The SAFE Banking Act Is a Victory for Federalism and Markets
In the House of Representatives, where progress has been on hold since the Financial Services Committee cleared the bill in March, Majority Leader Steny Hoyer (D-Md.) has confirmed the measure will receive a floor vote this coming week. Meanwhile, Senate Banking Committee Chairman Mike Crapo (R-Idaho) recently told Politico that he also intends to bring up some version for a committee vote by the end of the year.
Sponsored in the House by Rep. Ed Perlmutter (D-Colo.) and in the Senate by Sen. Cory Gardner (R-Colo.), the SAFE Banking Act would grant safe harbor for banks and credit unions who provide financial services to cannabis-related businesses that are legal under state law.
The news about Crapo is particularly noteworthy, as the chairman has been clear about his strong opposition to marijuana legalization. His home state of Idaho is notorious for having among the most stringent cannabis laws in the nation; even the sale of the cannabidiol (CBD) oil is classified a criminal offense. While he did not explicitly confirm that the committee would take up the SAFE Banking Act, specifically, Crapo’s promise to take up the issue raises the odds significantly that the measure could reach the floor in both chambers.
In the House, rumors of a pending floor vote had been floated repeatedly since the bill cleared committee – first, that it would happen before Memorial Day, then before Independence Day, then before summer recess – but none came to pass. The hang-up appeared to be insistence by the progressive wing of the Democratic caucus that the chamber take up more far-reaching legislation—such as H.R. 3884, the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, sponsored by House Judiciary Committee Chairman Jerrold Nadler (D-N.Y.)—that would legalize marijuana at the federal level and expunge criminal records.
Hoyer’s commitment to hold a vote next week signals that that division, while perhaps not fully mended, has at least been put on hold. (The measure does commission a study by the Government Accountability Office to examine diversity and inclusion in the cannabis industry.) And with 206 co-sponsors, it appears to have a reasonable chance of passage. Because it is on the Suspension Calendar, it would require yes votes from two-thirds of the members (290, if they are all present) to pass on first reading.
But to have a reasonable chance of going the distance in the Senate – first, to get through Crapo’s committee before clearing the hurdle of getting Senate Majority Leader Mitch McConnell (R-Ky.) to bring the measure to the floor – it’s going to need a good showing from Republicans on the House floor, hopefully even better than the 26 House Republicans who have signed on as co-sponsors. And there are very strong reasons for GOP members to back this bill.
At the heart of the SAFE Banking Act is a longstanding conservative principle: respect for federalism. To date, the use of marijuana for medical purposes and/or recreational purposes by adults has been approved in 33 states and the District of Columbia. Another 14 states permit the use, sometimes restricted to those with a prescription, of CBD oil. But under federal law, it remains illegal under the Controlled Substances Act to grow, transport, distribute, sell, possess or use marijuana.
This disparity between federal and state law creates several complications, including for the financial services industry. Cannabis businesses may act completely in accordance with local state law, but federal law dictates that banks, credit unions, insurance companies, credit card providers and other financial firms who provide services to those businesses, their subcontractors or even their employees could run afoul of a number of federal criminal statutes, find themselves potentially liable for large regulatory sanctions or even lose their deposit insurance from the Federal Deposit Insurance Corp (FDIC).
As a result, many cannabis-related businesses operate as cash-only, finding themselves locked out of basic business needs like the ability to maintain checking accounts, administer payroll, access short or long-term credit or even pay their taxes. Though the number of lenders who serve the industry is growing, it’s been estimated that as much as 70 percent of cannabis-related business have no relationship with a lending institution. Dealing in that much cash poses other public safety problems. A 2017 report from the Wharton Public Policy Initiative found that half of all cannabis dispensaries have been robbed or burglarized.
Where lenders do serve the industry, as 553 banks and 162 credit unions did as of June 30, they not only allow commerce to flow freely and aboveboard, but they also provide valuable information to criminal justice. The Financial Crimes Enforcement Network has received tens of thousands of suspicious active reports (SARs) from such institutions, raising red flags when their due diligence shows a cannabis-related business may not be in full compliance with their respective state’s regulations or with the Cole Memorandum that the U.S. Justice Department issued in 2013.
Though FinCEN continues to track compliance with the Cole Memorandum, which granted limited safe harbor for cannabis businesses operating legally under state law, the DOJ rescinded the memo in January 2018. In its place, the SAFE Banking Act would ensure that financial services firms who serve legitimate cannabis-related business could not be penalized, forced to halt services or denied access to their deposit insurance fund (the FDIC for banks and thrifts, the National Credit Union Administration Share Insurance Fund for credit unions) for doing so. The bill provides explicit safe harbor for institutions to provide checking, savings, credit, debt collection, payments and real estate brokerage services, among others, to the cannabis industry.
It’s understandable that some conservatives continue to be skeptical of the trend toward legal marijuana, but it is a genie that is unlikely to be put back in the bottle. Current projections are that legal marijuana sales will grow at 14 percent annually over the next six years, reaching $30 billion by 2025. That’s too large an industry to keep in the nebulous “gray” market, somewhere between legal and illegal. It’s so large that even banks that have eschewed the business can’t help but be enmeshed in it. Whenever a mortgage is written for an electrician who did work for a dispensary, there is a nexus with this gray market.
The SAFE Banking Act would help to bring that activity aboveboard. It would entrust day-to-day oversight and regulation of the industry to the states, those laboratories of democracy that are closest to the people. Meanwhile, banks and credit unions would continue to report both to law enforcement and to their own regulators when they see activity that goes awry of the law. Indeed, given the unique regulatory compliance responsibilities of financial services firms that serve this industry, we should be particularly concerned that well-resourced institutions with experienced professionals have incentive to take up the challenge.
This is a serious bill that addresses serious issues in an emerging market. Congressional Republicans should take up the charge to pass it.