House Financial Services Subcommittee Hearing on Banking of Cannabis-Related Businesses
House Financial Services Subcommittee on Consumer Protection and Financial Institutions
“Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses”
Wednesday, February 13, 2019
Key Topics & Takeaways
- FinCEN Guidance, SARs and Other Reporting: Pross explained that in the last two years they have filed more than 3,000, and that the FinCEN guidance outlines three types of cannabis-related SARs – marijuana limited SARs, marijuana priority SARs, and marijuana termination SARs – that each highlight a different level of legal concern to FinCEN. Deckard said that each institution must do its own cost-benefit analysis to determine what risks they are willing to take on, whether they be their reputation, legal, or compliance risks.
- Expanding Banking Access and Access to Capital: Asked about the most immediate impact of passage of the proposed legislation, Pross replied a significantly reduced legal risk for financial institutions. Deckard said more clarity and a safe harbor would lead to more entrants into the banking of cannabis-related businesses.
- Impact on Tax Collection: Asked about the implications for tax collection, Ma said that banking the cannabis industry would make these businesses more auditable and reduce instances of tax fraud. She also explained that hundreds of thousands of dollars in tax revenue are paid in cash, which her office then has to count and hold until it can be deposited, and being able to put directly into a bank who is best suited to handle that cash flow would be best, rather than storing it in homes, businesses, and the offices of government agencies.
- The Honorable Ed Perlmutter (D-Colo.), Member of Congress
- The Honorable Fiona Ma, California State Treasurer
- Maj. Neill Franklin (Ret.), Baltimore City & Maryland State Police Departments, and Executive Director, Law Enforcement Action Partnership (LEAP)
- Rachel Pross, Chief Risk Officer, Maps Credit Union, on behalf of Credit Union National Association (CUNA)
- Gregory S. Deckard, President, CEO and Chairman, State Bank Northwest, of behalf of Independent Community Bankers of America (ICBA)
- Corey Barnette, Owner, District Growers Cultivation Center & Metropolitan Wellness Center
- Jonathan H. Talcott, Partner, Nelson Mullins
Rep. Gregory Meeks (D-N.Y.), Chairman, House Financial Services Subcommittee on Consumer Protection and Financial Institutions
In his opening statement, Meeks called the banking of cannabis-related businesses (CRBs) an important issue that has gotten too little attention, noting the recent rapid and dramatic shift in the state and local treatment of cannabis that has led to a rise in varying degrees of legal business activity in a multitude of states. Meeks said federal drug laws and banking regulations have not evolved to reflect the “new reality” that exists at the state and local level, which has led to “major disruption and uncertainty.” He said the absence of a broader, permanent regulatory framework for the financial services industry has prompted the need for legislation, such as the SAFE Banking Act championed by Reps. Earl Perlmutter (D-Co.), Denny Heck (D-Wash.), Steve Stivers (R-Ohio), and Warren Davidson (R-Ohio), calling it one of several opportunities to pass meaningful legislation to allow financial institutions to better serve their constituents.
Rep. Blaine Luetkemeyer (R-Mo.), Ranking Member, House Financial Services Subcommittee on Consumer Protection and Financial Institutions
In his opening statement, Luetkemeyer said there is agreement this is an issue that must be addressed, as many banks and credit unions are deciding if they can or cannot be involved with cannabis businesses. He noted the committee does not have jurisdiction over de-scheduling cannabis, but he welcomes the broader conversation. He mentioned several issues with the proposed legislation, including how banks would separate bad actors from locally legal ones, Federal Deposit Insurance Corporation (FDIC) insurance issues, the movement of money between states with different levels of cannabis legality, and whether allowing a federally illegal business to access banking services would create more challenges than it solves.
Rep. Denny Heck (D-Wash.)
In his opening statement, Heck discussed the risk to public safety posed by all-cash businesses, noting the many armed robberies, thefts, and deaths that have already occurred. He called on the committee to use their jurisdiction to prevent these crimes in the future and better protect business owners and their employees.
Rep. Patrick McHenry (R-N.C.)
In his opening statement, McHenry said that no matter where a person ideologically falls on the cannabis legalization debate, the core matter is that conflicting state and federal laws must be resolved. He said many issues need to be addressed with the proposed legislation for it to work, including issues related to the Bank Secrecy Act (BSA), anti-money laundering (AML) laws, know your customer (KYC) rules, and suspicious activity reports (SARs). He called for law enforcement to be more involved in the discussion, and for the committee to engage in a wider discussion.
