Pot banking goes to Washington: 3 takeaways

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WASHINGTON — With legal hurdles for financial institutions to serve marijuana businesses under the spotlight in Congress, two things are clear: Members of both parties want to make it easier for legal cannabis businesses to access financial services, but meeting that goal is still fraught with challenges.

At a hearing before a House Financial Services subcommittee — the first in Congress to delve into the pot banking issue — lawmakers discussed a legislative proposal backed by both Democrats and Republicans to remove legal banking restrictions for legitimate pot businesses. But not everyone is on board and it is still unclear if the measure has enough support to become law.

The bill spearheaded by Rep. Ed Perlmutter, D-Colo., would prohibit federal banking regulators from restricting deposit insurance for legitimate marijuana businesses. More than 30 states have legalized marijuana in some manner, but with U.S. law still classifying it as an illegal narcotic, federally regulated banks and credit unions are reluctant to serve the industry.

“We need these marijuana-related businesses and employees to have access to our banking system … to prevent tax evasion, money laundering and other white-collar crime,” Perlmutter said at the hearing. “Our bill is focused solely on taking cash off the streets and making our communities safer.”

Other proposals have been introduced ranging from full legalization of marijuana to enabling businesses to skirt the federal ban on pot in states that have legalized the substance for medicinal or recreational purposes.

The issue is still dividing lawmakers. Some Republicans object to the idea of providing an exemption for financial institutions from the ban without first legalizing marijuana at the federal level. Other members are wary of throwing their support behind a bill if their state has not yet legalized pot.

Here are key takeaways from Wednesday's hearing:

Lawmakers are split, and not across party lines

While the hearing Wednesday may be viewed as a positive sign for financial institutions looking to service legal cannabis businesses, comments from some lawmakers suggest cannabis banking legislation is a long way from President Trump’s desk.

In a recent interview, Rep. Patrick McHenry, R-N.C., the ranking member of the full House Financial Services Committee, said lawmakers “are a long way from writing policy” related to cannabis banking.

That sentiment was echoed by other committee members at the hearing.

“We must remember we are dealing with an illegal industry on the federal level. As far as I know, the House Financial Services Committee does not have jurisdiction over de-scheduling a drug," said Rep. Blaine Luetkemeyer, R-Mo., the ranking member of the consumer protection and financial institutions subcommittee. "In my opinion, we are putting the cart before the horse by addressing this issue here ... but I welcome the broader conversation.”

McHenry said it would be hard to enact legislation giving a clear path for pot banking without also making conforming changes to anti-money-laundering requirements in the Bank Secrecy Act.

“Regardless of where you fall in this cannabis debate, on the issue of marijuana, we have conflicting state and federal law that we have to resolve," he said. "For any statute to work, we have to look at current Bank Secrecy Act statutes. … At a minimum they have to be adapted in order for this proposed statute to work.”

But Perlmutter's bill has support from both sides of the aisle. The cosponsors include Reps. Denny Heck, D-Wash., Steve Stivers, R-Ohio, and Warren Davidson, R-Ohio.

Leading up to the hearing, and during the testimony Wednesday, it has been hard to group voices in the debate based on their political leaning. While conservative Republicans are reluctant to legalize marijuana, some libertarian voices complain about cutting off financial services avenues for marijuana businesses that are legal at the state level.

"Legislation that gives legal businesses that are otherwise susceptible to money laundering or other fraud access to financial services is sound policy," according to a marijuana banking "primer" released by the American Action Forum, a conservative think tank based in Washington.

Meanwhile, both Democratic and Republican lawmakers from states where marijuana is not legal have been relatively quiet on the issue, suggesting a wariness about being out in front on legislation to clarify the federal government's policy.

Support is building for Perlmutter's bill

Despite the obvious divisions on Capitol Hill, Perlmutter's bill — known as the Secure and Fair Enforcement Banking Act (or SAFE) Banking Act — has won backing from key quarters.

It was widely supported at the hearing from witnesses representing banks and credit unions. The financial services industry has been more outspoken in support of the SAFE Banking Act than an alternative plan by Sens. Cory Gardner, R-Colo., and Elizabeth Warren, D-Mass. Rather than deal specifically with banking, the Senate bill would enable businesses to skirt the federal ban on pot in states where it is legal.

