The House Financial Services subcommittee on Consumer Protection and Financial Institutions held a hearing Thursday entitled “Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses.” Just the fact that the hearing took place is being seen as a win the Congressional Cannabis Caucus and the cannabis industry at large as it appears that members of both parties are finally willing to tackle the issue of the lack of access to financial services for state-legal cannabis businesses.
The hearing came just days after Oregon Sen. Ron Wyden proposed legislation to allow legal cannabis markets the luxury of doing business without the threat of federal intervention. The proposal aims to remove marijuana from the federal controlled substances list altogether thus removing federal criminal penalties that come with it. A hearing has not yet been scheduled for Wyden’s proposed bill.
“The American voters have spoken, and continue to speak, and the fact is you can’t put the genie back in the bottle. Prohibition is over.” — Rep. Ed Perlmutter of Colorado
At Thursday’s hearing, lawmakers discussed the Secure and Fair Enforcement of Banking Act of 2019, aka the SAFE Banking Act, a legislative proposal backed by both Democrats and Republicans that could remove banking restrictions for legitimate cannabis businesses. The bill which began its evolution as far back as 2013 would end restrictions on the Federal insuring of deposits and prevent federal regulators from taking adverse actions against banks and credit unions doing business with legitimate cannabis businesses. Today, the bill has at least 20 sponsors in the House.
For years now, because cannabis is federally illegal, the vast majority of banks have been unwilling to do business with cannabis operations. Furthermore, some banks have expressed apprehension about working with ancillary businesses that aren’t directly handling cannabis but that provide services to cannabis-touching businesses. Although the number of banks and credit unions willing to deal with cannabis concerns is growing, it’s only amounted to the metaphorical drop in the bucket.
As a result, for the most part, the industry has been forced to do business in cash only. That includes paying employees, vendors, taxes, and anything else that requires a transfer of funds from one party to another. This might not be a problem if cannabis were still a cottage industry, but cannabis is now a multi-billion-dollar nationwide market. According to a Tweet by Perlmutter, 47 states plus the District of Columbia — 97.7% of the population — have legalized some form of recreational or medical marijuana or CBD. The situation has been called “untenable” by U.S. Attorney General Nominee William Barr. And just about everyone agrees.
Yes, individual states have knocked around the possibility of creating state-sponsored banks specifically to alleviate the cannabis cash quandary, but so far attempts have failed. And, all the same, the consensus is that a nationwide solution would be far superior to a patchwork of state-level solutions, and it’s the United States Congress that needs to act on cannabis banking legislation.
However, the issue puts the Federal government in a quandy. How can the Feds allow banks to do business with companies that are breaking federal law? Although the banking issue is a top priority for cannabis industry advocates and is also the issue that’s most likely to succeed in gaining congressional blessings, it really is “putting the cart before the horse,” as Mason Tvert of the Marijuana Policy Project puts it.
But putting the cart before the horse may turn out to be a good thing for the industry for a couple of reasons. First, it would solve the banking issue. Second, it would spur Congress to take action on ending prohibition and putting the power to regulate cannabis into the hands of the individual states.
"Lawmakers are not being asked to weigh in on whether marijuana should be legal or not. They are simply looking at whether banking services should be available to these businesses in states where it is already legal," — Mason Tvert of the Marijuana Policy Project, an advocacy group.
The “first dominoes that should fall”
In 2013, a U.S. Department of Justice memo provided federal prosecutors with some guidance in the matter asking them to refrain from using agency resources to prosecute state-legal cannabis companies. The memo led to another 2014 memo by the Financial Crimes Enforcement Network that was meant to alleviate banks and credit unions' concerns about serving cannabis businesses. Neither of these actions had much of an effect on banks’ decisions to avoid doing business with cannabis-touching operations.
A few years later, in 2017, the nominee for Treasury Secretary at the time, Steve Mnuchin, when pressed on the banking issue, said, “I will work with Congress and the President to determine which provisions of the current tax code should be retained, revised or eliminated to ensure that all individuals and businesses compete on a level playing field.”
However, in early 2018, former Attorney General Jeff Sessions rescinded the DOJ memo. But later in the year William Barr, the nominee to succeed Sessions, said he would uphold the 2013 memo. Barr characterized the current policy gap between states and the Federal government as “untenable” and called it incumbent upon Congress to address the situation with a Federal policy that applies to all states rather than, as he put it, “cutting deals” with individual states. Barr further went on to describe the current situation as akin to “a backdoor nullification of federal law” and that it is “breeding disrespect for the federal law.”