The Honorable Ed Perlmutter (D-Colo.), Member of Congress
In his testimony, Perlmutter noted the importance of this hearing for the thousands of employees and businesses across the country that are put at risk by having to operate as all-cash businesses. He said that 47 states plus the District of Columbia have spoken on legalizing cannabis in some form, including every state represented by every member of the committee. Perlmutter said allowing cannabis businesses to access the banking system will improve transparency, accountability, and help reduce the risk of violent crime by creating a safe harbor for financial institutions who choose to do business with cannabis-related businesses and protect ancillary businesses by clarifying the proceeds from legitimate cannabis businesses are not unlawful under AML or other banking laws. He added that putting cannabis-related transactions into the banking system will help law enforcement, and only Congress can provide this certainty for businesses across the country.
The Honorable Fiona Ma, California State Treasurer
In her testimony, Ma described how cannabis-related businesses arrive at California state government offices with duffel bags or suitcases full of cash to pay their state taxes, sometimes travelling hundreds of miles, because they do not have access to banking services. She said that cannabis revenue is increasing “dramatically” in many states, and therefore so does the tax collection, adding that some estimates say the global legal cannabis market could triple in the coming years and the U.S. will fuel a majority of this growth. She expressed her support for the proposed SAFE Banking Act to provide a safe harbor for financial institutions wishing to accommodate this growing sector.
Maj. Neill Franklin (Ret.), Baltimore City & Maryland State Police Departments, and Executive Director, Law Enforcement Action Partnership (LEAP)
In his testimony, Franklin discussed how current law leaves locally legal businesses vulnerable to theft, robbery, and violence and how the proposed legislation would make communities safer. He noted that cannabis is not a niche business market, but rather is a significant and legitimate part of the U.S. economy. Franklin said that removing barriers to banking services would help dismantle the influence of illicit markets, and help the industry stabilize through managed payrolls, payment of correct taxes, and enhanced public safety. He stated the greatest fear is not loss of profit, but injury or loss of life as a result of a robbery attempt. He called on the committee to protect the lives of constituents working to earn a living in the cannabis industry and stated his support for the SAFE Banking Act.
Rachel Pross, Chief Risk Officer, Maps Credit Union, on behalf of Credit Union National Association (CUNA)
In her testimony, Pross discussed the challenges faced by cannabis-related businesses and the banking institutions that choose to work with them, noting that Maps Credit Union is the only financial institution that has continuously served the cannabis industry since 2014, and has since provided banking services to 500 cannabis-related businesses. She said the money that has been banked with them represents millions of dollars no longer carried around in backpacks and shoeboxes, stressing the importance of this in light of the high risk of crime in cash-only businesses. Pross explained that they have a rigorous screening process for all new accounts, which has required a strong internal infrastructure to support their compliance protocols and monitor these high-risk accounts. She added that their BSA/AML program has been repeatedly reviewed by regulators, and they file quarterly SARs on every cannabis-related account, adding that that financial institutions should be allowed to lawfully serve businesses that are in line with local laws.
Gregory S. Deckard, President, CEO and Chairman, State Bank Northwest, of behalf of Independent Community Bankers of America (ICBA)
In his testimony, Deckard noted the current conflict between local and federal law which has led to great uncertainty for the financial industry and a “serious” public safety hazard. He explained that his bank has chosen not to serve cannabis-related businesses due to the legal compliance and regulatory risks, although the Financial Crimes Enforcement Network (FinCEN) guidance does provide some clarity. He expressed support for the SAFE Banking Act, saying that without a safe harbor, financial institutions worry that the political attitudes could shift against cannabis-related businesses and the banks that serve them.
Corey Barnette, Owner, District Growers Cultivation Center & Metropolitan Wellness Center
In his testimony, Barnette discussed his experience as the owner of a cannabis-related business, particularly how he is forced to operate entirely in cash and is therefore unable to do a formal payroll, service customers with credit cards, and holds large cash reserves that “creates headaches” and is a threat to public safety. He explained that many cannabis-related businesses bounce from bank to bank but have their accounts “randomly” closed within weeks of opening. He stressed that the lack of banking access is particularly hard on small and minority-owned businesses who would typically look to bank loans to finance start-up costs, but the inability to access these services creates a barrier to entry that only the wealthy can overcome.
Jonathan H. Talcott, Partner, Nelson Mullins
In his testimony, Talcott expressed his opposition to the SAFE Banking Act, saying Congress should address de-scheduling cannabis before proposing changes to banking regulations or creating safe harbors. He said there is a “shadow economy” using legitimate cannabis businesses as fronts to make money illegally, and that this complicates tax revenues. He said that the Controlled Substances Act is a federal law that preempts all state laws, and every business involved in the cannabis industry is committing a federal felony. Talcott added that he believes cannabis should be treated as a public health issue, not a banking law issue.
Question & Answer
De-scheduling of Cannabis
Luetkemeyer used his time to question whether the witnesses have taken their concerns to the Department of Justice, Attorney General, or the House Judiciary Committee, explaining that if there is to be a change, it should begin with de-scheduling cannabis, which is under the jurisdiction of those divisions. Rep. Andy Barr (R-Ky.) said that providing legal certainty for the financial services industry could be done by amending the Controlled Substances Act, noting that in the 2018 Farm Bill, industrial hemp was de-scheduled. Deckard replied that industrial hemp businesses now have access to banking services.
