On May 15th, House representatives passed H.R. 6800 (The HEROES Act), the latest COVID-19 related stimulus package. Included in the provisions of the bill was the SAFE Banking Act of 2020, a bill which would provide safe harbor for financial institutions who service cannabis related businesses. On May 19th, the Attorneys General sent a letter to congress urging passage of the act. The all-cash nature of the cannabis industry poses serious problems for public health, safety, and tax collection for businesses and state regulators, and during the COVID-19 pandemic these issues have become even more important.
This post will discuss the provisions of the SAFE Banking Act of 2020. We will first discuss how the bill’s safe harbors and legal protections would apply to depository institutions. We will then discuss how the bill alters the guidance handed down to financial institutions by the Financial Crimes Enforcement Network (FinCEN). Finally, we will end with a discussion of the bill’s application to CBD and Hemp businesses.
How do the SAFE Harbors Function?
In our recently released white paper, Solving an Untenable Situation: The Public Health and Safety Rational Behind the Secure and Fair Enforcement Banking Act, we discuss how the Federal Deposit Insurance Corporation (FDIC) has significant regulatory authority over financial institutions via the issuance of Federal Deposit and Share Insurance. Federal and state law require all banks and credit unions to receive such insurance either through FDIC or the National Credit Union Administration (NCUA), and requirements for maintaining such insurance include complying with the provisions of the Controlled Substances Act (CSA), the Money Laundering Control Act (MLCA) and the Bank Secrecy Act (BSA). As we explain in detail in our paper, these laws collectively prohibit financial institutions from servicing marijuana-related businesses (or cannabis-related legitimate businesses, as defined by the act), so banks who provide such services to cannabis businesses risk revocation of their deposit and share insurance, which effectively closes the bank’s doors overnight.
Sec. 110606(b)(1) of the SAFE Banking Act of 2020 states that:
“A federal banking regulator may not . . . (a) terminate or limit the deposit insurance or share insurance of a depository institution . . . or take any other adverse action against a depository institution . . . solely because the depository institution provides or has provided financial services to a cannabis-related legitimate business or service provider.
In addition to revocation of deposit and share insurance, penalties for not complying with the CSA, MLCA and BSA can also include monetary penalties for financial institutions. Section (b) further states that:
“A federal banking regulator may not . . . (b) prohibit, penalize, or otherwise discourage a depository institution from providing financial services to a cannabis related legitimate businesses . . .”
These provisions collectively prohibit federal banking regulators from penalizing financial institutions solely for servicing a cannabis-related legitimate business. The provisions do not speak to the legitimacy of a states cannabis businesses, leaving legitimacy to be determined by the states. The provisions also do not require financial institutions to service cannabis businesses, they only provide assurance to financial institutions who do service cannabis related businesses that they will not be penalized solely for servicing such a business.
Under the MCLA, a financial institution can be charged with money laundering if it conducts a financial transaction involving the proceeds of a known “specified unlawful activity” while also knowing that the transaction is meant, in whole or in part, to conceal something about the nature of those proceeds, or to avoid a reporting requirement. “Specified unlawful activity” includes the manufacture, importation, sale, or distribution of a controlled substance. A financial institution can also commit money laundering under the MLCA by knowingly engaging or attempting to engage in a transaction in more than $10,000 of criminally derived property, which includes marijuana.
Sec. 110606(c) states that:
“. . . the proceeds from a transaction involving activities of a cannabis-related legitimate business or service provider shall not be considered proceeds from an unlawful activity solely because . . . (1) the transaction involves proceeds from a cannabis-related legitimate business or service provider.”
By removing proceeds from a transaction involving activities of a cannabis-related legitimate business from the definition of unlawful activity, this provision allows financial institutions to manage payments from cannabis related businesses to other ancillary businesses without fear of being charged with money laundering.
