It’s “Safe” to Assume That Politics Will Delay the Marijuana Industry’s Access to Financial Institutions
By James A. Kohl, Esq.
In 2015, I wrote an article for the Communiqué outlining the problems faced by the marijuana industry because it was blocked from access to financial institutions. The fundamental problem the industry faced was twofold. First, under federal law, marijuana remains illegal and remains a Schedule I drug pursuant to the federal Controlled Substance Act. 28 U.S.C. § 801 et. seq. Second, financial institutions are prohibited from accepting funds that were derived from criminal activities. As a result, the Federal Reserve remains unwilling to approve a master account for financial institutions that service medical marijuana clients. A master account allows a financial institution to deposit money into a Federal Reserve branch which is converted into an electronic credit. The institution can then transfer money between banks, using the primary nine-digit routing transit number.
In the past five years, Americans have become open to the cultivation, manufacturing, and sale of marijuana products. Even though marijuana is legal in 11 states for adults over the age of 21, and legal for medical use in 33 states, banks remain unwilling to accept funds that are derived from marijuana operations for fear of punitive regulatory action. In interviews with representatives from a local bank and a nationally associated bank, they both expressed that they remain strongly averse to accepting funds from marijuana businesses notwithstanding state regulations permitting them. Additionally, both institutions stated that they audit accounts that are suspected to be related to regulated marijuana businesses. If the audits determine that the accounts are associated with regulated marijuana businesses, they close the accounts and return the funds. Neither financial institution were opposed to taking the money per se. For them, the math is simple; deposits from regulated marijuana businesses are a mere fraction of the total deposits they control. They are not willing to risk federal discipline and possible prosecution for such a relatively small amount of funds.
As a result, marijuana businesses are literally sitting on piles of cash. The problem is not limited to companies that are directly involved in the cultivation, processing, or sale of marijuana. Financial institutions refuse to accept funds from service providers of state-sanctioned marijuana businesses. The accounts of lawyers, plumbers, landlords, etc. have been closed and returned to their owners because they have accepted funds from regulated marijuana businesses.
To alleviate the problem, on March 7, 2019, Representative Ed Perlmutter (D-CO) introduced the Secure and Fair Enforcement (SAFE) Banking Act. SAFE will stop federal banking regulators from punishing financial institutions that provide banking services to state-regulated marijuana businesses and their related providers. Under this bill, federal regulators will not be allowed to do the following: (1) terminate or limit deposit insurance on the grounds that the financial institution provides services to state-regulated marijuana businesses; (2) prohibit or discourage financial institutions from providing financial services to state-regulated marijuana businesses; (3) recommend or encourage financial institutions to not offer banking services to account holders that are affiliated with state-regulated marijuana businesses; (4) discipline or take adverse action related to a loan that was made to individuals on the sole basis that the individual owns a regulated marijuana business, or leases real estate or equipment to a regulated marijuana business; or (5) penalize financial institutions that chose to provide financial services to regulated marijuana businesses or their providers.
SAFE quickly gained support in the House, and on September 25, 2019, the bill was passed. There are currently 206 members of the House of Representatives who have cosponsored the bill. Almost one half of House Republicans voted to enact SAFE. When the House passed the bill, it appeared that relief was on the horizon for state-regulated marijuana businesses and their providers.
Pundits were hopeful that SAFE would make it through the Senate when Mike Crapo (R-ID), the Senate Banking Committee Chairman, stated that he would put the bill up for a Committee vote in September. That proved to be false hope, as Senator Crapo has not called for a vote and appears to be unlikely to do so anytime in the near future.
On December 18, 2019, Senator Crapo published a laundry list of concerns about SAFE. He stated, “I remain firmly opposed to efforts to legalize marijuana on the federal level, and I am opposed to legalization in the state of Idaho.” Senator Crapo further stated that he was concerned that SAFE did not address the level of THC in marijuana, marketing to children, the lack of research on the effects of marijuana, and the need to prevent criminals from laundering their money into the financial system via the marijuana industry. Senator Crapo wants a full referendum on marijuana as opposed to passing SAFE to ensure the denial of access to regulated marijuana business to financial institutions.
According to a Pew Research Center Survey published in November 2019, two thirds of Americans favor legalization of marijuana in some form. Idaho, however, remains firmly opposed to legalizing marijuana. Senator Crapo’s holdup of SAFE illustrates the old axiom that all politics are local. Until marijuana is removed from Schedule I or SAFE is passed by the Senate and signed into law, Nevada’s regulated marijuana businesses will remain caught in the middle of politics.
About the author:
James A. Kohl is an attorney, mediator, and arbitrator who has practiced in all phases of commercial litigation for over 20 years. He handles a variety of cases in multiple industries and fields, and advises business owners in the creation, acquisition, and disposition of entities and real estate. jkohl@howardandhoward.com.
This article was originally published in the “Cannabis Law” (April 2020) issue of Communiqué, the official publication of the Clark County Bar Association.
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