WASHINGTON — As the Senate stands poised to hold its first markup of the Secure and Fair Enforcement Act, or SAFE Banking Act — a bill that allows banks and payments companies to do business with cannabis companies in states where the substance is legal — some experts say that in the decade since state-level recreational legalization has taken root, banks have adapted to serve the industry just fine.
Tyler Beuerlein, chief strategic business development officer at Safe Harbor Financial — a firm that assists cannabis businesses find banking solutions — says there is a decreasing need for such legislation as cannabis businesses already have a relatively wide array of options at their disposal for accessing bank-like services.
“There are hundreds of [banking] options depending on operator type, location and size and we provide banking services to the industry in all state legal markets [meaning] finding a transparent banking option is no longer the ‘heavy lift’ it has been in the past,” he wrote in an email. “There are a few of what I would call regtech and/or fintech companies [like Safe Harbor] who service the sector in partnership with banks and credit unions.”
Banks servicing the industry, he said, have assets north of $50 billion and can be found across the country and with varying depository charters. Though fintech partnerships like Safe Harbor have forged a durable link between the industry and more risk-tolerant financial firms, Beuerlein noted the largest, most traditional banks continue to face a series of challenges to banking cannabis.
Despite questioning its relevance today, Beuerlein said he still supports the SAFE Banking act, though he is pessimistic about its chances of ever passing after the bill has stalled for years.
“The bigger question is what would it accomplish at this point?” Beuerlein said. “It would be difficult to find a cannabis operator without a transparent banking relationship at this point.”
Beuerlein added that the Secure and Fair Enforcement Act, or SAFE Banking Act, which has been stalled for years in Congress but would allow banks to do business with cannabis businesses in states where it is legal, solves some but not all of the complications that come with cannabis banking. Tax provisions like Section 280E, which prohibits tax deductions related to the sale of schedule I and II substances, remain uncorrected in the legislation.
“If [SAFE] enabled the U.S.-based cannabis companies to access the U.S. capital markets, increased lending options, compelled the branded card networks to enter the cannabis industry or eliminated 280E, then it will have been well worth the wait,” he said. “My concern is that it may not accomplish any of the above.”
Bank regulators examine firms servicing the sector in a similar fashion to highly regulated, cash intensive businesses such as casinos. In what he called a worst-case scenario, Beuerlein said officers at such institutions can in some cases be personally liable for such relationships.
Seasoned cannabis banking expert and certified anti-money laundering and risk management professional Robert Baron is even more skeptical about the need for SAFE, and said the solutions it offered when it was introduced in 2017 have since grown obsolete. He said the SAFE Banking Act was initially formed as a response to Attorney General Jeff Sessions rescinding the Cole Memo — an Obama-era circular that said the Department of Justice would not enforce federal prohibition laws in states that had legalized marijuana — in 2018, just as recreational cannabis became legal in the State of California.
Baron said despite what proponents of the legislation might claim, it’s already “Safe” to bank cannabis. Most state-level cannabis ventures have operated in compliance with 2014 guidance issued by the Financial Crimes Enforcement Network, which outlines how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations. SAFE Banking may actually increase compliance burdens for banks with cannabis clients, he said.
“Bankers are not at risk for simply banking [cannabis/marijuana-related business]; they are at risk for banking them without complying with existing Fincen guidance that requires the establishment of effective risk management, due diligence, monitoring policies and procedures, verification of state-licenses status, and heightened analysis of transaction activity that is reported to each state’s regulator,” he wrote. “If SAFE Banking passes, the Fincen guidance will remain in force and possibly expand, thus increasing the compliance burdens of hundreds of financial institutions [already] banking cannabis.”
Cannabis lawyer Vince Sliwoski said while companies can currently access state-level bank-like services, they still face increased costs due to the patchwork of options, and relatively small firms interested in partnering.
“They really do want to do business with traditional banks because right now, most states only have small credit unions working with the industry, and most of these credit unions only offer basic merchant accounts with relatively high fees,” Sliwoski wrote in an email. “A few have more expansive offerings, like equipment loans, but generally cannabis companies don’t have access to the full suite of services that other, similarly sized commodities businesses have and they pay more for those limited services.”
While cannabis companies used to have an insatiable demand for banking services, Beuerlein said today the market is more competitive. Cannabis-curious firms are increasingly competing and even struggling to find business in a crowded field.
“This is not the cannabis banking market of 2014-2020, where businesses were clamoring for options,” he said. “If a financial institution understands the market dynamics, compliance responsibilities and can manage to win business, they can be successful. If they do not, they typically exit the business or are forced out by their regulators.”
Cannabis banking experts say rescheduling won’t fundamentally change the calculation for financial institutions either. Despite the legalization of cannabis in multiple states, federal laws still classify it as a controlled substance, hindering access to financial services. Rescheduling cannabis will mean companies would have more free cash however, as companies offering schedule III substances are eligible for section 280e write-offs, a major win for the industry.
Baron notes that while rescheduling wouldn’t affect banks’ continued reliance on the 2014 Fincen guidance, it could relax institutions’ perceived riskiness, which continues to diminish as the illegality of the substance is gradually relaxed.
In Canada, for example, recreational cannabis became legal nationwide in October 2018 — and Visa, Mastercard and American Express all agreed to handle cannabis payments from the very first day.
“Rescheduling will change the way that states regulate cannabis to move into alignment with eventual FDA oversight of cannabis businesses [and] Federal and State regulatory reconciliation would need to occur, which would take years to complete,” he wrote. “In that interim, the status quo of the state licensing regime would remain, as would the existing [Fincen] guidance and AML/BSA expectations.”
While many see SAFE as only complicating the current framework — which works relatively well — Sliwoski is more pessimistic about the status quo, and thinks SAFE is still necessary.
“People have tried very hard to innovate in the space, but I don’t see much changing here until we get a chance in federal law,” he wrote.
Sliwoksi said he is not hopeful about its future prospects.
“I’ve learned not to get my hopes up after seeing it pass [one chamber] so many times, only to fizzle in the [other] chamber,” he wrote. “I don’t think the chances improve going into an election year, either.”