Finally, under existing FinCEN & DOJ guidance, financial institutions who want to bank cannabis businesses must comply with substantial burdens, but even complete compliance does not alleviate the risk that federal banking authorities may take action against such institutions. If a financial institution is charged with money laundering under the MLCA or BSA, criminal and financial penalties can extend beyond the institution to individual officers or employees of the institution, serving as further disincentive for financial institutions to bank cannabis-related legitimate businesses.
Sec. 110606(d) alleviates that possibility by providing that:
“With respect to providing a financial service to a cannabis-related legitimate business or service provider within a State . . . that allows . . . cannabis pursuant to a law or regulation of such State, . . . a depository institution . . . and the officers, directors, and employees of that depository institution, . . . may not be held liable pursuant to any federal law or regulation (a) solely for providing such a financial service, or (b) for further investing any income derived from such a financial service.” (emphasis added)
This provision addresses Deputy Attorney General Cole’s statement in the 2014 DOJ guidance to financial institutions, that “neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA, the money laundering and unlicensed money transmitter statutes, or the BSA.” Under Sec. 110606(d), financial institutions could rely on this provision as a defense to prosecution solely on the basis of banking a cannabis related business.
How does SAFE Alter FinCEN Guidance?
All financial institutions must file Suspicious Activity Reports (“SARs”) with FinCEN if the institution knows, or has reason to know, that the funds involved in a transaction were derived from illegal activities. The guidance makes clear that financial transactions involving cannabis-related legitimate businesses constitute funds derived from illegal activities. The attached white paper discusses in detail the different SARs filings and the requirements for each filing.
Sec. 110606(f)(5)(a) states that:
“With respect to a financial institution . . . that reports a suspicious transaction pursuant to this subsection, if the reason for the report relates to a cannabis-related business or service provider, the report shall comply with appropriate guidance issued by the Financial Crimes Enforcement Network. The Secretary shall ensure that the guidance is consistent with the purpose and intent of the SAFE Banking Act of 2020 and does not significantly inhibit the provision of financial services to a cannabis related legitimate business. . .” (emphasis added).
Based on this language, the SAFE Banking Act of 2020 does nothing, in and of itself, to alter the reporting requirements to FinCEN for financial institutions. Financial institutions would still need to comply with the current FinCEN guidance. However, since the current FinCEN guidance does “significantly inhibit the provision of financial services to cannabis related legitimate businesses,” FinCEN would likely be required to issue new or updated guidance which conforms to the purpose of the SAFE Banking Act of 2020, which is to “ensure access to financial services [for] cannabis-related legitimate businesses.”
SAFE’s Application to CBD and Hemp Businesses
The SAFE Banking Act applies not only to financial institutions serving cannabis-related legitimate businesses but also to hemp farmers and hemp-derived CBD manufacturers.
Hemp and hemp-derived CBD products were made lawful under the Agricultural Improvement Act of 2018 (“The 2018 Farm Bill”). Why then did the House feel the need to provide explicit coverage?
Hemp and marijuana are derived from the same plant, cannabis sativa, but have an important scientific and legal difference. Under the 2018 Farm Bill, hemp and hemp-derived CBD products are exempted from the definition of “marijuana” in the CSA, on the condition that said hemp contains no more than 0.3% THC (as measured on a dry-weight basis). THC, Delta-9 tetrahydrocannabinol, is the compound that creates a psychoactive experience, or high. Cannabidiol (CBD), on the other hand, is the non-psychoactive cannabinoid found in marijuana and has been shown to have an anti-inflammatory effect. Currently, CBD is being extracted from hemp and turned into all manners of consumer products (beverages, topical lotions, dietary supplements, and pet food). You’re not alone if any of this is confusing to you.
The Act makes clear that there is widespread consumer confusion on the relationship between hemp, CBD, marijuana, and THC. Research conducted by Digital Citizens Alliance has found nearly four in ten Americans think CBD is another name for marijuana. Despite the confusion, the estimated size of CBD marketplace is enormous, with sales revenue exceeding $1 billion in the U.S. in 2019. Confusion over legality compounded with the rate of market expansion has impacted hemp farmers and extractors ability to access the national banking system.
