WASHINGTON — Democrats' control of Congress and the White House has brought financial institutions and cannabis businesses closer than ever to legislation enabling them to work together. But how exactly lawmakers enact pot banking reform has also become more complicated.
For the past year, Congress debated a bill barring regulators from penalizing banks and credit unions that service marijuana-related business in states where pot is legal. The Secure and Fair Enforcement Banking Act was a compromise
After the victories by President-elect Joe Biden and Senate Democrats, some observers urge quick action on the legislation. Others say the change of power presents an opportunity to go further and decriminalize marijuana altogether, which would give depository institutions more cover to cater to an industry under a legal cloud.
"By de-scheduling cannabis, it would remove the conflict immediately and banks would have no legal issues with working with cannabis businesses because they would be in no violation of federal law,” said Morgan Fox, a spokesperson for the National Cannabis Industry Association.
Democrats controlling the Senate could position Congress to pass the Marijuana Opportunity Reinvestment and Expungement Act, or MORE Act, which would remove marijuana from the list of scheduled substances under the Controlled Substances Act.
Sen. Elizabeth Warren, D-Mass., has also championed the Strengthening the Tenth Amendment Through Entrusting States Act, or STATES Act, which would exempt companies complying with state marijuana laws from the federal pot prohibition. Warren's bill gives banks extra cover to work with cannabis firms without the more extreme step of blanket legalization.
Some analysts believe the Democrats' election sweep means they will attempt passing the MORE Act before pursuing one of the other two bills as a backup.
"We are more likely to see legalization legislation attempted first before Congress looks to the STATES Act as a fallback,” said Jaret Seiberg, an analyst at Cowen Washington Research Group. “If you get legalization, you won't need special banking protections, because there won't be any illegal activity at the federal level anymore."
But, Seiberg added, if the Senate fails to pass either of those, "the spotlight then goes back to the SAFE Banking Act.”
A more welcoming political environment for marijuana banking also raises the odds that financial institutions will need to incorporate new compliance processes. This includes ensuring that any business they do with the legal marijuana sector complies with anti-money-laundering rules, regardless of any legislative reforms.
"The biggest undertaking for a financial institution interested in serving the cannabis industry is detailed compliance protocols and the staffing to implement them," said Rachel Pross, chief operations officer at the Oregon-based Maps Credit Union, which already provides services to the industry. "At Maps, we maintain a ratio of one full-time employee for every 40 cannabis business accounts."
The cannabis industry has long been seen as a golden opportunity for financial institutions, particularly community banks and credit unions, to expand revenue via a growing sector. But regulatory concerns about the federal marijuana ban have made many depository institutions nervous, despite continued efforts by states to legalize pot.
“The legal market in this country was somewhere around $13 billion to $14 billion this year and is expected to go up next year, and the year after that,” said Fox. “And the vast majority of that market is unbanked.”
As of June 2020, only about 500 banks actively provided service to marijuana-related businesses, according to the Financial Crimes Enforcement Network. The cannabis industry hopes that number will rise with legal reforms, removing financial services obstacles for many companies that have had to seek alternative options for obtaining credit, processing payments and storing funds.
Fox suggested a congressional effort to legalize marijuana would likely hit roadblocks in the short term, meaning a bill like the SAFE Banking Act could still be the path of least resistance.
“It’s going to be pretty complicated and I think an ongoing discussion about what exactly the best path forward is for more comprehensive legislation, but I think that there is a very, very good chance that we are going to see progress in the near future on more incremental changes," he said.
Banks have spent years advocating for Congress to pass the SAFE Banking Act. House Democrats passed that legislation in 2019 with roughly 90 Republicans voting “yes.” But the Republican Senate leadership wouldn’t put the legislation up for a floor vote.
According to Fincen, only roughly 700 depository institutions currently service the marijuana industry. And most of the institutions serve the industry by imposing heavy fees on clients due to the AML compliance and reporting burdens that they face.
Steven Kemmerling, CEO of CRB Monitor, said that the Fincen numbers could be inflated because banks and credit unions frequently submit suspicious activity reports if they think a transaction is related to a cannabis-related business.
“Fincen may include anyone who files any type of marijuana-related limited or priority SAR, even if the SAR is a stretch or not entirely accurate,” said Kemmerling. “For example, maybe the compliance officer filed a marijuana SAR on a hemp or CBD company, possibly because he or she doesn’t really understand the difference between marijuana, hemp and CBD.”
Saphira Galoob, principal and CEO of the Liaison Group, said she thinks that “probably fewer than 100 financial institutions actively service the cannabis industry.”
Just in 2020, Arizona, New Jersey, South Dakota, Montana, and Vermont passed ballot measures expanding the permissible use of marijuana.
“In Oklahoma, there are nearly 10,000 active licenses for cannabis businesses and fewer than 10 banks that serve them,” Galoob said. “Florida has 307 licenses and fewer than four banks.
Galoob estimated that in some states, the disparity is wider. In Arizona, for example, around 250,000 patients use medical marijuana as prescribed by a physician, but the state only has three banks servicing the industry. "It is a disproportionate number of financial services institutions correlative to the size of the market and number of businesses,” Galoob said.
Don Murphy, director of federal policies at the Marijuana Policy Project, noted that the marijuana industry has brought in billions in sales almost immediately after states have legalized the substance.
“Illinois just topped $1 billion in sales,” Murphy said. “Wouldn’t the banks love to have $1 billion … in electronic transactions going through their facilities?"
But even if the SAFE Banking Act or the STATES Act were enacted, some are skeptical that banks are going to take on new clients and see a windfall of new deposits.
“I think the current calculus for most banks is that the cost of conducting due diligence, and the potential for regulatory criticism, is just not justified by the money to be made,” said Ben Hutten, counsel at Buckley. “Until marijuana is no longer illegal under the Controlled Substances Act, I'm not sure that the SAFE Act or the STATES Act are going to result in a whole lot of traction.”
Seiberg said he still thinks that the main beneficiaries of marijuana banking legislation are the cannabis businesses themselves.
“It's going to mean they have more options for banking services, they're likely to pay less in fees, and they're going to be less exposed to the risk of having their banking relationship suddenly terminated,” Seiberg said. “If you're a bank, ... you want the legal protection. You don't want the risk that there's a change in administration and a very different perspective on cannabis, and suddenly, you're going to face enforcement action and litigation.”
