There has been much discussion around the SAFE Banking Act, with some hailing it as a panacea for the challenges cannabis businesses have experienced in securing banking. But what would the SAFE Banking Act actually do if signed into law? 

Reviewing what's in the SAFE Banking Act

The Secure and Fair Enforcement (SAFE) Banking Act has been floating around Congress for years now, recently gaining traction anew under the administration of President Joseph R. Biden Jr. While intended to improve accessibility to banking services for state-legal cannabis businesses, the bill also adds great momentum to the movement for federal cannabis reform.

Importantly, the SAFE Banking Act codifies existing regulatory realities instead of creating a new regulatory framework for banks. The bill's most important provision reads:

"… a depository institution, entity performing a financial service for or in association with a depository institution or insurer that provides a financial service to a cannabis-related legitimate business or service provider, and the officers, directors and employees of that depository institution, entity or insurer may not be held liable pursuant to any Federal law or regulation (1) solely for providing such a financial service; or (2) for further investing any income derived from such a financial service…"

This codifies into federal law the decision already made by the U.S. District Court of Massachusetts on August 21, 2018 dismissing claims against defendant Century Bank. The decision notes that the plaintiffs in that case failed to demonstrate that providing banking services violates any laws, particularly Racketeer Influenced and Corrupt Organizations Act (RICO) laws – especially if that institution was compliant with Treasury Department guidance.

What changes would the SAFE Banking Act make?

If the SAFE Banking Act only gives the force of law to existing regulations and reinforces prevailing legal precedent, does it change anything? There are eight key provisions that will impact how cannabis banking is done:

Change #1: It eliminates federal liability for cannabis-friendly financial institutions

From its inception, the legal cannabis industry and associated ancillary services operated on a perception of risk, as opposed to actual risk, of civil and criminal liability. As a practical matter, compliant operators have only experienced occasional consequences, so the industry is steadily moving into mainstream commerce and acceptance, with only a few inevitable hiccups here and there. Fortunately, these hiccups have not been enough to derail the industry's progress. 

However, the elimination of federal liability for providing financial services is an important foundation for providing industry access to these services, as it allows institutions to make objective decisions without concerns regarding the legality of cannabis.

Change #2: The SAFE Banking Act begins to address lending issues

Commercial lending to the industry has been restrained largely by the theoretical risk of forfeiture of the borrower's assets by law enforcement. The SAFE Banking Act partially addresses this by prohibiting forfeiture of the lender's interest in the assets.

Change #3: It reassures financial institutions by normalizing the cannabis industry

By eliminating the risk of violating the federal cannabis prohibition, and specifically including insurers, many financial service providers will feel more comfortable supporting the cannabis industry. This includes commercial and investment bankers, securities brokers and exchanges and other fiduciaries. This would clearly go a long way toward normalizing access to the same range of essential services enjoyed by all legal industries.

Change #4: The SAFE Banking Act codifies existing federal cannabis banking regulations

FinCEN issued its guidance for banking marijuana-related businesses (MRBs) like dispensaries and cultivation facilities back in 2014. Federal and state bank examiners and regulators adopted the protocol of requiring their client banks to adhere to the Federal Financial Institutions Examination Council (FFIEC)'s bank examination manual, which included the 2014 FinCEN protocol, when working with the cannabis industry.

All three federal deposit insurance agencies – the FDIC, NCUA, and OCC – have officially acknowledged this as their policy for the past several years at least. The SAFE Banking Act mandates that they continue to do so. In this regard, one may expect little to no change in current examination standards.

Change #5: Defines state-legal hemp and ancillary cannabis business profits as legitimate

FinCEN defines a marijuana-related business, for the purpose of complying with its 2014 guidance, as an entity that "dispenses, cultivates or manufactures marijuana." Any enterprise not conforming to this definition is excluded from compliance with this guidance. Financial institutions are recommended to limit their Bank Secrecy Act (BSA), anti-money laundering (AML), know your customer (KYC) and enhanced due diligence (EDD) reporting and supervision protocols for indirect entities such as ancillary businesses. Instead, those businesses should be held to the same standards as any other high-risk sector. Fincann has corresponded with FinCEN on this topic.

Based upon the plain text of the legislation, proceeds from a transaction involving activities of legitimate hemp or ancillary cannabis-related business are not considered proceeds from unlawful activity, and so, are not subject to anti-money laundering laws. Among other things, this clarifies that the filing of marijuana-related suspicious activity reports (SARs) for hemp, CBD and cannabis-related ancillaries is not required nor encouraged under FinCEN protocol. Interestingly, state-licensed test labs, while plant-touching entities, also fall under these criteria.

Change #6: Improves industry-wide access to business checking accounts

Although thanks to the energy and courage of pioneers in both banking and the cannabis industry, there are now just enough financial institutions throughout the country to provide compliant, transparent, sustainable commercial depository accounts to all entities across all industry sectors, overall access to a range of essential financial services remains limited. Passage of the SAFE Banking Act would go a long way to relieving many of these constraints.

Change #7: Credit card transactions would be considered legitimate

The major credit card networks, including Visa, MasterCard, American Express, and Discover, are on record stating that passage of the SAFE Banking Act will not affect their prohibition on the use of their networks to process cannabis transactions based upon their policy of prohibiting illegal goods and services. However, the legislation specifically absolves credit card transactions of liability. We will wait and see if they continue their policy after passage on the technical grounds of cannabis still being federally illegal.

Change #8: This builds on growing cannabis reform momentum

Passage of the SAFE Banking Act would send a clear and encouraging signal to all stakeholders that momentum is strong and growing for mainstream acceptance of the cannabis industry. Short of outright federal legalization and regulation, this would be important progress for the industry, which desperately needs reform in taxation, research access and several other sectors.

Bankers can offer compliant cannabis banking today

While the passage of the SAFE Banking Act is certainly a moment worth celebrating, and although theoretical risks remain, bankers eager to get involved in the legal cannabis industry should be aware that nothing is holding them back currently. By adhering to the AML/BSA standards set out by multiple federal agencies, banks can prevent the introduction of dirty money into the U.S. banking system, while also working alongside legitimate and lucrative cannabis businesses. As Congress begins a full-court press on federal cannabis reform, the time is now for banks to onboard clients working in the legal cannabis industry.