This Is What You Need to Know About Cannabis Banking Laws in 2021
A roundup of recent reforms and what you can expect.
The prosperous cannabis industry has long faced significant barriers to obtaining financial services. For example, as of June 2020, only 695 banks and credit unions were servicing marijuana-related businesses, according to the latest report from the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This despite the fact that the North America legal cannabis market was worth $16 billion in 2020.
A large percentage of cannabis clients pay in cash, and that, combined with a lack of banking options, has frequently left business operators stuck with huge quantities of cash on hand. This, in turn, makes them become bigger and easier targets for theft and fraud, not to mention potentially giving rise to tax evasion issues for the less scrupulous. Greater access to banking institutions directly equates to a more stable financial structure and fewer opportunities for cash management to go wrong.
With adult-use and medical cannabis now legalized in several new states, the number of cannabis businesses in need of a bank will only increase. The good news is that recent changes to the law in California and expanded guidance for credit unions, combined with a Democratic election sweep, are likely to mean more banking choices for the industry.
California Assembly Bill 1525: A little legal and financial relief
California Governor Gavin Newsom recently signed Assembly Bill 1525 into law. The bill accomplishes two major objectives:
- It provides safe harbor for California banking institutions doing business with cannabis companies by legally affirming that banks and other entities (specifically, licensed armored car services and professional accounting services) are not committing a crime under California law by serving cannabis clients and removing state penalties for banks or other entities that work with cannabis operators.
- It makes it easier for cannabis businesses to be assessed for loans and other services and financial institutions to comply with federal reporting requirements. The bill achieves this by allowing licensed cannabis businesses to sign a waiver permitting state or local licensing and regulatory authorities to share their "application, license, and other regulatory and financial information" with a designated financial institution "for the purpose of facilitating the provision of financial services for that licensee." The hoped-for outcome is to ease the banks' burden of ensuring that federal requirements are being met by allowing the state to share licensing information with the operators' agreement.
One banking challenge that cannabis businesses regularly face is exorbitant monthly account fees or banks that take a percentage of each deposit. Although AB 1525 does not address fees specifically, the hope is that by removing some of the most significant barriers to doing business with the cannabis industry, a wider range of banking options will become available and lead to a more competitive environment.
But most banks are federally insured, and marijuana is still classified as a Schedule I drug in the federal government's Controlled Substances Act. AB 1525 does not provide protection against the prospect of federal criminal prosecution for California banks. As such, in spite of this bill, banks may still balk at providing financial services to cannabis companies.
Credit Unions to take on more hemp-related banking
According to FinCEN's most recent report, while the cannabis industry flourished during the pandemic, the number of banks working with marijuana businesses declined in 2020. This was in contrast to credit unions, which have continued to see an uptick in hemp clients.
That increase was likely due, in part, to the National Credit Union Administration's (NCUA) recent release of detailed guidance to members on servicing legal hemp-related businesses. The 17 question FAQ aimed to boost the comfort level of credit unions currently serving or considering serving hemp-related businesses by addressing many concerns about managing the complexities and risks involved.
With the NCUA stepping up efforts to educate its members on how to service an industry that many financial institutions consider fraught and legally challenging, hemp businesses may want to take a closer look at banking with an FDIC insured credit union.
Will the year ahead offer hope for the passage of previously stymied federal cannabis banking reform? Let's take a look at what's potentially on the docket in 2021.
The SAFE Act
The Secure and Fair Enforcement Banking (SAFE) act would create protections for banks and credit unions that provide financial services to legal cannabis-related businesses. Notably, the Act also includes protection for cannabis industry service providers who themselves can potentially lose access to banking services for merely having cannabis businesses as customers.
The Act was written to garner broad support from both parties, including legislators who oppose federal legalization. It passed Congress with flying colors in late 2019, even receiving votes from nearly 100 Republicans, but failed to clear the previously Republican-led Senate. However, with new Democratic leadership at the country's helm, the cannabis industry and financial institutions have expressed renewed optimism about the odds of SAFE's passage, particularly if neither of the other two acts we explore below gain traction.
The STATES Act
The Strengthening the Tenth Amendment Through Entrusting States (STATES) Act would allow states to establish their cannabis laws without fear of federal intervention and remove the threat of federal trafficking prosecution for those acting in compliance with state law.
It is considered a compromise bill meant to appeal to both parties and assuage those who would never support federal legalization. However, the STATES act would saddle banks with the job of verifying whether or not cannabis customers comply with state law, which may serve as a deterrent to financial institutions without the manpower or in-house expertise to do so.
Additionally, because the bill lacks the robust social and racial equity provisions of the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, it's unlikely to be a top priority for a Democratic majority government.
The MORE Act
The Marijuana Opportunity Reinvestment and Expungement (MORE) Act is considered the boldest and comprehensive of the three main pieces of current cannabis legislation. It would effectively end the criminalization of cannabis for adults at the federal level by removing it from the list of controlled substances included in the Controlled Substances Act (CSA). MORE would also be retroactive, meaning it would automatically expunge cannabis arrests, charges, and convictions at no cost to the individual.
The Act also outlines several other significant steps towards social justice, economic development, and cannabis criminal justice reform, such as ensuring that the federal government cannot discriminate against people because of cannabis use. The biggest potential hurdle to its passage as currently written is that it's considered weak on addressing the myriad federal regulation and taxation details required to execute it.
Still, the Cannabis Trade Federation switched its support from the STATES Act to the MORE Act in October 2020, and the Act passed the House of Representatives in December 2020. Given that its lead Senate sponsor is newly-elected Vice President Kamala Harris, many expect it to—at a minimum—serve as the basis for a new and more fully fleshed-out piece of legislation that will hopefully get passed within the next two years.
As 2021 progresses, the opportunity to make headway on cannabis banking reform appears better than ever. Both operators would undoubtedly welcome the change. They have faced a dearth of financial services for so long, and the banking industry, which would love to bring a new roster of cash-rich clients into its fold without fear of federal prosecution. However, any new legislation is likely to include stringent regulatory and compliance protocols, so banks will still have to decide if the extensive due diligence required to do business with the cannabis industry is worth the effort.