But that “disrespect” just may be a good thing. About two-thirds of Americans and more than 30 U.S. states already disrespect or disregard federal cannabis policy. It’s time that Congress do the same.
“I think it’s a mistake to back off on marijuana. However, if we want a federal approach, if we want states to have their own laws, let’s get there, and let’s get there the right way.” — U.S. attorney general nominee, William Barr
While all this was happening, the Republican-controlled Congress took no action to alleviate the banking problem. In fact, they took no action whatsoever on cannabis policy reform other than to temporarily tie the hands of the Department of Justice and the Drug Enforcement Agency to prevent them from going after state-sanctioned cannabis operations.
“It’s a new Congress, with new leadership in the House, and I think we have a real shot getting this issue resolved this session. … That’s why we’re seeing this hearing so early in the year.” — Aaron Smith, executive director of the National Cannabis Industry Association.
In the Fall of 2018, Earl Blumenauer, Founder, and Co-Chair of the Congressional Cannabis Caucus sent a memo to congressional leaders introducing his blueprint for action to be taken during the 116th Congress to implement federal cannabis policy reforms. In the memo, Blumenauer identified the access to banking issue as one of the “first dominoes that should fall.”
“With Chairwoman Waters scheduling a hearing on the historic legislation by Congressmen Heck and Perlmutter, we are finally making progress toward addressing the irrational, unfair, and unsafe denial of regular banking services for state-legal marijuana businesses around the country. Congressmen Heck and Perlmutter have been tireless champions of this new and vibrant industry and this is an important step forward toward ultimately ending the failed prohibition of marijuana.” — Rep. Earl Blumenauer.
What happened at the hearing
At the hearing, banking and credit union executives, representatives from law enforcement, and stakeholders in the cannabis industry went before lawmakers to state their case for a federal solution to the banking problem.
“We need these marijuana-related businesses and employees to have access to our banking system … to prevent tax evasion, money laundering, and other white-collar crime. Our bill is focused solely on taking cash off the streets and making our communities safer.” — Rep. Ed Perlmutt
It became clear during the hearing that finding a congressional solution to the problem is has bipartisan support. Cosponsors of the SAFE Banking Act include Democratic Rep. Denny Heck of Washington State, and Republican Reps. Steve Stivers of Ohio, and Warren Davidson of Ohio. Also, a bipartisan group of lawmakers circulated a draft of the bill of prior to the hearing.
“The absence of a broader, permanent regulatory framework continues to keep nearly all banks out of this growing industry despite a clear interest. Today’s hearing will allow us to begin consideration of draft legislation to bring transparency, accountability and address a major driver of violent crime in this space.” — Rep. Gregory Meeks of New York, chair of the subcommittee
Names testifying at the hearing included California State Treasurer Fiona Ma, Corey Barnette, owner of District Growers Cultivation Center & Metropolitan Wellness Center in Washington DC., and Gregory Deckard, a bank executive speaking on behalf of the Independent Community Bankers of America.
Ma, whose state is home to the largest legal cannabis market in the world, painted the hearing as a critical step forward. “One of the surest ways of bringing a business out of the shadows and collecting lawfully-imposed taxes is to promote access to the economy’s banking and payments systems,” Ma said.
Representative Dina Titus echoed that point and said that her home state of Nevada “is proof that the era of marijuana prohibition is over” and that it’s “time for the federal government to start acting like it.”
“The Committee is undoubtedly aware that cannabis businesses are not alone in struggling to gain access to banking — even though theirs is the most difficult situation. Any business that handles significant amounts of currency is also subject to greater scrutiny by the financial services industry for all of the reasons that are well understood by members of this committee.” — California State Treasurer Fiona Ma
According to Ma, consumers in Colorado purchased more than $1.5 billion worth of legal cannabis products in 2018, while in California, the cannabis market is expected to surpass $5 billion by 2020.
“Today, after six years, we finally have a hearing, and it comes too late, Too late to prevent dozens of armed robberies in my home state of Washington. Too late for Travis Mason... a 24-year-old Marine veteran in Aurora, Colorado, who reported for work as a security guard at Green Heart Dispensary on June 18, 2016, and was shot dead that night by an armed robber… We have the power in this committee to prevent murders and armed robberies. We must use it, and we must use it now because we are already late.” — Rep. Denny Heck, cosponsor SAFE Banking Act
What banks and credit unions want
The banking industry is generally in agreement that SAFE-like legislation is needed. However, lawmakers have introduced two bills that take different approaches to the problem. While one has been favored by the Independent Community Bankers of America, the other is more likely to be favored by bigger banks.
