The Growth of Cannabis in the U.S.
Legal cannabis (also referred to as “marijuana”) is one of the fastest growing industries in the United States. California became the first site of the United States modern legal cannabis market in 1996 when it legalized marijuana for medicinal purposes. Fast forward to 2020, more than half of the states have legalized marijuana for medicinal purposes, and eleven states and the District of Columbia have legalized recreational use of marijuana for adults. A recent Gallup survey conducted in October 2019 found that 66% of Americans currently support legalization of marijuana and that support crosses party lines and is unlikely to stall as cannabis becomes more normalized in American society.
The rapid increase in both the number of states that have legalized cannabis and in the amount of public support for cannabis has generated billions of dollars in sales for marijuana-related businesses (“MRBs”) and led to their exponential growth. Overall, the U.S. cannabis industry generated nearly $9 billion in sales in 2017, and that number is expected to balloon to over $40 billion by 2024. There are tens of thousands of licensed cannabis businesses in the U.S., selling goods made by thousands of different brands, and employing hundreds of thousands of workers. Investors are also starting to recognize the opportunities available, with more than $10 billion invested in the industry in 2018.
However, due to federal laws and financial regulations, a significant majority of the proceeds generated by MRBs in this booming industry cannot be banked.
The Cannabis Banking Problem
Under federal law, financial institutions are not only potentially criminally liable for offering their services to MRBs, but must also affirmatively ensure that they do not do so through adequate due diligence and reporting. The Money Laundering Control Act, Bank Secrecy Act, and the Banking Act of 1933 form an overlapping network of laws and regulations that make working with the cannabis industry prohibitive for banks. The potential penalties range from substantial fines, criminal prosecution, and even loss of the ability to operate in inter-state commerce through loss of federal deposit insurance. While there is a framework in place, supplied by the Obama-era Department of the Treasury, to allow banks to work with MRBs, the cost of doing so is onerous due diligence reporting on each and every MRB customer. Additionally, with the changes to Department of Justice policy instituted by former Attorney General Jeff Sessions in January 2018, banks now have far less certainty as to whether federal prosecutors will choose to go after them for doing business with MRBs. As a result, only 8.4% of financial institutions in the U.S. work with MRBs, and 70% of MRBs have no relationship with one.
Banks’ reluctance to work with MRBs because of these federal laws has created public safety issues for MRB operators. They are susceptible to robberies and burglaries because they are forced to keep hundreds of thousands of dollars in vaults on their premises. The methods used by criminals have ranged from threats with bear mace, to stick-ups, to even physical assault and torture. In Denver, Colorado, burglaries comprised almost 80% of cannabis industry-related crime, and, on average, more than 100 burglaries occur each year. The problem extends to states like California and Washington, which also have upticks in violent crime and theft related to MRBs.
This problem is compounded by the fact that many municipalities have been unable or unwilling to track crimes specifically perpetrated against MRBs. For example, the Washington State Liquor and Cannabis Board (WSLCB) is grossly understaffed, over 50-to-1 in proportion to the number of growers it must monitor. Only the Denver Police Department specifically and comprehensively tracks its cannabis-industry-related crimes. This general lack of tracking is problematic for smaller MRBs that cannot afford 24-hour security measures or large reinforced facilities, as it makes them even more vulnerable to criminals envisioning easy, big scores, since municipalities cannot craft comprehensive responses without such data. Sophisticated security systems for dispensaries carry a heavy price tag, especially if states mandate particular security requirements, and most small-scale MRBs are likely unable to afford them.
There is a solution though in a piece of federal legislation that recently passed in the House of Representatives in September 2019, the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”).
The SAFE Act Solution
Although the SAFE Act does not alter marijuana’s federally illegal status, it is designed to increase access to financial services for MRBs through a “Safe Harbor” shielding the banks from prosecution. By providing increased access to banking, the SAFE Act would greatly reduce the number of MRBs operating as all-cash businesses, and thus alleviate the safety concerns associated with such operations.
The SAFE Act’s provisions provide powerful protection for financial institutions seeking to do business with MRBs. Section 2 ensures that federal banking regulators cannot penalize financial institutions solely for doing business with an MRB, so long as that MRB continues to operate legally under applicable state laws. Section 3 classifies proceeds generated by MRBs as not unlawful, and thus allows financial institutions to process transactions involving funds from MRBs without fear of liability for participating in money laundering. And Section 4 ensures individual protection, both criminally and civilly, from prosecution by any federal government agency or department for the employees, directors, and officers of financial institutions doing business with MRBs.
The combined effect of these provisions will substantially alleviate the safety concerns that MRBs face in the current cannabis-banking environment. If MRBs are able to store their cash proceeds at banks, and use non-cash options for payment, then they will be less tempting targets for criminals. This will reduce crime rates for MRBs and result in an overall improvement in public safety. The primary reason that a majority of financial institutions have not dealt with cannabis businesses is the continued risk of federal regulatory action; but, if the Act becomes law, they will have sufficient legal cover to do so. The Senate should pass the SAFE Act to reduce that risk of regulatory action, and improve community safety across the nation.