The 116th U.S. Congress is inching its way toward banking reform for legitimate cannabis businesses, but the landmark H.R. 1595 bill still has an uphill battle in its future. While 11 states have legalized recreational cannabis and 33 states have medical marijuana laws on the books, marijuana businesses have struggled to find access to the banking system.
Much of the cannabis industry is relegated to cash-heavy operations, which can’t be effectively taxed or regulated. Cash-based operations are vulnerable to theft, laundering, and other illicit acts. The Secure and Fair Enforcement (SAFE) Banking Act of 2019 has seen surprising interest by House and Senate committees, which is a welcome departure from the Republican-controlled Senate’s previous indifference to the issue.
The State of Cannabis Banking
Cannabis businesses have almost no backing from financial institutions due to banks’ reluctance to go against federal law. The fear of federal prosecution has kept almost all banks away from the cannabis industry, except for a few local credit unions who are willing to lend to marijuana businesses. The largely cash-driven industry makes it difficult to track and tax cannabis business earnings, which can open the door for money laundering and theft.
The banks that do lend to marijuana businesses charge high monthly fees starting in the thousands. Small cannabis businesses aren’t always able to pay for excessive bank fees on top of complying with state regulations. Opening up access to financing from banks could help business owners who don’t have access to alternative financing options.
Banking is just one obstacle that’s affecting cannabis entrepreneurs. Section 280E of the Internal Revenue Code prevents marijuana companies from deducting business expenses. Changing this rule would also drastically help marijuana business owners. Fortunately, many bills are intending to overhaul federal law with marijuana legalization.
SAFE Cannabis Banking Act
Democratic Rep. Ed Perlmutter has been pushing versions of the SAFE Banking Act since 2013 to protect licensed pot businesses from federal prosecution. Under the 2019 version of the bill, its purpose is to “increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses.” Up until this year, Perlmutter wasn’t successful in getting his bill to be presented at a committee hearing.
On February 13, history was made as the U.S. House of Representatives held the first-of-its-kind hearing on the financial obstacles faced by pot businesses. This momentous occasion came at the heels of multiple cannabis reform bills including Senators Cory Gardner (R-CO) and Elizabeth Warren’s (D-MA) STATES Act, which seeks to protect state cannabis laws from federal interference.
On March 7, 2019 the SAFE Act was introduced to a House committee by Perlmutter and referred to the Judiciary and Financial Services Committees. The Judiciary committee voted 45 to 15 to advance the bill to the full chamber of the House. Co-sponsor Jeff Merkley (D-OR) introduced a companion bill in the Senate and the bill was referred to the Senate Banking, Housing, and Urban Affairs Committee.
On July 23, the Senate Banking, Housing, and Urban Affairs Committee, led by Sen. Mike Crapo (R-ID), held a hearing on the marijuana industry’s banking woes. After the hearing, chairman Crapo said that “a case has been made pretty strongly here” and that the complexity of the issue requires careful consideration. Previously, Sen. Crapo had dismissed the idea of looking at the cannabis banking problem as long as the substance was federally controlled.
During the Senate committee hearing, witnesses testified about the need for access to financial institutions to increase financial transparency and reduce safety risks in the cannabis industry. Co-sponsor Cory Gardner said that “the states are leading on this issue, and the federal government has failed to respond. It has closed its eyes and plugged its ears and pretended the issue will go away. It won’t.” Other witnesses included:
- Co-sponsor Jeff Merkley (D-OR)
- Credit Union National Association (CUNA) representative Rachel Pross
- American Bankers Association (ABA) representative Joanne Sherwood
- Smart Approaches to Marijuana (SAM) Vice President of Government Affairs Garth Van Meter
- LivWell Enlightened Health CEO John Lord
Even though the SAFE Act has over 200 co-sponsors, has advanced through multiple House committees, and has an expected floor vote in its future, Republican support is lacking in the Senate. Gardner reports he’s in constant communication with Senate Majority Leader Mitch McConnell, who decides which bills get onto the Senate chamber floor. Unfortunately, Republican attendance at the Senate hearing was non-existent except for Crapo and Gardner.
Future of Cannabis Banking
The SAFE Banking Act is only part of the solution to years of aggressive prohibition. If protections for cannabis companies from federal prosecution are made into law, cannabis-friendly states will be able to enrich their communities and regulate the industry better, while reducing black market competition. Recent cannabis-related bills are attacking marijuana issues on all fronts from the lack of research to social equity concerns.
Credit unions continue to lead the cause for serving cannabis operators. For example, GFA Federal Credit Union in Massachusetts became the first institution to openly serve cannabis businesses. Serving cannabis companies requires manual monitoring of deposits and detailed reports for federal regulators to avoid any legal troubles. Still, many banking institutions and cannabis businesses are hopeful for change very soon.
The success of the SAFE Act is tenuous, but Senate hearings signal an increased acceptance for debating a previously unsavory issue. As more states continue to legalize medical or recreational cannabis, more lawmakers will be beholden to a pot-friendly constituency. Banking reform would not only help current marijuana businesses and customers, but also pave the way for cannabis businesses to those who don’t have access to private equity.