On Sept. 25, 2019, the U.S. House of Representatives (the House) passed the Secure and Fair Enforcement (SAFE) Banking Act of 2019 (the Bill) to address the emerging issue of whether depository financial institutions (banks) can legally serve legitimate, state-legal cannabis-related businesses. The Bill provides safe harbor to banks providing services to cannabis-related businesses by prohibiting federal banking regulators from penalizing or criticizing a bank for providing financial services to such businesses. Additionally, the Bill addresses growing safety concerns for employees and owners of companies within the cannabis industry that operate cash-only businesses.
A Closer Look at the Bill
The purpose of the Bill is to provide safety to those associated with cannabis-related businesses by allowing them to use the U.S. banking system, which currently is inaccessible to these businesses by federal regulation. The Bill would grant access to cannabis-related businesses for many of the financial services most companies use daily, such as business checking accounts, electronic payment processing, employer-sponsored 401(k) accounts and small business loans.
According to the Bill, a depository institution shall not, under federal law, be liable or subject to penalty for providing a loan or other financial services to a cannabis-related business. The Bill prohibits federal banking regulators from the following:
- Terminating or limiting deposit insurance solely because the institution provides services to cannabis-related businesses;
- Prohibiting or penalizing banks from providing services to cannabis-related businesses;
- Recommending, encouraging or incentivizing banks not to offer financial services to an account holder solely due to their relationship with a cannabis-related business; or,
- Taking any adverse or corrective supervisory action on a loan made to a person solely because the person either owns such a business or owns real estate or equipment leased or sold to such a business.
The Bill also states that a depository institution may not be held liable pursuant to any federal law or regulation solely for providing a financial service or from investing any income derived from providing a financial service to a legitimate, state-legal cannabis-related business.
The next step for the Bill is to appear for consideration before the U.S. Senate (the Senate), where its future is uncertain. As currently written, the Bill may be modified or the Senate may do nothing with the House-passed Bill, instead opting to create its own bill. Therefore, it is unknown how long until the Senate takes action. Once the Bill is passed by the Senate, the Bill would appear before the President for final approval. Regardless of the actions taken by the Senate and the President, addressing a depository institution’s ability to provide financial services without penalty or regulatory criticism to cannabis-related businesses is now recognized as an important matter for the banking industry and for the government.
To prepare for legislation that allows depository institutions to serve cannabis-related businesses without penalty or regulatory criticism in the future, banks should begin to assess their risk appetite to serve the growing cannabis industry. Many banks may take the opportunity to serve cannabisrelated businesses once the legal aspects are resolved to achieve growth in loans and noninterest income as well as obtain lower cost deposit relationships. In contrast, other banks may be cautious about serving the industry given the perceived stigma and reputational concerns.
Banks should follow their normal risk management practices when considering services to the cannabis industry, including the following:
- Conduct research to understand the cannabis industry and related operations.
- Consider your institution’s risk appetite and how serving the cannabis industry may have impact.
- Tailor policies to address cannabis-related business specific matters (such as underwriting requirements, collateral considerations, customer due diligence and suspicious activity monitoring).
- Provide training to employees within the institution who will serve customers in the cannabis industry.
- Monitor developments in the regulatory and governmental space as it relates to cannabis.
We expect the Federal Financial Institutions Examination Council (FFIEC) will develop and issue guidance and examination procedures soon for those depository institutions serving state-legal cannabis-related businesses.
Click here to view this article as published in the 2nd Quarter 2020 issue of Bank Director.
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