On Aug. 20, the National Credit Union Administration (NCUA) announced that federally insured credit unions may offer financial services to legal hemp businesses, a promising step toward legal banking for the broader cannabis industry.
Although the Treasury Department has published guidelines for banks to provide services to the cannabis industry (including marijuana, hemp, and products derived from marijuana and hemp, such as CBD), financial institutions have been slow to work with businesses in the industry due to the contradictory legal status of cannabis—particularly marijuana—at the state and federal level.
With its new regulations, the NCUA, an independent federal agency that insures credit unions against bank failure (similar to the Federal Deposit Insurance Corporation), may help open the door for overt regulatory acceptance for banking in all aspects of the cannabis industry.
Financial Institution Support Still Lags Behind Explosive Growth
As of March, there are at least 633 depository institutions that provide financial services to the marijuana industry, the most controversial aspect of the cannabis industry from the perspective of federal law, according to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).
Banking services are critical: they facilitate more, and larger, transactions (it is difficult to move large quantities of cash), discourage criminality (cash business are vulnerable to money laundering), and make it easier to conduct business safely (cash businesses are easier to steal from). Lack of access to banking services poses a significant problem as the legal cannabis industry continues to grow rapidly and exponentially, hitting an $11.9 billion valuation in 2018 and expected to be worth $66.3 billion by 2025.
Generally speaking, banking in the cannabis industry is “quasi-legal.” The federal government tacitly permits banks to support the industry, and even provides official guidelines for how banks can provide financial services to cannabis businesses. This support, however, is technically illegal under federal law.
FinCEN has issued guidance as to how financial institutions servicing state-legal marijuana businesses can comply with federal regulations, but some banks are still reluctant to enter the market.
This reticence is due both to the fact that it is not unambiguously legal to bank cannabis businesses generally, and also due to banks’ concerns that supporting marijuana businesses while marijuana remains explicitly illegal under the federal Controlled Substances Act (CSA) can theoretically be characterized by prosecutors as aiding and abetting or money laundering. Such characterization could be the case even with respect to marijuana businesses that are otherwise legal at the state level.
Federal legislators have come close to passing laws that would remove all doubt as to the legality of what over 600 banks already do, and what FinCEN implicitly permits.
Most notably, the SAFE Banking Act (SAFE Act), a bipartisan bill with broad support, including from numerous state attorneys’ general, would protect financial institutions that provide banking services to cannabis companies (including marijuana companies) in compliance with applicable state law from adverse federal enforcement.
The SAFE Act was presented to the House Financial Services Committee and the Senate Banking Committee in 2017 and received hearings, but no votes in either chamber, at that time. The Senate version of the bill stalled after receiving a hearing in 2017 and has not yet been reintroduced. In the House, however, the bill received a full committee vote this year and awaits a full floor vote.
NCUA Fills Gap Left By 2018 Farm Bill
The 2018 Farm Bill legalized industrial hemp, defined as cannabis that has less than 0.3% tetrahydrocannabinol (THC), but unfortunately did not make it explicit that banks could provide services to the hemp industry.
Because the Farm Bill did not directly address the legality of banking businesses involved in the hemp industry, many financial institutions have been nervous about servicing businesses in that space due to the similarities between hemp and marijuana. Absent clear guidance that providing support to hemp businesses would not leave them open to federal enforcement actions, many financial institutions have chosen to steer clear of clients in the hemp industry.
Amid this context of a clear need, but incomplete legislative action, Sen. Michael Bennet (D-Colo.) issued requests to five federal agencies, namely, the Federal Reserve, the FDIC, the comptroller of currency within the U.S. Department of the Treasury (OCC), the NCUA, and the Farm Credit Administration (FCA).
The Federal Reserve, OCC, FCA replied that they do not plan to issue any guidance because they believe financial institutions can legally serve the hemp industry using guidance already in place and they prefer to leave more decision-making power to banks. The FDIC vaguely replied that it is aware of these concerns, which have been addressed in committee and banker outreach meetings, and that it will work to provide training and encouragement necessary to bank hemp businesses. The NCUA, however, officially authorized provision of banking services to the hemp industry, filling gaps left by the 2018 Farm Bill’s legalization of industrial hemp.
NCUA’s Decision Could Provide Model Guidance
Both sets of requirements impose stringent due diligence responsibilities for complying with federal anti-money-laundering laws, in particular by implementing programs that comply with the Bank Secrecy Act (BSA) and other anti-money laundering laws. The BSA requires banks operating in the U.S. to report transactions that involve transfers of $10,000 or more in a single transaction, or two or more related transactions occurring within a single 24-hour period.
Financial institutions must also report suspicious activity that could reflect possible money laundering or fraud. FinCEN enforces the BSA; institutions report covered activity by preparing Suspicious Activity Reports (SARs).
The NCUA’s regulations take a significant step forward, however, by explicitly permitting credit unions to provide banking services to one component of the cannabis industry. To be sure, this is because hemp is now legal federally, whereas marijuana is—at least officially—illegal under federal law.
At first glance, the regulations also appear more streamlined and practical, and therefore less onerous, than their FinCEN counterparts. For example, FinCEN guidance requires banks to develop an understanding of the normal and expected activities of the cannabis businesses that the banks will support, and additionally to conduct ongoing monitoring of publicly available sources for adverse information about the cannabis businesses and related parties.
On the other hand, the NCUA rules approach the same goal (compliance) by mandating generally that credit unions “remain alert to any indication an account owner is involved in illicit activity or engaging in activity that is unusual for the business.” Thus, the overall effect of the NCUA rules is not only to permit the provision of banking services to the hemp industry, but also to facilitate the services through more efficient and less burdensome practices.
Given the overall similarities between NCUA’s rules and FinCEN guidelines, the NCUA’s new regulations provide a clear model for how regulations for cannabis banking could be implemented as to financial institutions other than credit unions, and with respect to legal marijuana-related businesses, as well as hemp ones.
The NCUA’s legalization of lending to hemp businesses offers a model for how cannabis banking generally could be regulated in a way that mitigates risks associated with concerns such as money-laundering, while fostering agency oversight and economic growth.
Harmonization of NCUA regulations with earlier FinCEN guidance to institutions that provide banking services to cannabis companies also suggests a consensus may be forming as to the path forward for provide banking support to all aspects of the cannabis industry.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Barak Cohen is a partner in Perkins Coie’s White Collar & Investigations practice, and the Litigation Lead in the firm’s Washington, D.C., office. He is a former Department of Justice prosecutor, and now represents companies and individuals in international and U.S.-based internal investigations and high-stakes government investigations involving various regulatory bodies.
Michael C. Bleicher is an associate in Perkins Coie’s Privacy & Security practice. He focuses on matters involving the application of the Electronic Communications Privacy Act, intersections between privacy and national security matters, and general counseling for companies ranging from startups to blue chip firms.