Examining the SAFE Banking Act’s Potential Impact on the Cannabis Industry

By: Jon Avidor and Liam McKillop

Last September, the Secure and Fair Enforcement Banking Act of 2019 (the “SAFE Banking Act”) garnered enough votes in the House of Representatives to pass through to the Senate. This was an important first step for a bill that cannabis-related businesses are relying on to gain access to basic financial services that are currently unavailable to them. While the bill asserts that the main purpose of providing safe harbors to depository institutions that provide financial services to state-legal cannabis-related business to be an increase in public safety by reducing the amount of cash-on-hand to be held and transported, the effects of such an enactment will be much further reaching for the entire cannabis industry.

Currently, federally chartered depository institutions will not work with legitimate businesses within the cannabis industry due to the potential enforcement of severe penalties from federal banking regulators. The cash-dominant nature of the industry provides an abundance of headaches for these businesses, from the constant security needed to protect their cash on hand, to the overwhelming administrative recordkeeping required to account for every transaction, to the ability to acquire loans from banks for the financing of real estate acquisitions instead of having to use all-cash, therefore, depleting their capital on hand. This results in cannabis-related businesses being forced to seek out the services of state-chartered banks and credit unions who are willing to work with legal cannabis businesses within their jurisdiction. However, the strict reporting requirements imposed on these state-chartered banks make these services very expensive, sometimes costing around $5,000 per month in fees just to operate a checking account.

At a high level, the SAFE Banking Act would work to provide these depository institutions with protections from various federal banking regulators (i.e., the Federal Reserve, the Bureau of Consumer Financial Protection, and the Department of the Treasury) for their provision of basic financial services to legal cannabis business. Protection from federal regulators is necessary because the capital maintained by these state-legal cannabis businesses is directly tied into various cannabis-related operations that are illegal at the federal level due to the classification of cannabis as a Schedule I drug under the Controlled Substances Act (“CSA”). These financial services include things such as operating a checking account, obtaining a loan, or setting up an employee 401-k program—all things that a “normal” business would not have to think twice about obtaining as part of their standard operations—but also services that are almost entirely unavailable to legitimate cannabis-related businesses. Advocates of the bill believe that allowing basic financial services to these cannabis-related businesses will help reduce crime and fraud throughout the industry related to both the holding of large amounts of cash and the proper record-keeping procedures associated with such. Proponents also express hope that the bill will finally lead to more consistent growth within the industry, by allowing banks to funnel money into these companies and removing one of the largest concerns of potential investors.

However, as noted above, the passing of the bill through the Democratic-controlled House was simply just the first step, and the cannabis industry is anxiously awaiting a potential showdown in the Republican-controlled Senate. While there was not much doubt about the bill’s ability to pass through the House, concerns which loomed large about opponents within the Senate putting up a fight or using stall-tactics to prevent a vote have come to light. Currently, the bill is in a holding period, as it was referred to the Committee on Banking, Housing, and Urban Affairs after being received in the Senate. In December 2019, Mike Crapo (R-Idaho) the Chairman of that Committee had this to say in a statement expressing his lack of support for the SAFE Banking Act: “Significant concerns remain that the [bill] does not address the high-level potency of marijuana, marketing tactics to children, lack of research on marijuana’s effects, and the need to prevent bad actors and cartels from using the banks to disguise ill-gotten cash to launder money into the financial system.”  This statement echoes the concerns of most opponents who believe that the bill is just a partial solution and any real fix to the banking issues that plague the industry not come without a re-scheduling of the drug under the CSA.

While it seems unlikely that a final resolution for the bill will be reached in the near future, the steps taken thus far can still be viewed as a positive for the cannabis industry. The bill making it through the House was a monumental step, and even if voted down in the Senate, it has still laid the necessary groundwork for future relevant legislation. The bill has also worked to spark awareness and conversation around the extremely restrictive financial constraints which the legal cannabis industry currently faces. While actual victories are always better than moral victories, any and all forward progress is important to the long term stability sought throughout the industry