Legalizing pot may be only way to lift cloud over pot banking

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WASHINGTON — The insertion of a marijuana banking provision into a must-pass spending bill has reinforced industry hope of legislative progress, but some analysts worry the budget measure is too narrow to achieve its objective.

The House bill, which passed an appropriations subcommittee last week and is intended to fund the government through the 2020 fiscal year, includes spending for financial regulators. The pot banking measure bars agencies from using allotted funds to punish a financial institution “solely because the institution provides financial services” to a marijuana-related business compliant with state laws.

But some observers worry that may not be enough for banks and credit unions to service marijuana businesses. For one thing, the appropriations bill would need to be reauthorized every year. Meanwhile, with marijuana still banned at the federal level, a financial regulator could still flag a financial institution's legal risk as long as the agency does not use the specific budget resources.

"It simply says none of these funds may be used to penalize an institution solely because they are providing financial services to a marijuana business,” said Dan Crowley, a partner at K&L Gates. “That language is so narrow and so specific. ... They’re banking these businesses in a sector that is still illegal under federal law, which raises safety and soundness concerns. It’s not solely because they are providing financial services to a cannabis company.”

Two standalone bills are seen as having more potential to ease financial institutions' ability to serve cannabis businesses. The SAFE Banking Act would go further in restricting a regulator's ability to discourage pot banking. Meanwhile, the STATES Act would exempt businesses from the federal marijuana ban in states where the substance is legal.

Still, the fact that a marijuana banking provision was added to the spending bill has buoyed optimism that lawmakers are serious about enabling cannabis businesses to access financial services.

Banking industry representatives also hope that lawmakers' renewed attention on the legal treatment of industrial hemp could add further momentum to pot banking reform. Hemp was removed from the federal list of banned substances in the recent farm bill, but bankers have complained they still face regulatory resistance to servicing hemp growers and other businesses.

The effort to legalize industrial hemp was led by Senate Majority Leader Mitch McConnell, R-Ky., partly due to business interests in his state. But as bankers are still struggling to serve industrial hemp businesses, some believe that McConnell could accept a deal that provides clarity related to banking both the cannabis and the hemp sectors.

“It’s been frustrating for the lawmakers who thought the hemp issue was resolved in the Farm Bill, and ABA supported that legislation,” said James Ballentine, executive vice president for political affairs and congressional relations at the American Bankers Association. “If there is an opportunity to provide greater clarity for banking both hemp and cannabis in the SAFE Act, we would be supportive.”

Ultimately, the clearest-cut solution could be to have both substances removed from the list of federally banned drugs.

“I think they’re trying to move incrementally towards legalization and also to address the problem that we have with marijuana related businesses not being able to get accounts,” said Dan Stipano, a partner at Buckley. “Anything short of legalization on the federal level will probably not be enough. In the meantime financial institutions are caught in the middle of it. It’s a very untenable situation.”

Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, agreed that the language in the appropriations bill is likely not enough for bankers to start serving marijuana businesses. But he said any efforts to advance the issue, in general, are helpful.

“It’s good that the pressure is continuing on the problem of banking cannabis and banking legal businesses that are serving cannabis where it’s legal,” Merski said. “The concern there is banks are regulated by multiple regulators and agencies so everyone needs to be on the same page with allowing banks to bank legal businesses.”

The banking industry largely supports the SAFE Banking Act. The ABA also recently came out in support of the STATES Act, which directly addressed the Controlled Substances Act and enables states to determine their marijuana laws — effectively ending the federal ban on pot. That bill has been pushed by Sen. Cory Gardner, R-Colo., who faces a tough 2020 re-election bid.

The SAFE Banking Act, which was been a six-year effort by Rep. Ed Perlmutter, D-Colo., in the House, currently has more than 200 co-sponsors. And it passed the House Financial Services Committee in a 45-15 vote in March. While it is unlikely that a standalone marijuana bill would move forward through regular order in the Senate, some expect it could be tied to appropriations.

“I can see a scenario where the SAFE Act is attached to an appropriations bill later in the process,” said Crowley. “Appropriations are typically enacted in an omnibus bill later in the session. … Advancing the SAFE Act in the appropriations bill is definitely an option.”

Isaac Boltansky, director of policy research at Compass Point Research & Trading, said lawmakers opposed to marijuana legalization could downplay a marijuana banking fix if it is included “as a section on page 1,300 on a 2,100-page appropriations bill.”

But some say the SAFE Banking Act’s passage would have a marginal impact on the banking industry’s servicing of legal marijuana businesses.

Stipano said he doesn’t think the Treasury Department or the banking regulators have been the major roadblock preventing banks from servicing marijuana businesses.

“I don’t think it means anything because Treasury is not the problem,” Stipano said. “Neither the Treasury Department nor any of its components have taken any enforcement actions. … The reason why banks are reluctant to provide accounts to marijuana businesses is because it’s illegal under federal law.”

Boltansky said larger banks likely won’t start servicing marijuana businesses in response to banking-specific legislation getting enacted.

“Even if the SAFE Banking Act becomes law … the immediate impacts will be measured,” he said. “I don’t think you’ll have the money-center banks or the super-regionals involved. Smaller banks and credit unions are the first to move in that space.”

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