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April 7, 2021   /   Andrew Sheaffer

The Secure and Fair Enforcement (SAFE) Banking Act has once again been revived.  The proposed legislation, which would protect financial institutions from being penalized by Federal regulators for providing services to state-legal marijuana businesses, received initial signoff from the House in September of 2019 but never made it past the Senate.  It was then reintroduced as part of certain COVID-19 relief bills in 2020, but once again was shut down.  On March 18, 2021, the Bill was reintroduced for the second time, but this time with bipartisan support, as well as support from the American Bankers Association.

While this is certainly all positive momentum for the industry which has been operating largely on a cash only basis due to fear of sanctions keeping most financial institutions away from the industry, it is not the cure for the marijuana banking challenge.

Overview of the SAFE Banking Act

What Are the Key Provisions of the Bill?

As result of being primarily a cash only industry, marijuana-related businesses (MRBs) have  become targets of crime and financial regulators have had difficulty tracking funds across the industry.  Financial institutions would be covered under a “safe harbor” concept if the Bill is passed.  Meaning, Federal banking regulators by law may not take adverse action, prohibit, or penalize financial institutions or their officers simply for providing services to legitimate MRBs and service providers to such businesses.  Other high-level details of the Bill include:

  • Provisions to protect ancillary businesses, also known as indirect MRBs.  Proceeds from MRB-related transactions would no longer be deemed unlawful.
  • Within 180 days of passing, the Federal Financial Institutions Examination Council (FFIEC) must create guidance, procedures, and ongoing supervisory expectations for financial institutions.  It no longer would be a “guessing game” for financial institutions with consistent guidance in place.
  • Within 180 days of passing, revisions to the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act (BSA) Expectations Regarding MRBs must be made.  This guidance from 2014 established initial diligence and reporting expectations for financial institutions seeking to bank MRBs.
  • Within 90 days of enactment, guidance regarding banking services to hemp-related businesses (HRBs) must be updated to address compliance obligations and best-practices for providing financial services to HRBs, including payment processing.
  • Financial institutions would not be required to bank any MRB or indirect MRB and regulators may terminate accounts for infractions if claims are justified in writing. 
What Are Next Steps for the Bill to Pass?

The Bill’s pathway forward after being reintroduced to the House will require a majority vote (218 of 435 votes needed) to advance the Bill to the Senate.  Thereafter, the Bill would be assigned to a Senate committee, and if released, another majority vote will be required by the Senate to advance (51 of 100 votes needed).  A committee between the House and Senate would work out differences between the SAFE Banking Act and the Senate’s “companion” version of the Bill.  Majority votes through both the House and Senate would again need to happen to push the revised Bill forward, which would likely be a fairly quick process considering both parties would have already worked out their differences.  Within 10 days thereafter, the Bill would be printed and signed by the President.

What Does the Bill Not Address?

The Bill does not remove the need for enhanced due diligence to ensure MRBs meet the definition of a “legitimate business”.  In order to meet this definition and therefore be considered “bankable”, MRBs must adhere to all pursuant laws in their respective state(s).  Because of marijuana’s Schedule 1 status at the Federal level, validating licenses, conducting background checks and monitoring bank account activity are forms of due diligence that would  still be required for financial institutions that choose to service MRBs.  In addition, the Bill does not address the SBA’s policy for lending to MRBs.  Currently, MRBs and indirect MRBs that receive more than 50% of their revenue from marijuana-related products or services are unable to benefit from these advantageous loan programs.

5 Things to Expect Moving Forward

1. The Bill Is More Likely to Pass This Time Around – Since previously failing to pass multiple times, more states following the November elections in 2020 have legalized either medicinal or adult marijuana (or both).  According to the Defense Information Systems Agency (DISA), 42 states have legalized marijuana in some aspect, along with 4 territories and the District of Columbia.  A now Democratic-led Congress has resulted in nearly one third of the Chamber cosponsoring the Bill.  Less than a week after the Bill was initially reintroduced, the Senate quickly followed suit releasing its version of the Bill which currently has more than 30 senator cosponsors.

2. If Passed, Most Banks Will Still Refrain from Banking MRBs –  In its most recent report, FinCEN indicated that there were only 684 banks and credit unions banking MRBs as of December 31, 2020.  This represents roughly 5% of the approximate total 12,000 banks and credit unions based in the U.S.  With a safe harbor and clearer exam guidance in place assuming the Act passes, more financial institutions are likely to enter the space.  However, regulations in the Bank Secrecy Act would still continue to deter many institutions from extending services to MRBs.  If banks fail to conduct the necessary due diligence on MRBs, they could be hit with substantial fines totaling tens, or even hundreds, of millions of dollars.  Unless financial institutions have the budget, resources and infrastructure to scale business development efforts, the amount of work necessary to manage the risk would still be very expensive and demanding.

3. MRBs Able to Find the Right Banking Partners Will Flourish – CBD is starting to become an over saturated vertical.  Given all of the recent positive momentum in the industry, we expect to see an increase in product innovations with the plant in 2021, such as expansions in flower strains, beverages and microdose edibles.  To do this, MRBs need to have access to the right channels and strategic partners.  With a history of an established banking relationship, MRBs would be able to legitimize their services and reach new potential investors, conduct more extensive research, and expand product offerings.  In addition, full-service financial institutions dedicated to the industry can provide the expertise, technology, resources, services, and products to help these companies grow faster.

4. Major Card Brand Networks Won’t Budge (At Least Quite Yet) – The Federal Schedule 1 classification of marijuana would remain a massive obstacle for the payments industry even if the Bill were to pass.  Mastercard, Visa, American Express and Discover are on the record stating the passage of the Bill would not impact their prohibition of THC and MRB licensee transactions.  Historically, these major networks have erred on the side of caution until they have full support of the Federal Government.  Building the infrastructure to facilitate the industry would also take some time.  Networks would need to develop Merchant Category Codes (MMCs) and internal rules for the various business types in the industry with requirements to obtain a traditional style merchant account.w

5. Federal Marijuana Legislation Will Eventually Be Reintroduced – We have already started to see the domino effect in motion.  Enactment of the SAFE Banking Act would lay the groundwork for some upcoming major changes in the industry.  If passed, we can expect to see legislation reintroduced to end the Federal prohibition of marijuana.  One example is the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which is a proposed piece of legislation that would de-schedule marijuana from the Controlled Substances Act and enact various criminal reforms related to the product, including the expungement of prior violations.

Although the passage of the SAFE Banking Act would help clarify many issues for the banking industry and its regulators, it will not ultimately solve the larger issue at hand.

If additional guidance released by FinCEN and FFIEC following the likely enactment proves to be onerous, it may only continue to complicate the compliance and reporting landscape for banks and credit unions.  Thus, MRBs and HRBs could continue to face significant wait times before they will have meaningful and affordable access to banking services on a large-scale.  The general consensus in the industry is that there is still a lot of work that needs to happen to reach a long-term solution.  The SAFE Banking Act is the first major step to get there.


About West Town Bank & Trust

West Town Bank & Trust provides combined banking and payment processing services under one roof to hemp and CBD businesses. This unique offering includes compliance-focused, technology-enabled payment processing solutions to merchants throughout the U.S., as well as merchant deposit accounts and treasury management services on the back end.  Through combined expertise in commercial banking, on-boarding due diligence, compliance monitoring and payment processing, our team is uniquely positioned to help hemp-related businesses increase sales, improve cash flow, and ultimately decrease the costs of doing business.

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