Background – Legislation Effects

The Controlled Substances Act of 1970 made all forms of cannabis an illegal Schedule 1 substance. Today, 33 states, plus the District of Columbia, have legalized marijuana for medical use, and 11 states allow recreational use of marijuana for adults over the age of 21.

On December 20, 2018, the Agricultural Improvement Act of 2018 (2018 Farm Bill) passed, and hemp is no longer considered a Schedule 1 controlled substance. The production of hemp (defined as containing no more than 0.3% THC) is now governed by a regulatory plan established by the USDA, individual states, or local tribal governments. In December 2019, Federal regulators, along with the Conference of State Bank Supervisors (CSBS) issued joint guidance on providing financial services to Hemp-Related Businesses (see separate article from CRI titled “Providing Banking Services to Customers Engaged in Hemp-Related Businesses” for further discussion of this joint guidance).

Financial institutions in states that have legalized marijuana usage are in a difficult spot. How does a financial institution determine who to provide banking services to when state and federal laws conflict? To serve or not to serve marijuana-related businesses (MRBs), that is the question. While Federal regulators have not yet issued guidance related to providing financial services to MRBs, legislation is moving through Congress, and other sources of guidance are available.

Navigating Current Legislation

Landmark legislation was passed on September 25, 2019, by the U.S. House of Representatives. The Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act) allows financial institutions to provide banking services to legitimate cannabis-related businesses and ancillary businesses that serve them by prohibiting federal regulators from taking punitive measures. The SAFE Banking Act establishes a safe harbor for any financial institution that provides banking services to a legitimate cannabis-related business that holds and maintains a license from a state or local government. The SAFE Banking Act, as passed by the U.S. House of Representatives, has been sent to the U.S. Senate for consideration.

As the SAFE Banking Act continues through the U.S. Congress, affected financial institutions must navigate the contradiction between federal and state law when deciding to provide banking services to MRBs. Guidance exists that can be used as a source of reference when considering compliance risk and overall strategic risk to the financial institution.

FinCEN guidance issued in February 2014, “BSA Expectations Regarding Marijuana-Related Businesses,” remains the most pertinent guidance available to financial institutions from a compliance perspective. This guidance provides financial institutions with information on filing Suspicious Activity Reports (SARs), Currency Transaction Reports (CTRs), and FinCEN Form 8300. However, the guidance does not provide a definition of MRBs. Advance Financial Crimes Professionals Worldwide published an article “Defining Marijuana-Related Business” that assists in this area by discussing a three-tier system for classifying MRBs.

Another tool for financial institutions is the “CSBS Cannabis Job Aid,” located on the CSBS website, which is periodically updated by the CSBS. This job aid is an examiner reference tool that provides background information and state-specific information for both hemp and marijuana. It is a useful reference tool to understand how state examiners are approaching examinations for financial institutions that provide financial services to cannabis-related businesses.

Moving Forward

As the cannabis industry continues to evolve, staying abreast of developments is key for financial institutions that currently provide or are considering providing banking services to this industry. The pace of guidance has not kept up with the explosive growth of the industry, which is largely unbanked. The financial institutions group at CRI continually monitors the status of pending legislation and regulatory guidance as it is considered and issued. Our team of advisors is always ready to assist your financial institution in navigating this uncertainty.