New financial institutions that want to do business with the cannabis industry would get the same protections as existing banks or credit unions under an amendment Rep. Katie Porter (D-Calif.) plans to propose to the SAFE Banking Act.

Porter plans to introduce the amendment to H.R. 1595 as soon as March 26 when the House Financial Services Committee begins a multi-day markup of a package of bills.

The amendment clarifies that federal regulators can’t deny a “de novo” financial institution application for services like a charter, deposit insurance, membership in the Federal Reserve System or a Fed master account, or any other Fed services.

The provisions are meant to prevent a repeat of Colorado-based Fourth Corner Credit Union’s battle with the Kansas City Federal Reserve to obtain a master account. Fourth Corner had openly said it planned to do business with the cannabis industry, which is legal in its state. The regional federal reserve bank in 2018 granted Fourth Corner a provisional master account but restricted it from doing business directly with marijuana growers.

Fourth Corner’s difficulty in establishing basic banking functions highlights just one of the concerns facing the financial services industry as it looks to tap into -- or retain business with -- the burgeoning cannabis industry.

Growing Sector

The Secure and Fair Enforcement (SAFE) Banking Act is meant to shield financial institutions from enforcement actions by federal regulators for doing business with companies like dispensaries, cannabis growers, or even their landlords, accountants or lawyers.

Recreational cannabis is legal in 10 states and the District of Columbia. Some form of cannabis product use is legal in the majority of states. The industry is forecast to reach $80 billion in annual sales by 2030, according to Vivien Azer, a senior analyst with equity research firm Cowen. Meanwhile, the vast majority of the industry still has to transact in cash.

Without congressional action, a significant portion of economic activity will remain on the sidelines of the financial industry, the two largest bank and credit union trade groups said in a joint March 25 letter.

“The SAFE Banking Act of 2019 provides a mechanism for the cannabis industry and its service providers to deposit their cash in regulated financial institutions, which allows our members to meet the needs of their communities and helps those communities reduce cash-motivated crimes, increase the efficiency of tax collections, and improve the financial transparency of the cannabis industry,” the American Bankers Association and the National Credit Union Association said.

Though the bill stands strong chances for passage in both the Democratic-majority Financial Services committee and on the House floor, its prospects are less clear in the Senate.

Risk Averse

Not everyone agrees the SAFE Banking Act, if enacted, would resolve the banking industry’s hesitancy in dealing with marijuana businesses.

As currently written, there still isn’t enough detail in the bill to satisfy the most wary financial institutions, Rasul Raheem, senior counsel in Dykema Gossett PLLC’s Detroit office, said.

“One of the problems is this is a business that historically has been operated as a criminal enterprise; those enterprises are still out there so you run the risk of opening the banking system to people that have a criminal background and are still operating as a criminal enterprise,” he said.

Many due diligence questions still need to be answered, said Raheem, who has advised major banks on compliance issues when they discover they have a cannabis-related client. HFS Committee ranking member Patrick McHenry (R-N.C.)'s March 21 letter to committee Chairwoman Maxine Waters (D-Calif.), asking her to delay markup on the bill, raised many of those issues, Raheem said.

“Implementing this legislation, although a good step, is kind of getting ahead of ourselves without really addressing the industry and how it would make sure that you don’t have drug cartels and other criminal enterprises setting up shell entities and all of a sudden having access to the U.S. banking system,” Raheem said.

Without coordination with the Judiciary committees or law enforcement agencies, including the Department of Justice, it’s unlikely the legislation would give a large number of banks or credit unions the assurance they need to bank the pot industry, Raheem said.