Will The SAFE Banking Act Make Life Riskier For Banks?

Since California first declared marijuana “legal” for medical consumption in 1996, transactions involving legally permitted cannabis have been complicated things. In fact, in the intervening 23 years, the situation has arguably gotten even more complex as 31 states (plus the District of Columbia) have legalized cannabis consumption for either legal or medical reasons.

More complicated because the disconnect between state and federal regulation of the substance is growing wider by the year. Marijuana has been classified as a schedule one narcotic since 1970, which means according to the federal government, it is considered a drug with “no currently accepted medical use and a high potential for abuse.” A schedule one listing also means that cannabis is a product that is illegal to buy or sell in any context. Even say in a dispensary that is legally operating under state law.

Moreover, that tension has created an unusual situation for the legal — or at least legal-ish — cannabis industry. Consumers in states with legalization regimes can buy marijuana without fear of arrest — and merchants can sell it with similar confidence — but those transactions all must happen in cash. The card networks and nationally licensed banks working across state lines would violate the RICO anti-money laundering laws if they attempted to move the payment.

That cash-only policy isn’t limited to transactions for many dispensary owners. It is also the only tool that they can use for paying their staff,  contractors, bills and taxes because they can’t get banking service. Because of the legally ambiguous status of the industry most banks — even smaller regional and community institutions that don’t operate across state lines — want nothing to do with cannabis money, for fear of running afoul of the legislator and losing their banking license.

However, that situation could potentially be changing if the U.S, House of Representatives gets its way. Earlier this week, the Democratic-controlled House voted 321-103 on a bipartisan basis to pass the Secure and Fair Enforcement (SAFE) Banking Act of 2019. The act, as written, has been hailed as a significant victory for the legal cannabis industry because it officially allows federally-insured banks to work with cannabis shops and related companies in states that have legalized marijuana without fear of reprisals or risks to their banking licenses.

Proponents of the law say it is a major step forward that the industry has desperately needed for both business and fundamental safety reasons. However, opponents wonder if instead of subtracting complexity from the market it has just inserted a new variety of it, and perhaps accidentally created a less-safe banking system with the SAFE banking act.

The Proponent’s Pitch

Given the billions in dollars in sales the cannabis industry collectively does each year in the U.S. — the majority of the industry operating under a “cash only” designation across its entire operational life isn’t just inefficient, according to the law supporters, it’s dangerous.

Because cannabis shops are known to be cash-heavy organizations, they are frequent targets for robberies, as are their cash-carrying employees. That danger is frequently magnified by the fact that to perform even basic functions — like paying their taxes or electric bill — they have to carry cash to its recipient. Sending a digital payment or writing a check aren’t options when one doesn’t have a bank account.

Moreover, the banking lock-out, they note, extends fairly widely from the cannabis industry itself. Banks and credit unions have been known to drop the accounts of service providers like plumbers and carpenters not because they are directly participating in the industry — but because they did a job and were paid by a dispensary that contracted with them.

Plus, though it is mentioned less frequently, cash industries are notoriously hard to tax. The point of legalization in many states was as a source of tax revenue — and so it is relatively counterproductive to be unable to extract those taxes simply because it is too hard to keep track of all the revenue floating around in $100s and $20s.

However, beyond the specifics, the law’s general intention is clear, according to its advocates in Congress: To bring cannabis sales into the actual mainstream in the jurisdictions where voters have approved their legality — by making them able to work with banks just like any other business.

“Our bill is focused solely on taking cash off the streets and making our communities safe and only Congress can take these steps to provide this certainty for businesses, employees and financial institutions across the country,” Rep. Ed Perlmutter said on the House floor in support of the bill.

His sentiments were echoed by colleague Denny Heck who told of a cannabis dispensary security guard who was shot and killed during a robbery that never would have happened, but for the fact the thieves knew the dispensary was loaded with cash at the end of the day.

