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Senate Banking Committee Hearing on the Challenges of Cannabis and Banking

Senate Banking Committee

“Challenges for Cannabis and Banking: Outside Perspectives”

Tuesday, July 23, 2019

Key Topics & Takeaways

  • FinCEN Guidance and Law Enforcement: Pross said FinCEN’s guidance was “vital” and serves as a rulebook for effective and transparent operations in the cannabis industry. She said it provides the credit union clarity in how they file reports of suspicious activities. Pross said the three types of SARs reporting are for marijuana limited reporting of suspicious filings, marijuana priority reporting for unexplained activities, and marijuana closing reporting of accounts being closed for non-compliance or suspicious activity. Sherwood said that because marijuana is still illegal through federal law, the SAFE Banking Act should provide clarity and clear guidance for cannabis banking.
  • SAFE Banking Act: Pross, Sherwood, and Lord said there are no safe harbor provision in place, which would allow banking transactions cross state lines. Sherwood said the legislation is a start and that she and the American Bankers Association are happy to work with regulators on furthering the legislation.
  • Other Consequences: Lord said that the lack of cannabis banking prevents the Food and Drug Administration (FDA) or universities from adequately researching marijuana, as they receive federal dollars. Sherwood said that many universities in Colorado would benefit from the research. Van Meter said that customers will prefer to use cash in the cannabis industry due to data tracking, which will make it difficult to tell where the money originated. Pross said making the distinctions for cash from the cannabis industry in an interconnected economy is difficult and believes the SAFE Banking Act will address these concerns. Sherwood said there is a need for clarity on how to manage legacy cash.

Panel I Witness

Panel II Witnesses

 

Opening Statements

Chairman Mike Crapo (R-Idaho)

In his opening statement, Crapo said that the cannabis industry faces immense challenges but continues to expand in many states. Crapo said he looks forward to learning more about how the Secure And Fair (SAFE) Banking Act would work, but that he is worried about banks being able to provide banking services to entities engaged in federally illegal behavior that is legal in some states. Crapo stated that Operation Choke Point was a deeply concerning law because law-abiding business were targeted strictly for operating in an industry that some in the government disfavored, and added that Congress needs to pass legislation to prevent future Operation Choke Point initiatives.

Ranking Member Sherrod Brown (D-Ohio)

In his opening statement, Brown said that workers in the legal cannabis industry deserve the same rights as those in other industries, and Congress has a duty to look out for all American workers. Brown stated that without access to the banking system, legal cannabis-related businesses are forced to operate in the shadows and deal with large amounts of cash, making it a target for robbery and inviting money laundering, tax cheating, and other forms of organized crime. Brown concluded that Congress cannot continue to ignore the legal cannabis industry.

Panel I Testimony

The Honorable Cory Gardner, U.S. Senator, Colorado

In his testimony, Gardner stated that it is important to realize that the issue of cannabis is not going away and will only become more relevant in the future. He said that 65 percent of people support the legalization of marijuana, and 93 percent support the legalization of medical marijuana. Gardner said that the disconnect between federal and state marijuana laws has become intolerable. He explained that the state of Colorado brought in over $266 million in marijuana taxes last year, but that banks are refusing to accept industry money due to fear of regulatory action or federal forfeiture.

The Honorable Jeff Merkley, U.S. Senator, Oregon

In his testimony, Merkley stated that the Federal government is making it hard for law-abiding citizens to work legally in the cannabis industry. He stated that citizens operating under states’ rights are unable to access attorney guidance and prevent other services such as plumbing or lawn care from doing business with the legal cannabis industry because of fear of losing their relationship with banks. Merkley said he is glad he finally has the opportunity to share the stories of the challenges law-abiding citizens have to face in the industry.

Panel II Testimony

Rachel Pross, Chief Risk Officer, Maps Credit Union

In her testimony, Pross stated that in 2014, Maps voted to serve cannabis businesses for two primary reasons: 1) to serve the underserved; and 2) to enhance the safety of the Oregon community by ensuring that legal cannabis businesses operating in Oregon had access to mainstream financial services. She said that statistics show that the lack of access to mainstream financial services increases the risk of crime, especially in the cannabis industry. She said in 2017 and 2018, Maps generated over $529 million in cash deposits from cannabis businesses. She said to comply with the 2014 Financial Crimes Enforcement Network (FinCEN) guidance regarding marijuana-related business banking, Maps has established a rigorous screening and compliance protocol and has invested considerably in the robust infrastructure required to monitor these “high risk” accounts appropriately. Pross said that state and federal financial regulators have reviewed the credit union’s Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) programs on multiple occasions. Pross said the credit union files quarterly Suspicious Activity Reports (SARs) on every cannabis-related business account in the organization and Currency Transaction Reports (CTRs) on every cash transaction or group of cash transactions totaling over $10,000 in one business day. Pross said Maps reports any business they suspect could be engaged in illegal activities such as diversion into other states, money laundering, or black-market sales to law enforcement. She urged Congress to resolve the risk financial institutions face by providing a safe harbor for credit unions and banks serving state-sanctioned cannabis businesses and by passing the SAFE Banking Act.

