The House Financial Services Committee voted to advance a revised version of the Secure and Fair Enforcement Banking Act of 2019 (the "SAFE Act"). In addition, legislators reintroduced the Strengthening the Tenth Amendment through Entrusting States Act (the "STATES Act"), a bill that would restrict federal enforcement against state-legal cannabis activity.
On March 28, 2019, the House Financial Services Committee voted 45-15 to advance a revised version of the SAFE Act. As explained more fully in a Cadwalader memorandum, the SAFE Act - if passed - would supply a safe harbor from federal anti-money laundering and regulatory prosecutions for insured depository institutions that provide financial services to cannabis-related legitimate businesses and their service providers.
Currently, federal anti-money laundering statutes define any transaction concerning the proceeds of the manufacture, distribution or sale of marijuana to be unlawful, even if the transaction is legal within the state in which it takes place. Cadwalader attorneys stated that banking regulations prohibit depository institutions from entering into financial transactions or accepting account relationships involving illegal proceeds. The Financial Crimes Enforcement Network ("FinCEN") requires any transactions with illegal proceeds to be reported as suspicious. Under the SAFE Act, proceeds of a cannabis-related legitimate business will not be deemed as proceeds from illegal activity. Such a result would protect the real estate finance of marijuana properties, the broker-dealer custody of cannabis-related stocks and their receipt of dividends paid on those stocks.
On April 4, 2019, a bipartisan team of lawmakers reintroduced companion versions of the STATES Act in the Senate and the House. The STATES Act would modify the Controlled Substances Act to restrict federal enforcement against state-legal cannabis activity. In the memorandum, Cadwalader attorneys asserted that the STATES Act would be a critical step toward harmonizing federal and state laws as they relate to cannabis. Should the STATES Act become law, it would go further than any other bill to date to remove the hurdles that exist for state-compliant businesses and individuals expanding their cannabis businesses.
Commentary / Jodi Avergun
It remains to be seen if and when either bill will come to the House floor for a vote. The Judiciary Committee still needs to weigh in on the SAFE Act, and the STATES Act has not been scheduled for a hearing. And of course, even assuming passage in the House, there is still the Senate, which seems less inclined to pass either bill. However, with 47 states and the District of Columbia having legalized cannabis in some way, it seems hard to think that one or both of these bills will not advance.
Some words of caution are warranted. Neither bill fully legalizes cannabis. Both apply their safe harbor and exemption prohibitions exclusively to state-legitimate or state-compliant businesses. In other words, even with a safe harbor firmly established, banks and service providers are permitted to service only "legitimate" cannabis-related businesses. The level of diligence that will be sufficient to establish that the cannabis-related business is demonstrably legitimate so as to qualify for the safe harbor protections is not certain, but it can be assumed that standards of Know Your Customer compliance under the Bank Secrecy Act would apply. This would require, at a minimum, that a financial institution take measures to investigate whether its client is operating within the bounds of local law. With numerous highly technical state and local laws governing individual cannabis businesses, ascertaining a cannabis-related business's compliance with those laws will present a challenge going forward, but likely one that is worth the effort. Recent estimates suggest that within a few short years, the domestic legal cannabis industry could generate tens of billions of dollars in annual revenue.
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