Public safety and tax compliance concerns associated with cannabis companies operating largely in cash won’t disappear under federal rescheduling.
That’s because the legal risks for financial institutions choosing to service the cannabis industry would persist should the U.S. Drug Enforcement Administration (DEA) enact a proposal from the Department of Justice (DOJ) to reclassify cannabis as a Schedule III drug under the Controlled Substances Act (CSA).
Currently listed next to heroin, LSD and ecstasy, marijuana’s Schedule I status leaves most U.S. banks, credit unions and depository institutions steering clear from the potential ramifications of servicing state-licensed cannabis companies. An estimated 10% of banks and 5% of credit unions nationwide extend their reach to the cannabis space, Reuters reported in 2023.
Most of the financial institutions servicing cannabis clients are regional actors who are provided safe harbor by local governments. In Delaware, for example, Gov. John Carney signed legislation earlier this month that grants legal protections to financial institutions that provide services to cannabis-related businesses.
For the majority of big banks, however, the compliance risks aren’t worth the rewards.
Specifically, the Bank Secrecy Act (BSA) requires financial institutions to have procedures in place to assess their client risk base to help ensure they are not aiding unlawful behavior. These institutions must file suspicious activity reports (SARs) with the Financial Crimes Enforcement Network (FinCEN) for clients suspected of being involved in criminal activity, such as growing and selling cannabis. These reports help the U.S. Treasury Department prevent money laundering, tax evasion and other crimes.
In addition, federal anti-money laundering (AML) laws prohibit depository institutions from handling money that comes directly from criminal activities, such as cannabis sales. In other words, federal banking regulators could consider any money that can be traced to a plant-touching cannabis company as money laundering, according to the American Bankers Association.
This means financial institutions that service cannabis companies are exposed to legal, operational and regulatory threats that could result in fines and imprisonment for bankers. For example, a bank employee could violate federal AML laws “for knowingly withdrawing funds generated from marijuana sales from a checking account to pay the salaries of recreational marijuana dispensary employees,” according to the Congressional Research Service (CRS).
Bank employees could also be put behind bars for up to a decade for knowingly receiving deposits or allowing withdrawals of $10,000 or more in cash from the distribution or sale of cannabis, according to the CRS.
“I don’t know that moving [cannabis] from Schedule I to Schedule III is going to change the picture,” Cliff Stanford, a partner at Atlanta-based Alston & Bird, told Cannabis Business Times. Stanford leads the Bank Regulatory Team at his law firm and previously spent 15 years at the Federal Reserve Bank of Atlanta.
Without legislative clarity from Congress, a Schedule III listing would still present the same compliance risks that curb the appetite for financial institutions to take on cannabis clients, Stanford said.
Here, Stanford discusses the potential effects of cannabis rescheduling, White House policies and proposed legislation on the cannabis industry’s access to traditional banking and other financial services.
This interview was edited for style, length and clarity.
Cliff Stanford, partner, Alston & Bird
Cliff Stanford: The industry has been attuned to this for really a decade now—since the DOJ under Obama set forth its enforcement priorities [via the Cole Memo in 2013]. It became a question of how banks would handle their BSA-AML—anti-money laundering—obligations in light of the enforcement priorities and in light of state-legal marijuana businesses and activities. And there’s been appetite, I think, on the part of banks to bank these businesses, but that appetite has been very much tempered by the uncertainty that has been pretty clear as administrations have changed, as the enforcement priorities shifted from the DOJ, and they kind of lurched in one direction and back to the other and then back to the other.
Lange: Would cannabis rescheduling provide more clarity for cannabis banking beyond White House memorandums that get rescinded from one administration to the next?
Stanford: The rescheduling potential would certainly alter the mix there in terms of those concerns, which has raised this whole sort of conundrum about how banks can comply with their BSA-AML obligations and still bank these businesses. So, I think it would be a big deal for banks. It would clear away some of this uncertainty. I think it remains to be seen how, as a legislative matter, anything like the SAFER Banking Act would continue in a different form or what the impact would be. So, it seems like this rescheduling process has been hanging around for a while. I know there’s a hearing set for December, but it’s an election year, and so, I’m not sure how that’s going to go.
Lange: How much could this presidential election impact confidence in banks to maybe make the plunge to service the cannabis industry?
Stanford: Without what I’ll call legal clarity in terms of legislation—or regulation for that matter—that has some permanence to it, I think the industry is unlikely to shift based on the promise of a change in presidential tone, because the Cole Memo seemed pretty clear, seemed pretty well thought out, but the politics shifted. And so, the DOJ shifted and then shifted back. And that proves the point that there’s too much uncertainty there for a bank that is subject to other federal laws. If [federal guidance] doesn’t have some era of permanence to it in terms of what the lay of the land is and the law, it’s a risk issue for a bank to enter into that space. So even if we know who’s going to be president in the coming year, it won’t be just that that would change the industry’s approach. It’s going to take some more legal certainty either in the form of delisting it as a Schedule I drug and/or something like the SAFER Banking Act.
