The New Congress Takes Its First Crack at Cannabis Reform


Advocates and those in Congress who have long been clamoring for cannabis reform are expected to get their first swing today at solving the biggest hurdle faced by the increasing number of state-legal cannabis businesses squirming to operate under federal prohibition.

Up for discussion at the US House’s Consumer Protection and Financial Institutions Subcommittee is whether Congress can intervene and push more banks to accept deposits from cannabis businesses. Even though a 2014 U.S. Treasury memo gave something of a go-ahead for financial institutions to work with cannabis businesses by providing specific guidance on how to do so, regulatory challenges and the underlying risk of working with businesses that remain illegal under federal law have left most cannabis businesses struggling to find financial partners.

Many operate and pay their bills, along with state and federal taxes, in cash.

A new bill would create a “safe harbor” from prosecution for banks who do business with state-legal cannabis operators, according to draft legislation circulated before the hearing.

It’s unknown how the newly-elected Democratic House, whose members largely support national legalization, want to legislate on cannabis. A fresh crop of new Democratic members have promised bold, progressive swings on climate change, gun control and voting rights. Today’s subcommittee hearing begs the question of whether members ultimately want to take a different tact on cannabis, perhaps offering a politically pragmatic solution that could help businesses immediately and have a better chance at passing the GOP-controlled Senate.

In many ways, that banking gets the distinction as the topic of the first cannabis-related hearing of the new Congress isn’t surprising given the resources that have flooded Capitol Hill in recent months representing the interests of what is now a global multibillion dollar industry. As Cannabis Wire reported in its series on the new politics of cannabis in Washington, industry players ramped up their lobbying efforts in the GOP-controlled Congress over the past couple of years as their businesses rapidly grew.

Cannabis is now legal for medical purposes in 33 states and adult-use in 10 and D.C. The  American Bankers Association is also weighing in on the hearing through written testimony, arguing the state-federal conflict over banks is creating broader problems for financial institutions than just whether to give cannabis businesses checking accounts. “The impact of the divide between state and federal law extends to any person or business that derives revenue from a cannabis firm – including real estate owners, security firms, utilities, vendors and employees of cannabis businesses,” the association said.

Neill Franklin, a former police commander who now fights for legalization as the executive director of the Law Enforcement Action Partnership (LEAP), wants Congress to tackle the criminal justice reform elements of federal prohibition, including relief for those behind bars or with past convictions.

Still, Franklin, who is expected to testify along with a panel today, told Cannabis Wire he believes that House Democrats were smart to start with the banking issue.

Assuming a bill can pass the House, Franklin said it will be harder for a GOP-controlled Senate to make a legitimate argument against lawful banking for the cannabis industry given the untenable status quo in most senators’ home states. The all cash cannabis businesses have created major safety issues for the businesses, their employees, and consumers, he said.

In fact, Franklin said, criminals on both sides might prefer the current system because cannabis businesses make for “soft” robbery targets, and shady cannabis operators can easily hide cash, masking illegal activity.

“It sounds like a policy that has been designed by criminal organizations,” said Franklin, a former police commander in Baltimore and with the Maryland State Police, of the cash system. “You would think the federal government would be the first ones in line to say ‘we’ve got to really track what’s going on with this industry.’”

Fiona Ma, the state treasurer of California who is also testifying today, told Cannabis Wire that the state believes the Treasury Department may be more aggressive than they have let on publicly. Anti-money laundering laws can trigger what’s known as a Matters Requiring Attention (MRA) notice, where banks are notified by Treasury officials that they must look into suspicious bank account activities or businesses that appears suspect. MRAs are kept secret, so there is no way to know for sure whether banks drop cannabis clients because they receive one.

But California’s deputy treasurer, Timothy Schaefer, told Cannabis Wire that state officials believe that is often what’s happening. Rather than deal with a potential headache, Schaefer said it’s likely that banks are simply dropping their cannabis clients if they receive an MRA.  

“What we have seen is what we strongly suspect is the result of [an MRA],” Schaefer said. “We see it often enough that we’re worried about it.”

Underlying Treasury officials’ MRA is a body of law that helps explain why banks don’t want to take the risk when it comes to cannabis businesses. The Bank Secrecy Act, the USA Patriot Act and the Racketeer Influenced and Corrupt Organizations (RICO) Act have different aims in terms of preventing dollars from moving around organized crime efforts or terrorist groups, but they coincide with federal cannabis prohibition and often result in the flagging deposits from cannabis businesses, according to a state of California analysis.

Ma said that she is pushing for a solution at the state level, but ultimately the problem should be resolved by Congress. “It really is up to the federal government to allow banking access due to … access to the federal wire,” she said.

Ma said she plans to advocate today for the “safe harbor” provision, a solution that bank executives have convinced her could work, and one also pushed by her predecessor, John Chiang. “They’ve said we want to get into this business but we need some sort of assurance or some sort of safe harbor,” she said of financial institutions.

In 2017, Rep. Ed Perlmutter, D-Colorado, introduced a similar version of the draft legislation that is likely to be considered over the coming weeks and months, the Secure and Fair Enforcement (SAFE) Banking Act of 2019. When  highlighting the need for cannabis businesses to have access to banking, Perlmutter has pointed to a 2016 incident when a security guard at a Colorado dispensary was shot during an armed robbery.   

The SAFE Banking Act is also expected, according to a subcommittee memo, to be supported by fellow House Democrat Denny Heck of Washington, and Ohio Republicans Steve Stivers and Warren Davidson.  

Attorney Steven Schain, who has both banking and cannabis business clients for the cannabis-focused Hoban Law Group, told Cannabis Wire his list of 54 banks that are willing to work with cannabis clients hasn’t gone up much in recent months.

He explained that for cannabis businesses that make deposits, banks must file a Suspicious Activity Report (SAR). The uptick in SAR reports toward the end of last year sent to the Financial Crimes Enforcement Network (FINCEN) doesn’t necessarily reflect more banks willingly engaging with cannabis businesses, as some hope, Schain said. Instead, the additional reports to FINCEN may reflect one-off agreements with friends of the bank or institutions that don’t know they have cannabis clients and soon drop them after filing a SAR, he said.

What about credit cards? One reason credit card companies have stayed away from cannabis businesses is because a SAR report would have to be filed for every swipe — a regulatory hurdle that wouldn’t be worth the processing fees they can collect, Schain told Cannabis Wire.

That’s why, he said, it will be important to see whether Congress’ fix encourages less regulation. If banks, especially smaller banks and other financial institutions, think the headache isn’t worth it, many may decide not to engage with cannabis businesses regardless of a new “safe harbor” law or not.

“Banks are concerned with two things – profitability and risk they can manage,” Schain said. “It depends how the law is implemented and enforced.”

Still, he thinks, depending on the details, a safe harbor provision could do the trick if implemented in a way that doesn’t overburden financial institutions. If that’s the case, a safe harbor bill could do the trick, he said, as financial institutions get more comfortable with the new regulatory structure. When one bank then jumped into the business of cannabis, other competitors would likely follow. “There would be a fear of missing out,” he said.

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