To that end, the SAFE Banking Act applies the “safe harbor” with equal force to financial institutions serving hemp farmers and CBD manufacturers and includes two additional mandates.
First, federal bank regulators are directed to issue guidance to financial institutions “confirming the legality of hemp, hemp derived CBD products and the legality of engaging in financial services with businesses selling” such products.
Second, federal bank regulators must also provide recommended best practices to follow when servicing hemp farmers and hemp derived CBD products manufacturers.
There are practical reasons why a financial institution may be gun shy to engage a hemp farmer or CBD manufacturer. Hot Hemp is a primary concern. Consider this scenario: A hemp farmer grows 50 acres of hemp plants on an outdoor cultivation site registered appropriately with its state department of agriculture. Before he begins to sample his plants to ensure they contain no more than 0.3% THC, a number of things could occur to render his crop illegal: a strong wind cross-pollinates his plants with nearby outdoor marijuana plants; he waits a week to long to cultivate and the THC levels increase; or other environmental conditions cause a spike in the THC concentration in his hemp plants. When the test comes back, his hemp plants test at 1.5% THC, and he has cultivated illegal marijuana under federal and state law. Under most state hemp plans and the USDA interim final rule, the farmer must destroy his entire crop. Assuming the farmer has a bank, how is the financial institution expected to respond when it is informed its customer has illegally grown marijuana?
Financial institutions may also be reluctant to service CBD manufacturers due to the lack of regulatory clarity on CBD infused products under the Food & Drug Act and FDA regulations. Moreover, CBD manufacturers may find themselves in hot water with federal, state, and local law enforcement if their marketed products contain an impermissibly high amount of THC. For example, during the extraction process, a CBD manufacturer could inadvertently concentrate large amounts of THC, resulting in the possession of illegal marijuana concentrated oil. Indeed, consumer safety surveys and reports have found a large volume of products on the market either do not contain the amount of CBD presented on the label, or some contain high traces of THC in excess of the legal 0.3% limit.
Given the pace and scope of this marketplace, as well as the strong support hemp and hemp-derived CBD products received from both parties, it is somewhat surprising that the SAFE Banking Act’s applicability to CBD and hemp received little attention. It would come as no surprise if the drafters intentionally included the language as a nod to Sen. McConnell. But at this juncture will it be enough to advance the bill out of the Senate banking committee?
 CBD Confusion: How Consumers Can Be Mislead and Why the Market Needs Adult Supervision Now Digital Citizens Alliance (2020), https://www.digitalcitizensalliance.org/clientuploads/directory/Reports/DCA_CBD_Confusion_Report.pdf (last visited May 28, 2020)  Sophie Quinton & April Simpson, Hot Hemp Pits States Against Feds The Pew Charitable Trusts (2020), https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2020/02/21/hot-hemp-pits-states-against-feds (last visited May 28, 2020).  Matthew Van Deventer, Hot Hemp: How High THC Levels Can Ruin a Legal Hemp Harvest Westword (2018), https://www.westword.com/marijuana/hot-hemp-how-high-thc-levels-can-ruin-a-legal-hemp-harvest-9963683 (last visited Jun 1, 2020).  Jessica Bursztynsky, Former FDA chief warns consumers that all forms of CBD in food is actually illegal CNBC (2019), https://www.cnbc.com/2019/08/09/former-fda-chief-scott-gottlieb-warns-cbd-in-food-actually-illegal.html (last visited Jun 1, 2020).  Amanda Lewis, A Hidden Origin Story of the CBD Craze The New York Times (2020), https://www.nytimes.com/2020/05/23/sunday-review/coronavirus-cbd-oil.html (last visited Jun 2, 2020).
Austin Bernstein, Director - AGA Cannabis Project
Cole White, Summer Associate - AGA Cannabis Project