Pot banking edges toward acceptability

Greg Deckard

Financial institutions that offer services to marijuana-related businesses operate in very much of a gray area. In late March, however, Congress took a major step toward opening banking services to the fast-growing industry.

The House Financial Services Committee voted 45-15 last week to send the Secure and Fair Enforcement Banking Act (SAFE) Banking Act, a bipartisan bill that aims to bridge the gap between state and federal laws, to the full House.

Testifying at an earlier hearing which helped lay groundwork for the SAFE Banking Act, Washington banker Greg Deckard outlined the difficulties facing financial institutions who serve marijuana businesses. The chair, president and CEO of State Bank Northwest in Spokane, Wash., spoke on behalf of the Independent Community Bankers of America in front of the House Subcommittee on Consumer Protection and Financial Institutions.

Deckard said he’s heard of people in Washington paying their excise taxes with bags full of cash. A report in the Oregonian described Oregon Sen. Jeff Merkley tagging along as one constituent went to pay his tax bill with $70,000 in cash and the state receiving tax payments as high as $90,000.

Washington has allowed recreational marijuana sales since 2012 and medical marijuana since 1998. Six financial institutions in the state currently service the marijuana industry, three of which are banks. (Deckard’s bank is not one of those.)

“I think all six of those would tell you that it’s been a fairly smooth process in collaborating with the various agencies and regulators given the well thought-out process that the state went through,” Deckard said. Those institutions invested in large amounts of due diligence and compliance work up front, he said, and all continue to work with the industry.

A lot may be at stake. Legal marijuana was a $10.4 billion industry in the U.S. in 2018, Beau Whitney, vice president and senior economist at New Frontier Data, told the Associated Press.

At the congressional subcommittee hearing, California State Treasurer Fiona Ma testified that as part of her research to learn more about the marijuana industry, she met with the Colorado Department of Revenue, which saw overall cannabis revenue increase from approximately $68 million in 2014 to more than $266 million in 2018. She went to Washington state, which collected $319 million in excise taxes in 2017, an increase of $130 million from 2016. Sales of legal cannabis in Washington ballooned from $259 million in fiscal year 2015 to $1.3 billion in fiscal year 2017.

Growth projections range wildly, but all tilt at a solidly upward angle.

Marijuana still in limbo

While the 2018 Farm Bill legalized hemp, it did nothing for state-legal cannabis programs. A report from the Brookings Institute notes: “Over the past 22 years, 33 states have legalized cannabis for medical purposes, and over the past six years, 10 states have legalized cannabis for adult use. Every one of those programs is illegal under federal law, with no exceptions, and the Farm Bill does nothing to change that.”

The landscape regarding marijuana has shifted often and fast. A big move came last year when U.S. Attorney General Jeff Sessions rescinded the Cole Memorandum, which Deputy Attorney General James Cole issued in 2013. The memorandum gave federal prosecutors more leeway in determining whether to prosecute cases involving marijuana in states where it was legal.

Sessions’s move raised the question whether the attorney general’s office was toughening its stance on enforcement of drug laws and sent a scare through the still-nascent marijuana industry. This year’s congressional subcommittee hearing and then the advancement of the SAFE Banking Act to the House suggest the sentiment around cannabis may once again be shifting.

The FDIC said it is following the 2014 guidance issued by the Financial Crimes Enforcement Network, which provides that financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity.

The FDIC has issued at least two cease and desist orders pertaining to banks with marijuana customers. These cases were brought for the failure to follow preexisting Bank Secrecy Act/Anti-Money Laundering responsibilities or FinCEN guidance and not for the sole reason that the bank had marijuana or hemp customers, according to the FDIC.

The banks weren’t fined, but they were ordered to implement numerous safeguards, including being required to develop, adopt, and implement a revised written program for monitoring and reporting suspicious activity, beef up staffing, intensify their focus on compliance programs and training, fortify due diligence controls and to “determine which customers require Enhanced Due Diligence necessary for those categories of customers the Bank has reason to believe pose a heightened risk of illicit activity including, but not limited to, high-risk business accounts.”

On a steep learning curve

Deckard said that there is still much to learn when it comes to taxing, regulating and banking the cannabis industry, but he wonders where those businesses will turn if they can’t work with banks. The lack of clarity could also result in potential inconsistencies when it comes to interpreting banking compliance regulations, Deckard said. Plus, the politics could swing against cannabis, and bankers are vulnerable without a statutory safe harbor in place.

“From regulatory cycle to regulatory cycle, depending on the examiner that you get, you might get more scrutiny from a compliance perspective on one exam vs. another,” Deckard said.

When Deckard testified, he was joined by California State Treasurer Ma; Neill Franklin of the Law Enforcement Action Partnership; Rachel Pross of Maps Credit Union in Oregon and representing the Credit Union National Association; and Corey Barnette, owner of a marijuana growing center and dispensary in Washington, D.C. – all of whom backed the concept of allowing banks to handle cannabis-related businesses.

Jonathan Talcott, who was the lone dissenting voice, said more needs to happen with cannabis before Congress addresses the banking issues around it.

“Technically, everybody who is involved in the cannabis industry is committing a federal felony,” said Talcott, chairman of the nonprofit Smart Approaches to Marijuana. “Until that’s changed, any changes to the Bank Secrecy Act or related anti-money laundering statutes won’t get us very far.”

Deckard has been encouraged by the action taken since the start of the year that banks might one day be able to work worry-free with cannabis-related businesses.

And perhaps momentum is building.

The topic came up often at the recent ICBA convention in Tennessee. The calls in support of allowing banks to serve the industry are increasingly coming from outside of the cannabis industry as well.

Said Deckard: “With more and more states now approving it doesn’t make a bank look like it’s out there putting its reputation on the line as much as it did five years ago. It’s kind of here to stay. That tax revenue is being spent willingly and these states are not going to give that up.”