The Independent Community Bankers of America "hopes to work with this committee to advance the SAFE Banking Act of 2019 to create a statutory safe harbor so that banks like mine are free to serve the growing cannabis industry, should we choose to do so, without fear of legal and regulatory repercussion,” said Gregory Deckard, chief executive of State Bank Northwest in Washington, speaking on behalf of the ICBA.

Deckard said his bank currently does not serve cannabis businesses because "the legal stakes are simply too high for me, my board, and my investors to tolerate."

Rachel Pross, the chief risk officer for Maps Credit Union in Salem, Ore., said the SAFE Banking Act provides "narrowly targeted federal protections" for financial institutions that serve legal marijuana businesses.

"Credit unions do not have a position on the federal legalization of cannabis. The simple fact of the matter, however, is that many credit unions operate in states and communities that have made cannabis usage or growth legal for medicinal and/or recreational purposes," Pross said. "We strongly believe that financial institutions should be permitted to lawfully serve businesses that engage in activities that are authorized under their state laws, even when such activity may be inconsistent with federal law."

Support for the bill also extended to state and city officials testifying at the hearing.

California State Treasurer Fiona Ma said it was “critical” to accommodate the uptick in economic activity as a result of growing revenues from the cannabis market by providing those businesses access to banking.

“One of the surest ways of bringing a business out of the shadows and collecting lawfully-imposed taxes is to promote access to the economy’s banking and payments systems,” Ma said.

Major Neill Franklin, a veteran of the Baltimore and Maryland state police departments, noted public safety concerns when legal cannabis businesses are operating in all cash, leaving them vulnerable to theft.

“If we value public safety as much as we claim to, we need to ensure taxpaying businesses and their employees are safe from theft and personal injury,” Franklin said. “Knowing that thieves target dispensaries for their cash means there’s something we can do to help. Barriers to banking are needlessly putting people in danger.”

Banks' legal fears haven't abated

At the center of legislative efforts to clarify marijuana banking policy is the fact that the legal ban still forces financial institutions to be extra cautious about serving pot businesses.

The financial industry has struggled to get clarity from policymakers, and the Department of Justice has given mixed messages about companies' legal jeopardy in serving the pot sector.

In 2013, a DOJ memo told prosecutors not to focus on cases involving businesses that follow state laws. That led to a 2014 guidance by the Financial Crimes Enforcement Network meant to alleviate banks and credit unions' concerns about serving cannabis businesses.

Former Attorney General Jeff Sessions then rescinded the DOJ memo last year, but William Barr, the nominee to succeed Sessions, said he would uphold the 2013 memo.

In general, anti-money-laundering requirements have left banks wary about offering services to cannabis-related businesses, leaving many to rely on cash and refuse credit-card payments.

Banks’ caution extends beyond marijuana growers and dispensaries. They are also hesitant to work with ancillary businesses, such as electricians, plumbers and landlords, who aren’t directly involved in the sale or production of cannabis but provide services to related businesses.

Ahead of Wednesday’s hearing, the American Bankers Association noted in a letter to the Financial Services Committee that roughly 75% of member banks reported having to close an existing account or terminate a banking relationship, or turn away a potential customer because of the customer’s association with cannabis.

“Many of the examples provided by our members are related to customers with indirect connections to the cannabis industry — such as small businesses and entrepreneurs who lease space or sell their goods and services to dispensaries or growers,” the ABA letter said. “Without a change to federal law, that entire portion of economic activity in legal cannabis states will continue to be marginalized from the banking system.”

Pross said Maps Credit Union is one of the few financial institutions to continually provide banking services to cannabis businesses.

She said the credit union’s compliance program has been a significant benefit to law enforcement.

“We firmly believe that providing banking services to this industry delivers a significant benefit to law enforcement, because Maps is essentially providing free, highly-detailed information at least every quarter on cannabis-related monetary activity in the State of Oregon,” Pross said.

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Marijuana banking Regulatory reform Regulatory relief AML Commercial banking Community banking Federal credit unions House Financial Services Committee