Lange: If cannabis is reclassified to Schedule III under the CSA, do you think more financial institutions will be willing to provide common banking services to the cannabis industry just based on that incremental reform?
Stanford: I don’t think that would move the needle sufficiently. I think that because of the Bank Secrecy Act obligations of the bank and the heavy penalties that bank regulators can bring for violations of that law—they take it very seriously—is that without certainty under federal law as to what bank regulators will do if they bank state-legal and Schedule III federal-level marijuana businesses, I think there’s still going to be a question in the air in terms of how far banks would be willing to go to provide banking services. So, I don’t know that moving from Schedule I to Schedule III is going to change the picture.
Lange: So, the requirements under the Bank Secrecy Act, such as filing the suspicious activity reports and administering AML programs, those requirements won’t change under Schedule III is what you're saying?
Stanford: That’s right.
Lange: And for those things to change without legislation, cannabis would have to be removed from the Controlled Substances Act entirely?
Stanford: I think so. However, I think banks are in the business of taking risks in what they do when they make a loan or when they bank a customer. And so, there’s an element of risk appetite there in terms of banks that may have a higher risk appetite and may be willing to lean in a bit more. Schedule III feels different than Schedule I, and they may be willing to take on more businesses and still comply with their BSA-AML filing requirements as FinCEN has told them to. So, it could change, but it will depend on the institution. But for more open clarity and certainty about those obligations, it’s going to take descheduling cannabis entirely to really make that a clear picture.
Lange: From credit cards to loans to cash deposits to payroll, is there any type of financial service that may become more accessible compared to others under Schedule III based on that risk appetite?
Stanford: The way I think about it is there are different risk profiles for different financial services in this space. So, maybe the highest risk is taking cash deposits from dispensaries. It’s just very close [to the federally illicit activity]. Making loans to businesses that are backed by cash flows, or they’re backed by hard assets like plants in a field, it feels a little bit different in terms of the risk profile to the institution, in terms of compliance with BSA-AML, but it’s still sort of there. And then I think the credit card, the card network sort of acceptance of the use of cards in that space, is a whole other matter because they have to take such a global view. So, it really depends on the financial service. I think there are different risk issues and different profiles to each one, and that’s part of why banks have been less than energetic in leaning into and banking legal marijuana businesses. It’s because of the risk assessment and uncertainty that has come with that. So, again, more clarity equals less uncertainty equals more banking services.
Lange: The FinCEN issued guidance in early 2014 on financial institutions’ suspicious-activity reporting requirements when serving marijuana businesses. Do you think this guidance would change if cannabis were rescheduled?
Lange: I don’t know. I do know that in the SAFER Banking Act, there is a mandate in the bill as it stands today for FinCEN to restate that guidance in light of what the SAFER Act would do. But I don’t know that rescheduling from I to III would necessarily change the FinCEN guidance.
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Lange: What if the FDA approves cannabis as a prescription drug under Schedule III; would that have an impact on industry access to financial services?
Stanford: I would speculate that that could. Again, it would require, as the FinCEN guidance requires, at least in the thrust of that guidance, that the bank do substantial due diligence to ensure that whatever banking services it is providing to a business that’s engaged in FDA-approved cannabis drugs, that that business is not coloring outside of the lines of what it’s licensed to do by the FDA. And so, it’s a cost issue for a bank to determine and assess that a business is still coloring inside the lines of what’s permitted under the FDA approval or license or however that’s granted.
Lange: How would the SAFER Banking Act impact smaller cannabis companies or groups that are disproportionately impacted by drug war policies?
Stanford: It’s a big policy theme and question that you’re touching upon. Some think the SAFER bill is a good idea, but it still has provisions in it that permit the bank regulators to come behind and say, “No, no, no, no, we don’t want you to bank that kind of business.” And that’s been problematic because some think that the SAFER bill doesn’t work for that reason. The point is that it’s unclear yet whether that bill would be broad enough and not have the backdoor authority of the regulators to stop certain activities such that it would free up banks to bank all kinds of businesses without concern that their regulator would tell them not to bank certain kinds of business. Let’s say a smaller dispensary, for example, the regulators might say, ‘Well, we’re fine with you banking the large cannabis growers that are state-licensed and monitored, but we're not OK with you taking cash deposits from mom-and-pop dispensaries on the corner.”
And that’s part of the problem, I think, with the SAFER bill, is that there’s a lack of certainty there that could be a problem going forward for accomplishing what you’re talking about in terms of broad-based banking services for the industry.