“You can be agnostic on the underlying policy of whether or not cannabis should be legal for either adult recreational use or to treat seizures, but you cannot be agnostic on the need to improve safety in this area,” he noted.

This bill, now that it has been passed, has been widely praised both in the cannabis and banking industries. Neal Levin, CEO of the Cannabis Trade Federation, noted that the law, when it goes into effect, will have a positive impact on “public safety, increase transparency, and promote regulatory compliance.”  His sentiments were echoed by president and CEO of the American Bankers Association Rob Nichols and CEO of the Credit Union National Association Jim Nussle, who jointly wrote in an opinion piece for FOX Business, that passing the SAFE Banking Act, “would give financial institutions the certainty they need to fully support their communities. It would also demonstrate that Congress can still come together to solve the nation’s challenges.”

High praise.

But not everyone is quite so convinced as the boosters.

The Problems With SAFE Banking

While the new law has many supporters, there are also some questions worth asking in its wake —specifically around payments for product. While it is fairly uncontroversial that the new law will help dispensary businesses do things like paying their electric bill or taxes through non-cash means, it remains a little undecided how this will affect the cash-only nature of payments in dispensaries. Some have opined that this could very likely lead to the creation of a series of closed-loop card payments schemes that use direct ACH payments instead of the card network rails to facilitate electronic payments in stores. (Most agree that this new law, which mostly is pitched at regional players, will not have much effect on the card networks or large-multi state banks).

However, that, Continental Investment Partners Partner Paul Purcell told Karen Webster in a conversation about the new law’s effect on banking, might be much too big an assumption. The Federal Reserve, the regulator for all of these banks, and The Clearing House, which controls the ACH payments rails, both are likely going to want to weigh in here on whether or not this is the support they are comfortable with local banks offering.

“This is all about access to the federal wires. We have stringent standards for moving money internationally and domestically. And those rules create friction, but that friction is ultimately there to protect us because it is very important to protect our ability to know who is moving money, where they are moving it and why they are moving it.”

The cannabis industry — even in its legal form, it should be noted — has something of a mixed history with compliance to those regulations around moving money. California-based marijuana delivery services Eaze Solutions is currently under investigation for charges that it sought to elude the ban on using credit cards in cannabis sales by legally processing credit and debit card payments through European-based shell companies. Those companies made the payments for pot appear to be purchases of dog toys, dive gear, carbonated drinks, drone components and face creams.

That willingness to skirt the law and move fast and break things where compliance is concerned is a disturbing trend in the industry, Purcell noted, and should make any bank-based compliance officer very nervous about doing business within in the industry no matter what the new law says.

“I think there is a fundamental misunderstanding among supporters of this law of how risk management systems work in banks. The pressure that this will put on compliance and AML and risk management is incredible because the reality is we don’t have enough ammunition in those systems to deal with these issues yet.”

Plus Purcell — and many others, including the ACLU and House Majority Whip Steny Hoyer — agree that the standalone step is treating a symptom of the problems of selling pot, and not the disease itself.  Marijuana is going to continue to present a compliance nightmare for banks and business owners as long as it has two entirely separate and distinct legal statuses in the United States.

Many have pointed out that what would do a better job of clarifying marijuana’s legal status for banks than writing a one-off law about it, would simply be de-scheduling on a federal level and placing it under the jurisdiction of the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) when it comes to limiting sales and enforcing those limits.

What will come of this remains to be seen — specifically whether it will pass in the Senate. Majority Leader Mitch McConnell has in the past said he is not a supporter of cannabis legalization and there are thoughts this bill will die before ever reaching the Senate floor. Others, however, have noted with the right “sweeteners” for Republican legislators in the Senate, the bill could provide a focal point for the rare bit of bipartisan action that tends to be popular in the run-up to election years.

Which means for all the excitement about the new law’s passage, there remains a lot more questions than answers about its future on the table. The two most pressing, at this point, are will it ever become law at all — and if it does, will it actually added clarity to the issue or just more confusion for bankers?