Congressional Researchers Flag Legal Liabilities For Banks That Work With Marijuana Businesses While Reform Bill Lingers In Senate

As a bipartisan marijuana banking reform bill lingers in the Senate, congressional researchers have released a report outlining the various criminal penalties that continue to loom over financial institutions that work with state-licensed cannabis businesses.

While hundreds of banks and credit unions do report servicing state-legal cannabis operators—activity that regulators generally decline to take enforcement action against despite federal prohibition—the report from the Congressional Research Service (CRS) shows what’s technically at stake under existing statutes.

“Due to the legal risks under federal law, many financial institutions are unwilling to provide common banking products and services—such as debit or credit card payment services, business loans, electronic payroll services, and checking accounts—to state-authorized marijuana businesses,” CRS said. “Some argue that this unwillingness, in turn, has reportedly stifled growth of state-authorized marijuana businesses and forced them to operate largely in cash, raising public safety and tax compliance concerns.”

There are a number of legal liabilities associated with providing banking services to marijuana businesses due to the “discordant state and federal marijuana legal regimes,” the report says. That includes possible criminal penalties under the Controlled Substances Act (CSA), anti-money laundering (AML) laws and the Bank Secrecy Act (BSA).

“Individuals could be subject to a twenty-year prison sentence and criminal money penalties under [AML statute] for knowingly engaging in financial transactions involving marijuana-related proceeds with the intent to promote a further offense,” CRS said. “For example, a bank could violate [statute] for withdrawing funds generated from marijuana sales from a checking account to pay the salaries of medical marijuana dispensary employees on behalf of the dispensary.”

As the research service points out, however, there is limited guidance from the Financial Crimes Enforcement Network (FinCEN) that’s been in place since 2014, laying out Suspicious Activity Report (SAR) requirements for financial institutions that do choose to service the cannabis industry.

“The guidance identified transactions that might trigger federal enforcement priorities, which include distributing to minors and supporting drug cartels or similar criminal enterprises,” CRS said. “The FinCEN guidance also lists examples of “red flags” that may indicate that a marijuana priority SAR is appropriate, such as if a business fails to sufficiently document state law compliance.”

FinCEN’s latest quarterly report that was released in September showed a notable uptick over time in the number of financial institutions that are willing to service state-legal marijuana businesses despite federal prohibition. A total of 812 banks and credit unions reported actively working with marijuana companies in the second quarter of the 2023 fiscal year—a record high since FinCEN first started tracking these numbers in 2014.

But as CRS explains in the new report, those hundreds of banks are still technically engaging in an activity that could be construed as federally criminal under various statutes, which is why lawmakers in both chambers have been working to enact a legislative fix.

The report describes how the issue could be resolved under the Secure and Fair Enforcement Regulation (SAFER) Banking Act, for example. That bill advanced through the Senate Banking Committee in September, but it still needs to pass on the floor before potentially moving to the House, which has approved seven versions of the cannabis banking reform over recent sessions.

“The SAFER Banking Act and the very similar 118th Congress version of the SAFE Banking Act have two primary aims,” the report says. “First, they would constrain federal banking regulatory authority to penalize depository institutions for providing financial services to marijuana businesses complying with state laws. Second, they would protect depository institutions and their personnel from some legal liability under the BSA, AML, and asset forfeiture laws when providing financial services to or investing proceeds derived from serving marijuana businesses complying with state laws.”

Meanwhile, as that legislation awaits further action, a coalition of 20 congressional Democrats is urging Treasury Department officials to update federal guidance to prevent financial institutions from discriminating against marijuana business owners over prior cannabis-related activity that’s since been made legal at the state level.

In a letter sent to Treasury Secretary Janet Yellen and FinCEN Director Andrea Gacki on Tuesday, the bicameral lawmakers said that the existing Obama-era guidance “predates action by many states to legalize marijuana possession and sales, and it unnecessarily red-flags businesses whose owners have been engaged in marijuana activities that are no longer criminalized at the state level.”

Yellen told lawmakers in March that regulators are also exploring options to address the unique financial issues related to the cannabis industry. And last year, the secretary said that it’s “extremely frustrating” that Congress has so far been unable to pass legislation like the SAFE Banking Act and that Treasury is “supportive” of the proposal.

CRS released a separate report earlier this month cautioning that if cannabis is eventually legalized, lawmakers should consider the potential unintended consequences of imposing high federal taxes on marijuana products. The analysis comes amid an ongoing administrative review into marijuana’s scheduling under the CSA.

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