Changing political winds and the diminishing stigma surrounding cannabis has led U.S. lawmakers that historically restricted in Congress and criminalized the use and distribution of cannabis to reconsider those long held views. Recently, two bills were introduced, one in the House of Representatives entitled the SAFE Banking Bill and passed by the House in April 2021. A separate piece of legislation, still being drafted in the Senate, has been initially described as the Marijuana Decriminalization Bill.
These legislative changes would inevitably impact government enforcement on restrictions of marijuana-based activity, as well as compliance-related measures in the private sector. One such area is the filing of marijuana-related Suspicious Activity Reports (SARs). We will briefly review the current state of the suspicious activity regulations from the Financial Crimes Enforcement Network (FinCEN) in effect, anticipated changes from these two bills and their potential impact on financial institutions covered under the Bank Secrecy Act (BSA), as amended.
The Current State
Cannabis or marijuana and its related products remain listed by the US Drug Enforcement Administration (DEA) as a Schedule I drug. Drugs, substances or chemicals on this Schedule are defined as drugs with no currently accepted medical use and have a high potential for abuse1. As such, financial institutions covered by the BSA have had to report any transactions or customers appearing to be involved with a Schedule I drug as a suspicious activity and filing a SAR with FinCEN.
More recently, with an ever-increasing number of states legalizing the sale and use of cannabis medically and/or recreationally and decriminalizing cannabis2, FinCEN on April 14, 2014, issued FIN-2014-G001, providing guidance to the covered financial services industry on the Agency’s expectations for cannabis-related SAR filings3. The guidance provided a risk basis on “how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations,”4 noting each covered financial institution should determine “its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively.”5 SAR reporting of cannabis-related transactions under the guidance was broken down into three increasing risk categories6:
- Marijuana Limited – “The content of this SAR should be limited to the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified.”7;
- Marijuana Priority – “The content of this SAR should include comprehensive detail in accordance with existing regulations and guidance. Details particularly relevant to law enforcement in this context include: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) details regarding the enforcement priorities the financial institution believes have been implicated; and (iv) dates, amounts, and other relevant details of financial transactions involved in the suspicious activity.”8; and
- Marijuana Termination – “If a financial institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program, it should file a SAR and note in the narrative the basis for the termination.”9
While the guidance prepared covered financial institutions an avenue for providing financial services to the cannabis industry, it increased the time and manual decision-making process for determining which marijuana SAR category to file under. In addition, as the number of state laws legalizing cannabis in different forms increased, the complexity for covered financial institutions to file accurately categorized SARs since the 2014 guidance has only increased. A further example of this complexity in the FinCEN guidance includes: “where services are being provided indirectly (e.g., a financial institution could be providing services to a non-financial customer that provides goods or services to a marijuana-related business), the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.” Whether the financial institution decides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances.”10
Anticipated Changes From Proposed Legislation
The two proposed bills appear to differ in their respective approaches, with the House bill currently being a bit narrower in scope as compared to what the Senate may be drafting and has drafted in the past11. In the end, when the two pieces of legislation are reconciled between both houses of Congress, it is likely that the final bill would substantially reduce the need for covered financial institutions to file SARs on cannabis-related businesses and transactions.
House of Representatives: Proposed Secure and Fair Enforcement (Safe) Banking Bill of 202112
The proceeds of transactions with cannabis-related legitimate businesses13 (CLBs) and their service providers would no longer be considered proceeds from an unlawful transaction and thus not considered money laundering, and would also not be subject to any civil, criminal or administrative forfeiture of legal interest in providing a loan or other financial service. Moreover, the bill would prohibit federal banking regulators from, among other things:
- Terminating or limiting deposit or share insurance, or taking any adverse action against a “depository institution” solely because the institution provides, or has provided “financial services” to CLBs or service providers of a CLB;
- Prohibiting, penalizing, or discouraging a depository institution from providing financial services to a CLB or service provider;
- Recommending, incentivizing, or encouraging a depository institution not to offer financial services to an account holder because of the account holder’s connection to a CLB;
- Taking any adverse or corrective supervisory action on a loan made to a CLB or service provider (or their employees, owners, and operators), or to the owner or operator of real estate leased to a CLB or service provider; and
- Closure of accounts associated with a CLB unless the federal banking regulators provide a valid reason (e.g., national security), but cannot be solely due to reputational risk. In addition, notice of the closure to the customer would be required, providing a valid reason, except in cases of national security.
