Written by Dario Sabaghi
On 27th September 2023, the U.S. Senate Committee on Banking passed a bipartisan bill to ease access to financial services for cannabis businesses by a vote of 14-9.
The vote on the Secure and Fair Enforcement Regulation (SAFER) Banking Act[1] is historical as its older version, the Secure and Fair Enforcement (SAFE) Act, passed several times to the House of Representatives. Still, the Senate has rejected it since it was introduced in 2019.
Therefore, the fact that the SAFER Banking Act began its journey in the Senate has been seen as promising for its final approval because it would likely undergo easier approval in the House of Representatives.
This time, the amendments sorted out seem to have convinced Republicans in the Senate, who have always been reluctant to approve cannabis-related bills, to support the proposed legislation.
The SAFER Banking Act is essential legislation for the national legal cannabis industry. This is because cannabis remains illegal at the federal level, being listed on Schedule I of the Controlled Substances Act (CSA) alongside heroin and other narcotics[2].
In fact, given its federal classification, it would be challenging for cannabis businesses to access financial services, even in states where cannabis is regulated.
As a result, cannabis businesses and their consumers are forced to operate within a cash-based economy. Using debit or credit cards for payments is generally tricky, although a few alternative methods have been employed in recent years.
Some financial institutions provide services to cannabis businesses through the guidance issued by the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury in 2014. This guidance clarified how financial institutions falling under the Banking Secrecy Act (BSA) definition, including banks and money services businesses (MSBs), can offer financial services to the cannabis industry while complying with their BSA obligations. It’s reported that hundreds of cannabis businesses have accessed financial services in this manner[3].
Still, this situation could present risk management and regulatory compliance challenges, especially concerning anti-money laundering laws.
That’s why, If passed, the SAFER Banking Act would be a breakthrough for the cannabis industry in the U.S.
In summary, the SAFER Banking Act aims to facilitate access to deposit accounts, insurance, and various financial services for cannabis businesses. This legislation would prevent federal regulators from penalizing financial institutions for serving cannabis companies, their owners, and employees.
The passage of the SAFER Banking Act would enable financial institutions to expand their offerings as cannabis businesses would have access to capital, banking services, and payment methods that will benefit the entire industry, reducing operational risks associated with the substantial cash flow.
It’s worth noting that while the SAFER Banking Act’s key provisions offer protections against specific criminal, civil, and administrative penalties that could arise from a financial institution providing services to cannabis-related businesses, the Act doesn’t legalize cannabis. Instead, it would resolve the conflict between federal and state laws concerning banking, lending, and insuring state-legal cannabis businesses.
Although no enforcement actions taken against banks or credit unions solely for serving state-legal cannabis businesses have yet been reported, the absence of such actions doesn’t guarantee immunity from future enforcement. The fear of potential enforcement has been a significant deterrent in recent years.
Therefore, the SAFER Banking Act will retain specific guidelines and restrictions, mainly related to due diligence and ongoing monitoring of suspicious activities, which align with the standard practices of banking and financial institutions in highly regulated industries.
In practical terms, the SAFER Banking Act consists of various financial aspects of the cannabis industry.
For instance, the proposed legislation safeguards financial services involved in activities like authorizing, processing, clearing, and facilitating the payment of funds, including electronic transfers, credit cards, and other means.
The proposed banking reform treats income from legal state-level cannabis businesses as standard income for mortgage loan eligibility. It also shields mortgagers and servicers from federal liability for working with qualified borrowers who use cannabis-related income for mortgage payments.
The bill also protects financial institutions, agencies, and other parties involved in mortgage loans from criminal, civil, or administrative forfeiture solely for providing financial services to cannabis businesses.
Eventually, the SAFER Banking Act addresses the challenges hemp-related businesses face, requiring federal banking regulators to update guidance on providing financial services to them. This guidance includes compliance obligations and best practices for hemp-related businesses and service providers, such as payment processing.
The SAFER Banking Act comes amid growing momentum for adult-use cannabis in the U.S.
The Drug Enforcement Administration (DEA) is likely to reclassify marijuana from Schedule I to Schedule III under the Controlled Substances Act (CSA), following recommendations from the Department of Health and Human Services (HHS) and the Food and Drug Administration (FDA), according to several reports[1]. However, it remains uncertain how this rescheduling will affect the cannabis industry’s access to financial services. While some risks may decrease, they won’t disappear entirely, as it’s unknown how this change would influence the risk tolerance of banks, credit unions, and other financial service providers.
But overall, the passage of the SAFER Banking Act would have a significant impact on financial institutions as most U.S. states have regulated cannabis somehow.
[1] https://www.democrats.senate.gov/imo/media/doc/safer_section_by_section.pdf
2] https://www.dea.gov/drug-information/drug-scheduling
[3] https://www.fincen.gov/sites/default/files/shared/305326_MJ%20Banking%20Update%204th%20QTR%20FY2021_Public_Final.pdf
Source: Weed World magazine issue 167
Image: Adobe Firefly licensed.