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

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 businesses;
  • 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 capitalization.

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. 

Photo of Whitney Hodges Whitney Hodges

Whitney Hodges is a partner in the Real Estate, Energy, Land Use & Environmental Practice Group in the firm’s San Diego office. She is the leader of the firm’s Cannabis Industry Team and serves on the firm’s Pro Bono, Recruiting and Diversity &…

Whitney Hodges is a partner in the Real Estate, Energy, Land Use & Environmental Practice Group in the firm’s San Diego office. She is the leader of the firm’s Cannabis Industry Team and serves on the firm’s Pro Bono, Recruiting and Diversity & Inclusion committees, as well as numerous industry specific teams.