The proposal which seems to be preferred by larger banks is a bill sponsored by Democratic Sen. Elizabeth Warren of Massachusetts, a longtime nemesis of big banks. However, Perlmutter’s solution which covers depository institutions doesn’t address the other various roles that big banks often play in the financial system, and is the preferred solution of independent community banks.
"Credit unions do not have a position on the federal legalization of cannabis. The simple fact of the matter, however, is that many credit unions operate in states and communities that have made cannabis usage or growth legal for medicinal and/or recreational purposes," Pross said. "We strongly believe that financial institutions should be permitted to lawfully serve businesses that engage in activities that are authorized under their state laws, even when such activity may be inconsistent with federal law." — Rachel Pross, chief risk officer for Maps Credit Union in Salem, Oregon
A major banking group, the American Bankers Association, pointed to the risk of theft and crime that comes with doing business in cash as a public safety issue, as did Major Neill Franklin, a veteran of the Baltimore and Maryland state police departments.
The Independent Community Bankers of America voiced its support for the measure:
"[The ICBA] hopes to work with this committee to advance the SAFE Banking Act of 2019 to create a statutory safe harbor so that banks like mine are free to serve the growing cannabis industry, should we choose to do so, without fear of legal and regulatory repercussion… [Currently], the legal stakes are simply too high for me, my board, and my investors to tolerate.” — Gregory Deckard, chief executive of State Bank Northwest in Washington, speaking on behalf of the ICBA.
The American Bankers Association, a trade group whose members include large banks, circulated a letter to the Financial Services Committee ahead of Wednesday’s hearing. In the letter, the ABA ruminates that roughly three-quarters of member banks have had to terminate a banking relationship or turn away a potential customer because of an association with cannabis.
“Many of the examples provided by our members are related to customers with indirect connections to the cannabis industry — such as small businesses and entrepreneurs who lease space or sell their goods and services to dispensaries or growers. Without a change to federal law, that entire portion of economic activity in legal cannabis states will continue to be marginalized from the banking system… The SAFE Banking Act is not a cure-all for the cannabis banking challenge, and many financial institutions will undoubtedly decide that the industry is still too high-risk for their bank. Nevertheless, the bill will give some added clarity and legal protection.” — A letter to the Financial Services Committee by the American Bankers Association
The opposition
While the hearing Wednesday is widely viewed as a good sign for the cannabis industry, not everyone at the hearing was with the program. Some Republicans still object to relaxing banking rules without first legalizing marijuana at the federal level. The strongest opposition came from representatives of Southern states where cannabis has not been legalized.
In a recent interview, Rep. Patrick McHenry, a Republican from North Carolina and the ranking member of the House Financial Services Committee, said lawmakers “are a long way from writing policy” related to cannabis banking.
Missouri Republican Rep. Blaine Luetkemeyer expressed concern that relaxing banking restrictions while marijuana remains illegal at the federal level would create confusion. He also suggested that Congress handle the issue the same way it handled hemp, and remove it from the list of federally controlled substances.
“We must remember we are dealing with an illegal industry on the federal level. As far as I know, the House Financial Services Committee does not have jurisdiction over de-scheduling a drug. In my opinion, we are putting the cart before the horse by addressing this issue here ... The hemp industry showed us how to solve this problem — by de-scheduling the substance." — Missouri Republican Rep. Blaine Luetkemeyer
Although taking the same tack as was taken to loosen restrictions on hemp would seem like the right approach, the backward approach of starting with banking might open the door to additional reforms and, in the longer term, put an end to the federal prohibition of marijuana.
“In order to best support the states that have had the good judgment to license and regulate businesses to produce, manufacture, or distribute cannabis, it is critical to address this aspect of the failed policy of federal marijuana criminalization as part of any reform package moving forward.” — NORML
Lawmakers from states where marijuana is not legal, both Democrats and Republicans, are being relatively silent on the issue. Although it is still unclear if the measure has enough support to become law, the hearing is being seen by the cannabis industry as a significant development. However, any legislation drafted and passed by the House will be a challenge to push through the Republican-controlled Senate.