The SAFE Banking Act and Cannabis: Why Banks Should Take Notice

Although the attention of the political world is currently drawn to impeachment hearings and the countless nominees vying for the Democratic presidential nomination, Congress has still found time to work on a bill that would allow banking institutions to transact with cannabis businesses.  The SAFE (“Secure and Fair Enforcement”) Banking Act (the “Act”) would change the existing laws that prohibit federally insured banks from providing services to cannabis businesses.  Not only will the Act allow banks to expand their customer base, but will enable anyone who interacts with a cannabis business to pay and receive payment through customary means without having to resort to cash or some alternative method.

Florida’s Booming Cannabis Industry and Its Lack of Banking Access

In 2016, Florida voters passed Amendment 2 to the Florida Constitution. This amendment allowed for the cultivation, distribution, and medical use of cannabis.  Since 2016, the sale of medical cannabis has grown to an estimated $626 million in 2018.  Within the next five years, the industry is projected to grow to more than a $2 billion industry.[1]  More than 280,000 Floridians now have received a medical recommendation to use cannabis.[2]  As of earlier this year, more than a hundred dispensaries have opened throughout the state, with an average of two more opening each week to serve this swelling number of patients.[3]

However even with this significant market in place, cannabis businesses still rely heavily on cash, due to marijuana being federally listed as a controlled substance.  Banks that are insured by the Federal Deposit Insurance Act or the Federal Credit Union Act cannot provide services to cannabis businesses, without fear of running afould of federal law.

Due to the lack of access to financial services, the Florida cannabis industry is using cash for its transactions, relying on a limited number of banks that have been granted a safe harbor exception, or are using third-party payment services to circumvent use of traditional banks. [4]  Using cash poses a number of downsides, including the increased risk of theft or embezzlement, as well as the increased overhead costs physically handling, storing, and transporting cash.  Further, consumers have shifted away from carrying large sums of cash as almost all other businesses accept payment via credit or debit card.  Additionally, the financial services industry is being denied access to this growing and lucrative market.   Channing federal law to allow banks to provide services to cannabis businesses would likely increase profits for both the cannabis and banking industry.

The SAFE Banking Act’s Changes to Existing Law

The SAFE Banking Act was initially introduced in early 2017, by legislators from Oregon and Colorado (states with legal cannabis industries).  However, both the Senate bill, S. 1152, and the House of Representative bill, H.R. 2215, never got out of the committees to which they were referred, and died at the end of the congressional term.

In the spring of 2019, the SAFE Banking Act was re-introduced in both the House and the Senate as H.R. 1595 and S. 1200, respectively.  Under the text of the bill, a Federal banking regulator would not be allowed to terminate the deposit insurance or share insurance of an institution, if that institution provided services to a cannabis business.  The banking regulator could not prohibit or discourage an institution from providing services to a cannabis business, or recommend that an institution cancel the account of a cannabis business or an employee of a cannabis business.

Additionally, the Act gives the employees and officers of a bank that provides services to a cannabis businesses assurances that their conduct is not prohibited by federal law.  Further, with the Act in place, a bank could invest the deposits from a cannabis business without the worry that the profits from such investments could be considered “fruits of the poisonous tree.”  The Act would also allow a bank to collateralize a loan with property owned by a cannabis business without facing fear that such collateralization could jeopardize the bank’s compliance with federal law.

The Act recognizes that not all banks will want to provide services to cannabis businesses.  A bank may have legitimate concerns about having a relationship with an industry that is viewed unfavorably by some.  Under the SAFE Banking Act, no institution will be required to provide services to a cannabis business and can refuse services if it sees fit.

The Act would not only provide banking access to businesses that deal in medical cannabis, but would expand banking access for hemp producers and businesses that sell hemp products, like CBD oil.  Florida, which recently passed laws allowing for the production of industrial hemp, projects that hemp production will contribute hundreds of millions of dollars to the state’s economy in the next two years.[5]  The Act has a provision that would direct Federal banking regulators to issue guidance to financial institutions confirming that hemp businesses are legal and that the bank can provide services to these business without fear of running afoul of federal law.

SAFE Banking Act Passes the House of Representatives, Awaiting Action in Senate

In late September, the Act was passed by the House of Representatives by 321 in favor and 103 opposed to the the Act.  The Act now sits with the Senate, which has referred the Act to the Committee on Banking, Housing, and Urban Affairs.  Although the chair of the committee that is steering the bill through the legislative process has said that the Act may be voted on by the end of 2019, there is has been any concrete evidence that the Act will make it out of committee within the next several months.  Some have viewed the conservative leadership of the Senate as being a roadblock to the passage of the Act, but the Senate leadership’s recent meetings with cannabis companies may be suggestive of an openness to the reforms of the Act.[6]  At this point, passage of the Act appears to be in a “wait and see” status.

If the Act were to receive the approval of the Senate and the White House, this would likely be an economic boon for Florida’s cannabis and financial services.  The progress of the Act can be tracked here.

If passed, the Act would allow cannabis businesses the access to credit they need, reduce the potential for crime (as there would be less cash handled by the businesses), and make the purchasing of cannabis more convenient for the growing number of patients in Florida.  For financial instructions, the passage of the Act would open new markets, grow deposits, and cut the compliance related risks that are now present.  Overall, the Act would help financial intuitions by clearly defining legal v. illegal conduct when it comes to dealing with cannabis businesses.  In an industry that needs to clearly understand all the risks its faces when making a business decision, the Act would provide some much needed assurances.

[1]  Heroux Pounds, Marcia.  Florida is Becoming a Leader in the Nation’s Marijuana Movement, South Florida Sun Sentinel, November 1, 2019.

[2] Gross, Samantha.  FL Patients Hard-Pressed to Find Smokable Medical Pot as Demand Increases, Miami Herald, November 4, 2019.

[3]Cowee, Maggie and Smith, Jeff.  Chart: Florida Medical Cannabis Market Surges Ahead, With Five Companies Dominating, Marijuana Business Daily, May 7, 2019. 

[4] Angel, Greg.  Here’s WHY Florida Medical Marijuana Industry is Largely Cash-Based, MyNews13.com, April 23, 2019. 

[5]  Gancarski, A.G.  Florida Hemp Cultivation Permits Just Months Away Fulfilling Nikki Fried’s Vision, Florida Politics.com, September 18, 2019. 

[6] Cherney, Max.  Mitch McConnell Meets with Pot Execs In California, Pitched Need for Cannabis Banking Reform, Market Watch, October 12, 2019.