- The bill provides protection for businesses that perform financial services for or in association with a depository institution. Such institutions could facilitate payments and act as a money transmitter (e.g., a money service business (MSB)) that uses a depository institution to facilitate a payment for a CLB or service provider;
- Insurance companies would be authorized to write insurance for CLBs and their service providers;
- If enacted, FinCEN would be obligated within 180 days to update its guidance of April 14, 2014 (FIN-2014-G001) regarding SARs to conform with the provisions of the SAFE Banking Bill and not inhibiting the provision of financial services to cannabis-related businesses;
- The Federal Financial Institutions Examination Council (FFIEC) would be required within 180 days to issue guidance and update its examination procedures for federal bank examiners of such depository institutions on these revised requirements (i.e., updating the FFIEC’s BSA/AML Examination Manual of 2014, as amended); and
- Within 90 days of enactment, due to hemp-related legitimate businesses14 still having difficulty in obtaining financial services, the Federal banking regulators are to update their existing hemp banking guidance15 for hemp-related legitimate businesses and service providers to further advise and clarify depository institutions on their BSA and other Federal obligations to legitimate businesses in the hemp industry.
Senate: Proposed Marijuana Decriminalization Bill of 2021
The new Senate bill, while still being drafted, is expected to leverage items from its last version of the bill (i.e., S 597, the Marijuana Justice Act of 2019)16, as well as items noted in the above SAFE Banking Bill from the House. The Senate’s prior version of the bill included:
- Specifically, removes marijuana from the list of scheduled substances under the Controlled Substances Act and eliminates criminal penalties for an individual who imports, exports, manufactures, distributes, or possesses with intent to distribute marijuana;
- Reduces federal funds for a state that has not legalized marijuana and has a disproportionate arrest rate or a disproportionate incarceration rate for marijuana offenses;
- Directs federal courts to expunge convictions for marijuana use or possession; and
- Establishes a fund—the Community Reinvestment Fund—to support grants in communities most affected by the war on drugs.
Potential Effects to BSA/AML Programs
While it remains uncertain if either of the bills, or a combination thereof, will be finalized during the 117th Congress, if a bill is enacted into law, covered financial institutions might likely gain the following benefits once enacted and FinCEN issues updated final regulations, if any:
- Reduction in the number of cannabis-related SARs to be filed (i.e., some SARs likely to continue if national security is involved);
- Reduction in the number of potential alerts and escalated cases related to cannabis business activities, allowing covered financial institutions to either reallocate BSA/AML operational resources to other higher-risk alert/case investigations (e.g., other criminal drug activities, fraud, cyber-related events, human trafficking, terrorism, etc.) or, in some circumstances, reducing the number of required investigation staff (whether on-shore or off-shore);
- Improving the overall efficiency of Financial Intelligence Units (FIUs) by eliminating a full category of investigations thereby allowing more time for an FIU to enhance technology and analytics resources, a focus of the AML Act of 202017; and
- Allowing all covered financial institutions to either initiate or increase marketing efforts, formally establishing relationships, and selling financial products and services (e.g., cash management, lending, venture capital, debt/equity securities offerings and insurance) to a new industry that drastically needs financial services support.
How DHG Can Help
DHG’s Regulatory Advisory practice supports the growing and changing requirements and expectations of your institution’s Anti-Financial Crime needs. We stand ready to help our FS industry clients assess, transform, validate, and provide recommendations on their BSA/AML/OFAC Programs. Our collaborative process, whether on a holistic program basis and within specific control areas, assists our clients to stay ahead of changing regulatory requirements and expectations, while also improving the effectiveness and efficiency of their program and its underlying controls. Learn more by visiting our website or reaching out to us at firstname.lastname@example.org.
- US DEA Drug Scheduling (dea.gov) and US Department of Justice’s (DOJ) Diversion Control Division PART 1308 - Section 1308.11 Schedule I (usdoj.gov) governed by the Control Substances Act
- National Council of State Legislatures, State Medical Marijuana Laws (ncsl.org)
- FinCEN, FIN 2014 G001 (fincen.gov)
- https://www.congress.gov/116/bills/s597/BILLS-116s597is.pdf and https://www.congress.gov/116/bills/s697/BILLS-116s697is.pdf
- H.R.1996 - SAFE Banking Bill of 2021, https://www.congress.gov/bill/117th-congress/house-bill/1996?q=%7B%22search%22%3A%5B%22cannabis%22%5D%7D&r=3&s=2
- Defined as a manufacturer, producer, or any person or company that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products. Op cit, page25 https://www.congress.gov/bill/117th-congress/house-bill/1996?q=%7B%22search%22%3A%5B%22cannabis%22%5D%7D&r=3&s=2
- Agriculture Improvement Act of 2018 removed hemp as a Schedule I drug. This included “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.” 7 U.S.C. 1639o(1).
- FinCEN, FinCEN Guidance, FIN-2020-G001, and Banking Regulators Hemp Guidance (Final 12 3 19) FINAL (fincen.gov)
- DHG Knowledge Share of March 2021, The Implications of the Anti-Money Laundering and Corporate Transparency Acts of 2020 (dhg.com)