Medical cannabis has arrived in Mississippi. What does that mean for Mississippi banks? The implications of this development are enormous for the financial services industry in Mississippi, as each institution will soon have to determine whether it will knowingly bank the proceeds of the state’s newest industry and, if not, how to ensure that it does not unwittingly do so.
To make this determination, the financial institution first must understand the federal and state rules and regulations at issue.
An Overview of Federal Anti-Money Laundering Laws
If medical cannabis is legal in Mississippi, why is there any obstacle to banking the proceeds of medical cannabis?
Federal anti-money laundering (AML) laws are the primary impediment to banks serving the cannabis industry. The Bank Secrecy Act (BSA) and its implementing regulations establish various recordkeeping and reporting requirements for national banks, federal savings associations, and agencies of foreign banks. As we previously explained, the BSA requires that a financial institution file a Suspicious Activity Report (SAR) when it knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity. This would seemingly include any transaction involving funds derived from manufacturing, distributing, or dispensing cannabis, which is illegal at the federal level under the Controlled Substances Act (CSA).
Over the years, federal regulators have issued a series of guidance memoranda attempting to clarify when a bank must file an SAR regarding its cannabis customers. In 2013, the Department of Justice issued a memorandum for all United States attorneys providing guidance regarding cannabis enforcement, better known as the “Cole Memo.” In response to the Cole Memo and the growing number of states legalizing cannabis under state law, the Financial Crimes Enforcement Network (FinCEN) issued guidance that sought to “clarif[y] how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations” (FinCEN Guidance) in 2014. The FinCEN Guidance requires that a financial institution engaging a cannabis-related business conduct substantial and, importantly, continuing due diligence to determine whether that business is (1) complying with state law, (2) interfering with any of the eight priorities listed in the Cole Memo, or (3) otherwise engaging in “suspicious activity,” including a list of “red flags” enumerated in the guidance. Depending on what the institution uncovers in its due diligence, it must then file one of three cannabis-specific SARs and continue filing SARs throughout its relationship with the cannabis-related business.
While the FinCEN Guidance is an informal guidance document that does not immunize a financial institution from federal prosecution, many financial institutions have relied on it to provide banking services to cannabis companies. Indeed, 515 banks and 169 credit unions were providing such services as of December 2020. However, as the American Bankers Association has explained, “without congressional action,” the “majority of financial institutions will not take the legal, regulatory, or reputational risk associated with banking cannabis-related businesses[.]”
What does the SAFE Banking Act do?
By its terms, the SAFE Banking Act seeks to “ensur[e] access to financial services to cannabis-related legitimate businesses and service providers” by removing some of the attendant legal and regulatory risks. The act’s key aspects include:
- Establishing that “proceeds from a transaction involving activities of a cannabis-related legitimate business or service provider” are not “proceeds from an unlawful activity,” such that processing transactions involving these proceeds will no longer constitute money laundering “solely” because the proceeds derived from cannabis.
- Prohibiting federal regulators from terminating or limiting depository insurance solely because a financial institution provides services to a cannabis-related legitimate business.
- Prohibiting federal regulators from taking adverse actions against, or otherwise discouraging, financial institutions from providing services to cannabis-related legitimate businesses.
- Protecting depository institutions from civil, criminal, or administrative asset forfeiture for providing financial services to cannabis-related legitimate businesses.
- Amending the SAR reporting guidelines for cannabis-related legitimate businesses.
- Directing the Financial Crimes Enforcement Network to issue guidance and exam procedures for financial institutions transacting with cannabis-related legitimate businesses.
Will the SAFE Banking Act pass?
The SAFE Banking Act’s prospects for becoming law have waxed and waned for more than two years. The act was first introduced by Rep. Ed Perlmutter on March 7, 2019, but it failed to receive the support needed to pass the Senate.
The act re-emerged in both the House and Senate with more bipartisan support in March 2021. Rep. Perlmutter again introduced the SAFE Banking Act – H.R. 1996 – this time with 180 cosponsors (154 Democrats and 26 Republicans). Around the same time, Sen. Jeff Merkley introduced a similar bill – S. 910 – with 39 cosponsors (28 Democrats, nine Republicans, and two Independents). The act passed the House on February 4, 2022 as part of the America COMPETES Act of 2022. The Senate previously passed a version of the COMPETES Act without the cannabis banking provision, so the Senate still must act favorably before the SAFE Banking Act can become law.
As we recently wrote, there appear to be sufficient votes in both houses of Congress – including Republican votes – to pass the SAFE Act if it receives a straight-up vote. The harder question is whether those leading the charge for federal cannabis reform will allow for the proposal to proceed to a vote in a piecemeal fashion or if they will insist that lawmakers vote on a broader reform package as a whole (including widespread decriminalization, expungement of prior marijuana convictions, etc.). If the latter, I think Republicans may balk at some of the more progressive provisions. If that happens, we will see whether the most strident supporters of cannabis reform are willing to take a narrower victory or if they will insist on an all-or-nothing approach.
The Mississippi Medical Cannabis Act addresses the issue of banking medical cannabis, making clear that “[a] bank may provide any services to any person or entity licensed in this state to engage in the business of medical cannabis, or with any person or entity engaging in business dealings with such licensee, if the bank provides those services to any other business.” Further, a bank and its officers, directors, agents and employees are not liable pursuant to any state law or regulation solely for (a) providing financial services to a licensed medical cannabis establishment or (b) investing any income derived from providing financial services to a licensed medical cannabis establishment. On the other hand, a bank is not required to provide financial services to a licensed medical cannabis establishment.
These provisions appear to provide a safe harbor to banks in Mississippi wishing to provide banking services to cannabis customers. The confounding factor, however — and as is so often the case in the cannabis industry in the United States — is that cannabis is still federally illegal. Mississippi banks are, therefore, generally still subject to the federal AML laws described above.
So, is the juice worth the squeeze? Are there risks associated with banking proceeds of cannabis activity? Yes. But, then again, risk is inherent when financial institutions provide services to any industry. The cannabis industry, though, presents financial institutions with unique challenges and unique opportunities. And, as it so often is when deciding questions involving questions, the answer likely depends on how each financial institution approaches the analysis of risks and benefits.
For financial institutions looking for new revenue streams, the cannabis industry creates new opportunities through low-cost deposits, cash handling fees, treasury management services, and the like. Although cannabis companies will always present compliance challenges for financial institutions, those willing to invest in the infrastructure required to manage relationships with this higher-risk industry stand to reap significant rewards.