Senate Majority Leader Chuck Schumer (D-NY) has said that federal legislation addressing some of the banking challenges facing the legal cannabis industry is a priority this year. However, despite Sen. Schumer’s support, new concerns have emerged within his caucus that may endanger proposed solutions.
The Secure and Fair Enforcement (SAFE) Banking Act has been billed as the answer to banking woes for cannabis companies and a version of it has been introduced in every Congress since 2013. The U.S. House of Representatives first passed the bill in 2019 and has passed it seven times in total. Some of these votes have occurred on a standalone version of the bill, while others incorporated the SAFE Act’s language into larger bills, including budget and COVID-19 pandemic-related bills.
The U.S. Senate has never held a vote on the SAFE Act because Senate filibuster rules essentially require 60 senators to agree on a bill before it progresses to a floor vote and Senate Republicans have prevented the SAFE Act from reaching a floor vote. Thus, even when SAFE Act language has appeared as a component in larger measures, it has been stripped out in the Senate.
SAFE Act in detail
From a policy standpoint, the SAFE Act would make three key changes to cannabis banking laws. First, federal deposit insurance providers like the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association could not threaten or withhold coverage from a bank simply because it offers services to a legal cannabis company that is compliant with its state’s laws.
Second, proceeds from state-licensed cannabis sales would not be considered unlawful. This means depositing those proceeds into banks would no longer constitute money laundering under federal law.
Finally, banks could not have their assets seized for offering loans to legally operating, compliant cannabis companies.
Beginning in 2019, the SAFE Act has also incorporated language intended to protect insurers who provide coverage to cannabis companies operating in compliance with state law from being “held liable under any Federal law or regulation.” Insurance offerings for cannabis have been sparse and unduly costly relative to commercial offerings in other industries because insurers might be subject to federal charges of aiding and abetting or money laundering provisions. Policies intended to protect against civil or legal risk—such as officers’ and directors’ insurance—are nearly impossible to find at any price because state-licensed cannabis companies are, by definition, federal criminal enterprises.
Technically, it is not illegal under current law for banks to offer accounts to cannabis companies, even if they are operating legally in states.
The U.S. Justice Department, through its Financial Crimes Enforcement Network (FinCEN) division, promulgated rules in 2014 intended to “enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” Most cannabis companies report they already hold a bank account through a bank that follows these rules. However, these accounts are concentrated in a handful of local banks and credit unions, while 95 percent of financial institutions still refuse to offer accounts.
As Reason Foundation has detailed, most banks have arrived at this decision because compliance with the FinCEN guidance is so extensive and costly that servicing a cannabis account would be unprofitable. Among the banks that do offer accounts, they typically pass these costs onto account holders by charging thousands of dollars each month to maintain the account, plus a percentage of all deposits. Thus, while it’s expensive for cannabis companies to maintain a checking account, they are available and allow licensees to deposit cash earned from legitimate sales and to make electronic payments to employees, vendors, and tax authorities.
Changing political calculus in 2023
Some emerging Republican support for SAFE Banking in 2023 theoretically makes its passage possible. Sen. Steve Daines (R–MT) is a co-sponsor of the SAFE Act and a U.S. Senate Banking Committee member, where the bill received its first Senate hearing this May. Daines has apparently privately indicated that there are at least 10 Senate Republicans in favor of the SAFE Act this year:
According to new intel from Pelorus Capital Group Co-Founding President Rob Sechrist, a prominent member of the Senate Banking Committee—the group currently studying SAFE Banking legislation and which held a hearing in May—has the 10 votes needed to pass a potential Senate floor vote.
On our latest Trade To Black podcast, Mr. Sechrist stated that he recently met with Senator Steve Daines (R-MT), a member of the Senate Banking Committee and co-sponsor of the SAFE Banking Act. While the meeting agenda was broad, the issue of SAFE Banking was addressed directly.
Straight to the point, Rob Sechrist reports that, “Senator Daines confirmed to me that he does have the ten votes necessary (for SAFE Banking Act passage). And the way he worded it was with a lot of confidence, as if he’s got more (votes) than necessary.”
A spokesperson for Daines said there are enough Republican votes to get SAFE passed.
Sen. Rand Paul (R-Ky.), a long-time cosponsor of the bill and one of the lawmakers involved in negotiations since last year, agrees: “I think we have over 60 votes,” he said on Tuesday but added, “Who they are, I’m not sure.”
Those estimates from Sens. Paul and Daines likely suggest that if all 50 members of the Democratic caucus supported the measure, they believe they could find 10 Republican votes and secure passage of the bill. But that’s where the political calculus gets tricky.
Some Senate Democrats, led by Jack Reed (D–RI), began raising new objections this summer to old language that has appeared in every version of the SAFE Act since 2019. That year, language from the Financial Institution Customer Protection Act was folded into the SAFE Act to coax Republican support before 100 House Republicans voted in favor of the SAFE Act. This language, incorporated as Section 10 of the SAFE Act, was designed to prevent federal regulators from pressuring financial institutions to refuse services to specific customers or industries.
In a program called Operation Choke Point, the Obama administration in 2012 began directing banking regulators to try and cut off financial services to businesses it labeled “high-risk” but were nevertheless legal industries like payday lenders, gun shops, and pornographers. Although the program ended in 2017, Section 10 of the SAFE Act would expressly revoke any authorization for regulators to force account closures unless the account holder breaks the law. Sen. Reed now argues this language should be pared back to apply only to the cannabis industry while preserving regulators’ discretion to force the closure of other accounts as they did under Operation Choke Point.
This new wrinkle has introduced an unexpected impasse that may again prevent the SAFE Act from reaching the Senate floor. Since Section 10 has not been controversial in any of the previous iterations of the SAFE Act, Reed may be simply manufacturing political cover for some Senate Democrats who do not want to go on record with a vote on the legislation. While the bill has far more support amongst Senate Democrats than Republicans, several Senate Democrats and President Joe Biden have publicly indicated opposition to broader marijuana legalization and may also oppose incremental moves like the SAFE Act.
Despite the limited availability of financial services for legal cannabis companies, well-capitalized firms are at least able to access these services under the 2014 FinCEN rules, even if the fees appear to be unaffordable for smaller firms.
However, the essential advantage to be gained from the SAFE Act is that it would allow banks to lend money to cannabis companies. Currently, this would be considered aiding and abetting a federal crime, so bank lending is minimal, leaving cannabis companies to rely almost exclusively on private equity to finance their often-heavy startup costs. This scenario favors well-heeled cannabis companies that already control or have access to capital while leaving aspiring entrepreneurs of modest means behind.
Suppose Congress wants to level the playing field in state-legal cannabis markets so that independent and smaller companies can compete. In that case, it must find a way to loosen the financial controls around the industry, which it could do through an incremental measure like the SAFE Act or, preferably, through a comprehensive legalization bill like the States Reform Act.