Public Safety and Cooperation with Law Enforcement
Multiple committee members asked about the impact of the proposed legislation on public safety and how banking cannabis-related businesses could be useful to law enforcement. Franklin discussed how many law enforcement agencies have units that specifically deal with financial research into targets of investigations, and how banking records are “crucial” in this process, noting that an all-cash environment makes this nearly impossible. Franklin also discussed how expensive security measures these businesses must undertake are, including surveillance, armed guards, and armored trucks. Franklin said the legislation would “absolutely” make the cannabis industry safer.
Pross said that because they are banking cannabis-related businesses, they are able to provide information to law enforcement they wouldn’t otherwise have, including SARs and Currency Transaction Reports (CRTs) that show how cash is moving through the banking system. She added that they have filed more than 13,000 reports to FinCEN that includes information that would otherwise not be available to law enforcement.
FinCEN Guidance, SARs and Other Reporting
Asked by McHenry how many SARs have been filed by her credit union, Pross responded that in the last two years they have filed more than 3,000. In response to a question from Rep. David Scott (D-Ga.) about SARs, Pross explained that the FinCEN guidance outlines three types of cannabis-related SARs – marijuana limited SARs, marijuana priority SARs, and marijuana termination SARs – that each highlight a different level of legal concern to FinCEN. Rep. Steve Stivers (R-Ohio) asked if financial institutions need more clarity on SAR requirements, to which Deckard replied, “the more clarity the better,” but that existing BSA/AML regulations are fairly clear on when SARs are required. Pross added that codifying the FinCEN guidance would mean additional guidance on SARs would not be necessary.
Rep. Jennifer Wexton (D-Va.) asked what process a financial institution goes through before accepting a cannabis-related client. Pross explained they have an “extensive” application process, including a review of corporate and financial records, criminal background checks on all account signatories, and validating that the licensure is in good standing with the state.
McHenry asked if the conflict between state and federal law creates uncertainty, to which both Pross and Deckard replied that it does. Deckard continued that each institution must do its own cost-benefit analysis to determine what risks they are willing to take on, whether they be their reputation, legal, or compliance risks. Pross said her institution relies on FinCEN guidance on how to comply with reporting requirements to address these risks.
Expanding Banking Access and Access to Capital
Rep. Lacy Clay (D-Mo.) asked Deckard why his bank does not currently accept cannabis clients. Deckard explained that there are multiple reasons, but primarily the bank does not want to risk exposure to federal regulatory action “depending on the politics of the moment” and they determined there was too much legal uncertainty, but added that with better guidance from regulators, they would move past that initial risk and reconsider their position.
In response to a question from Meeks about diversity in the industry and access to capital, Barnette explained that access to capital is difficult and especially affects minority-owned businesses and communities impacted by the war on drugs, saying the regulatory requirements on the industry are very expensive to comply with.
Meeks asked about the most immediate impact of passage of the proposed legislation, to which Pross replied a significantly reduced legal risk for financial institutions. Deckard said more clarity and a safe harbor would lead to more entrants into the banking of cannabis-related businesses.
Impact on Tax Collection
Asked about the implications for tax collection, Ma said that banking the cannabis industry would make these businesses more auditable and reduce instances of tax fraud. She also explained that hundreds of thousands of dollars in tax revenue are paid in cash, which her office then has to count and hold until it can be deposited, and being able to put directly into a bank who is best suited to handle that cash flow would be best, rather than storing it in homes, businesses, and the offices of government agencies. Ma also noted that California has collected more than $28 million in cannabis taxes so far, which is expected to continue growing. She added that their collected cannabis taxes go into one national bank, and there is a question of whether that bank will continue to accept it and the safe harbor will help ensure the bank will continue to process their cannabis tax revenue.
Rep. Bill Foster (D-Ill.) noted there is a lot to learn in this space from alcohol prohibition. Franklin replied that the alcohol industry is now well-regulated and taxed, and transactions can be easily tracked because the industry is banked.
Other Consequences of Lack of Banking Access
Multiple committee members asked about other consequences of cannabis-related businesses not having access to banking services. Barnette highlighted that his business cannot accept credit cards, so customers have to walk in with cash, putting them at risk for theft. He added that he also has to pay his employees in cash, putting them at risk on payday, and also affecting his ability to hire highly-paid employees or services like architects that he could not pay a large salary to in cash. Ma said that being paid in cash affects employees’ FICO credit rating, which has myriad affects including on student, home, and auto loans, and affects their ability to obtain an apartment because they are often based on income reports and tax returns that they do not have. She also said that many people paid in cash do not pay all their taxes, pay into Social Security, and that income is not analyzed for child support or alimony payments a person may owe.
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