Joanne Sherwood, President, and CEO, Citywide Banks

In her testimony, Sherwood stated her support for the SAFE Banking Act, explaining that 33 states have already approved cannabis, creating a need for congressional action and clearer guidance from banking regulatory agencies. Sherwood said access to the banking system for cannabis businesses would increase the efficiency of tax collections, improve financial transparency, address safety concerns and improve federal and state oversight of the financial activities of the cannabis industry. Sherwood said that the SAFE Banking Act would help clarify that proceeds from a state-licensed cannabis business would not be considered unlawful under federal money laundering statutes and direct FinCEN and federal banking regulators to issue guidance and exam procedures for banks doing business with cannabis-related legitimate businesses, adding that this would help the states that have legalized cannabis make their communities safer, collect taxes, and regulate their cannabis markets effectively.

Garth Van Meter, VP of Government Affairs, Smart Approaches to Marijuana

In his testimony, Van Meter said that the marijuana industry is hoping to gain many of the benefits of federal legalization without a debate over public health effects and that a policy change concerning banking would have massive public policy and public health ramifications. Van Meter said that the SAFE Banking Act would allow the expansion of an industry pushing new, exponentially more powerful forms of marijuana before any of its health or other societal impacts are fully understood. He said the best-case scenario, and the intended effect of the bill, would be to allow only state-licensed marijuana producers and stores to participate in the federal banking system, but that the bill could also provide a scalable new avenue for cartels to infiltrate the banking system in a much more systematic way.

John Lord, CEO and Owner, LivWell Enlightened Health

In his testimony, Lord stated that 33 states, the District of Columbia and numerous U.S. territories have passed effective medical cannabis laws and 11 of those states, DC, and two territories have made cannabis legal for all adults, with estimated state-legal cannabis sales exceeding $12 billion in 2019. Lord said that due to the dichotomy between state and federal laws, banks and credit unions have been reluctant to serve cannabis businesses or have refused to do so altogether. He said in some cases, banks that were willing to work with cannabis companies were discouraged or prevented from doing so by their regulators. He said that the status of cannabis and banking at the federal level has resulted in credit card companies refusing to process transactions for cannabis stores, which has forced cash transactions for the cannabis industry. He said that under the FinCEN guidance, there has been a steady increase in the number of financial institutions serving cannabis businesses, and that data released by FinCEN last month showed that more than 633 financial institutions had filed marijuana-related business SARs in the first quarter of 2019, indicating some level of interaction with the industry. Lord said resolving the banking issue could significantly aid cannabis businesses in securing business loans, as well as address operation costs and compliance concerns.

Question & Answer

FinCEN Guidance and Law Enforcement

Sens. Mark Warner (D-Va.), Crapo and Brown asked if FinCEN guidance would be beneficial in statute and the shortcomings of the guidance. Lord said all guidance is helpful, and he will assist Congress in evolving regulation. Pross said FinCEN’s guidance was “vital” and serves as a rulebook for effective and transparent operations in the cannabis industry. She said it provides the credit union clarity in how they file reports of suspicious activities. Sherwood said that because marijuana is still illegal through federal law, the SAFE Banking Act should provide clarity and clear guidance for cannabis banking.

Sen. Catherine Cortez Masto (D-Nev.) asked why the cannabis industry is required to file three compliance reports. Pross said the three types of SARs reporting are for marijuana limited reporting of suspicious filings, marijuana priority reporting for unexplained activities, and marijuana closing reporting of accounts being closed for non-compliance or suspicious activity.

SAFE Banking Act

Sens. Jon Tester (D-Mont.) and Crapo asked how the SAFE Banking Act could resolve regulatory concerns and how to address safe harbor provisions. Pross, Sherwood, and Lord said there are no safe harbor provision in place, which would allow banking transactions cross state lines. Sherwood said the legislation is a start and that she and the American Bankers Association are happy to work with regulators on furthering the legislation. Pross said the FinCEN guidance would be beneficial to use for a regulatory perspective.

Other Consequences

Tester asked how the credit unions provide access to banking without regulators intervening. Pross said every financial institution has to go through the risk and analysis process and have regulators’ approval, which Maps completed. She said that Maps is state-regulated and federally insured by the National Credit Union Administration (NCUA).

Sen. Brian Schatz (D-Hawaii) asked if the lack of cannabis banking has hindered opportunities for research. Lord said yes and that it prevents the Food and Drug Administration (FDA) or universities from adequately researching marijuana, as they receive federal dollars. Sherwood said that many universities in Colorado would benefit from the research. Van Meter said it is a “fair” point out that there are barriers to research, and he supports reducing the barriers.

Sens. Tina Smith (D-Minn.) and Crapo asked about legacy cash and making distinctions between cash used for cannabis versus other purposes. Van Meter said that customers will prefer to use cash in the cannabis industry due to data tracking, which will make it difficult to tell where the money originated. Lord said that his business had to account for every dollar to state regulators in a “very intense” process. Pross said the credit union is frequently audited and must provide thorough financial statements to Oregon regulators. She said making the distinctions in an interconnected economy is difficult and believes the SAFE Banking Act will address these concerns. Sherwood said there is a need for clarity on how to manage legacy cash.

Security Risks

Sens. Tester, Cortez Masto, and Schatz asked about costs and concerns regarding security risks. Lord said his business had previously spent hundreds of thousands of dollars but have since internally hired veterans to address the security issues caused by having large amounts of cash at hand. Pross said that Maps does not store their cash in-house, and works with law enforcement to hone in on criminal activities. She said the concerns are surrounding cartels and gangs laundering money, which requires transparency from their end when reporting to law enforcement.

For more information about this hearing, click here.