlawful
    activities and thus, not within the purview of anti-money
    laundering regulations;
  • Establishing that depository institutions are not, under
    federal law, liable or subject to asset forfeiture for providing
    loans or other financial services to legitimate cannabis-related
  • Prohibiting a federal banking regulator from requesting or
    ordering a depository institution to terminate its customer
    relationship with a cannabis-related business unless the agency has
    a legitimate reason not based on reputational risk; and
  • Amending the reporting requirements for SAR and requiring
    FinCEN to issue guidance on transactions related to
    cannabis-related businesses that is “consistent with the
    purpose and intent of the SAFE Banking Act of 2021 and does not
    significantly inhibit the provision of financial services” to
    said businesses.

These changes would not only provide banks with the level of
comfort necessary to enter the market but would also allow for the
use of payment processing networks, like Visa and Mastercard, for
business-related transactions (currently, Visa’s position is
that use of cashless ATMs by cannabis dispensaries violates its
service rules).

While reform would be preferred by many, some argue it is not
necessary. Due to widespread state cannabis legalization and public
support for decriminalization, the number of financial
institutions—namely credit unions and state-chartered
banks—that recognize and respond to the substantial business
opportunities offered by this industry are accelerating at an
impressive rate. However, even with some credit unions and
state-charted banks supplying these services, this does not address
payment processing issues. Furthermore, these typically smaller
financial institutions have limits on deposits to ensure adequate

Why has reform not occurred yet?

Congress is not without options to address the cannabis
quandary. For example, it could revise the BSA by creating an
exemption for financial institutions providing services to cannabis
operators that are in compliance with state and local law—as
proposed by the SAFE Banking Act. Or Congress could deschedule
cannabis as a federally illegal drug under the CSA. Many in the
cannabis industry believed either of these changes would have
occurred by now. However, as we approach the 10-year anniversary of
state-initiated legalization and nine years since federal reform
was first proposed, the United States is no closer to cannabis
banking reform, despite growing bipartisan support and lobbying
efforts from organizations and businesses, including the American
Bankers Association, the American Financial Services Association
and the Credit Union National Association. This delay begs the
question—why is the cannabis industry still in limbo when it
comes to the provision of financial services despite what appears
to be widespread bipartisan support, at least in the House?

For whatever reason, the July 2022 version of the SAFE Banking
Act has yet to make it to the Senate floor for a vote, wasting away
in various committees until this year’s version of the bill is
essentially dead. While Republicans have begun to come around to
cannabis law change, particularly with respect to banking reform,
Democrats have moved away from singularly addressing banking and,
instead, are focusing on full federal legalization that includes
components of both a banking bill and social equity, a concept that
intends to use cannabis legalization to address those communities
disproportionally impacted by the War on Drugs. In doing so,
Congress has introduced no fewer than three cannabis-related bills
this year in addition to the SAFE Banking Act. With competing
bills, legislators’ support has been split, resulting in yet
another year of unwarranted deadlock that continues to harm the
cannabis industry.

While the SAFE Banking Act may not resolve all the issues
related to cannabis, banking reform would still be a great victory
for the cannabis industry. It would also signal the beginning of
federal de-stigmatization of the product, promote public safety by
discouraging participation in the illicit cannabis market, and help
cannabis-related businesses comply with tax laws. Congress would be
wise to heed the cries of both the cannabis and banking industries
and focus on at least passing banking reform in an effort to
legitimize and regulate the cannabis industry.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Cannabis & Hemp from United States

Indian Advertising Regulation & Law

Khaitan & Co LLP

The Indian advertising market has been subject to consistent and strong growth for some time, and this has been assisted by the adoption of technology and the massive growth in smart devices …

Choice Of Entity For The Startup Business

Crowell & Moring

While forming a new entity is generally quite easy, corporate structure and tax considerations play a fundamental role in a startup’s ability to raise capital. Prospective investors have expectations for how a “venture backable” business …

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s