Financial institutions are watching the progress of a bill in the U.S. Senate that would allow banks and credit unions to provide services to cannabis businesses.
Most banks and credit unions have shied away from offering these services, but passage of the SAFE Banking Act in the Senate and signing of the bill by President Trump would open access to the multibillion-dollar marijuana industry.
Although some financial institutions, such as Partner Colorado Credit Union and Safe Harbor Credit Union, have been providing banking services to Colorado marijuana businesses, many others have been unable to establish banking relationships because marijuana is illegal at the federal level.
Industry observers say that small and medium-sized banks and credit unions would be the first to offer financial services to cannabis businesses if the bill becomes law, but there is interest from larger institutions as well.
Among the institutions reportedly supporting passage of the SAFE act are the American Bankers Association, Credit Union National Association, Wells Fargo, Key Bank, PayPal, Nationwide and Prudential, according to Marijuana Business Daily.
The act has also elicited support from law enforcement organizations including the Law Enforcement Action Partnership and the National Association of Attorneys General.
THE ACT’S PROVISIONS
Officially titled the Secure and Fair Enforcement Banking Act of 2019, HR19-1595 was passed by the House of Representatives on Sept. 25 with a strongly bipartisan vote.
It was sent to the Senate on Sept. 26 and referred to the Committee on Banking, Housing and Urban Affairs, where it now resides.
According to the official summary by the Congressional Research Service, the bill would prohibit federal banking regulators from penalizing a financial institution for providing banking services to a legitimate marijuana-related business.
Specifically, it would forbid:
• Terminating or limiting a financial institution’s deposit insurance or share insurance solely because the institution provides financial services to a cannabis business;
• Prohibiting or discouraging financial institutions for offering these financial services;
• Incentivizing or encouraging a financial institution not to offer these services to an account holder solely because of an affiliation with a cannabis business; and
• Taking adverse or corrective action on a loan made to a person solely because that person owns a cannabis business or owns real estate or equipment leased or sold to such a business.
A STRATEGY THAT FAILED
These penalties have been imposed or threatened, said Charles Houghton, a cannabis business consultant and attorney in Colorado.
“Up until now, the real big impediment to full-on banking is … that the Federal Reserve has been unwilling to allow funds to be transferred to the Fed for people involved in the cannabis industry,” Houghton said. “They threatened Federal Reserve accounts for depository institutions that have banked the industry.
“And then there’s also the Federal Deposit Insurance Corp., which provides deposit insurance to financial institutions, and that has been threatened from time to time. … [The act] also prevents the Fed from terminating a deposit account because someone is banking the industry, and it also won’t allow them to affect FDIC insurance for those institutions.”
Houghton views those threats as efforts to curtail the cannabis industry that backfired.
“Everyone failed to realize how resilient the cannabis industry really is,” he said. “They just learned how to operate without banking, and the industry moved merrily along, but it became less transparent and less easily tracked.”
As of October, both recretional and medicinal cannabis are fully legal in 11 states including Colorado; 24 more states allow sales of medicinal-only marijuana.
“We’ve now got a multibillion-dollar industry that isn’t going anywhere,” Houghton said. “Whether you’re for or against cannabis, if you want to collect taxes on it, if you want to effectively track the industry and regulate it the way it ought to be regulated, then you have to give the industry the ability to bank.”
Forcing marijuana businesses to deal in cash not only precludes effective regulation and tracking but also endangers businesses and employees, some say.
Denver police recently alerted marijuana businesses to an uptick in smash-and-grab burglaries that are occurring, even though the businesses typically don’t keep cash on their premises after hours.
The cash system also opens up opportunities for other illegal activities.
“It’s just an invitation for people to cheat the system, to not pay tax and to filter money from otherwise completely illegal activities,” Houghton said. “And if you give them banking, it will prevent that.”
Banking also needs to occur to help eradicate the black market and deter internal theft, said Erik Knutson, founder of Denver-based Keef Brands, which produces cannabis-infused beverages, edibles and concentrates.
“Internally within the company, it’s hard to track cash,” said Knutson, who also is a founding board member of the American Trade Association of Cannabis and Hemp and the Cannabis Trade Federation. “There’s a lot of it that goes unreported.”
Having to deal only in cash also creates supply-chain problems for businesses like Knutson’s, forcing them to use wire transfers and money orders for transactions.
Knutson has been working with Safe Harbor Credit Union for several years.
“It’s been fantastic for our business,” he said. “We get audited every month, and my employees know that’s out there. We’ve had a reduction in product loss of at least 10 percent.”
Given the impeachment inquiry and other issues holding center stage in Washington, D.C., now, it’s difficult to predict when the Senate might take up the SAFE Banking Act.
“I think that there are some senators who might believe this is the first step towards legalization that they’re not quite ready to take yet,” Houghton said. “If you read the bill, it really doesn’t address that.”
Rep. Steve Stivers, R-Ohio, a cosponsor of the bill, said: “For me this has nothing to do with the larger debate about marijuana; instead it’s about legislating for the world we live in, and that reality includes legal businesses being forced to assume the huge risks that come from operating exclusively in cash.”
Jason Warf, executive director of the Southern Colorado Cannabis Council based in Colorado Springs, calls the bill a “precursor for the federal government to ease into that transition” to legalization. “It almost forces the hand of the IRS to allow 280E deductions.”
That section of the tax code states that businesses cannot deduct any expenses incurred in the production, distribution or sale of controlled substances. At the federal level, marijuana remains a Schedule I controlled substance, which includes substances such as heroin, LSD and Ecstasy. Those substances are defined as drugs with no accepted medical use and a high potential for abuse.
As to the fate of the SAFE bill, “I do believe the votes will be there to get it passed,” Warf said.
Knutson is cautiously optimistic about the bill’s chances.
“They’re definitely talking about it right now,” Knutson said, adding that he thinks “it’s huge” that Senate Majority Leader Mitch McConnell met with cannabis industry executives, small-business owners and advocates during a trip to Southern California earlier this month.
“I really don’t know how [the bill] is going to be received,” Houghton said. “But if it goes through, I think that’s going to have a profound effect on the way business is done. I think it will free up additional capital to come into the market.
“A lot of investors represent big pools of money that they try and invest in all kinds of different industries. They shied away from this one because there isn’t banking. So if you get the SAFE Banking bill passed, and you also get public money that’s available, that releases a lot of potential that we haven’t seen before.”