Additional Contributors
On the horizon is the Secure and Fair Enforcement Regulation Banking Act of 2023 (SAFER Banking Act), legislation to provide protections to financial institutions that offer services to the cannabis industry. Marijuana is currently illegal on the federal level, but states can sanction cannabis businesses. What does this complexity mean for institutions that provide financial services to the businesses, and what risks do the banks face?
What is the SAFER Banking Act?
The SAFER Banking Act is legislation that would extend federal protections to federally regulated financial institutions that offer services to cannabis businesses, granting these businesses access to the same banking services as traditional business models. Currently, most financial institutions do not provide services to state-sanctioned marijuana businesses primarily because of the inherent risks and lack of regulations around providing such services when marijuana is federally classified as a Schedule I controlled substance.
The bill states a federal banking regulator would not be able to penalize a depository institution for providing banking services to state-sanctioned marijuana businesses. The measure would allow a federal banking regulator to require a financial institution to terminate a deposit account if (1) a valid reason exists, such as the financial institution is participating in an unsafe practice; or (2) reputation risk is not the dispositive factor. This legislation would also no longer consider proceeds from a transaction conducted by a state-sanctioned marijuana business an unlawful activity.
While the SAFER Banking Act has gained bipartisan support, it is not universally supported. Many obstacles still exist for the legislation, including reaching consensus in the Senate and moving the bill through the House.
Impact on the Banking Industry: Pros and Cons
Currently, only approximately 10% of all U.S. banks and 5% of all credit unions provide cannabis-related businesses with accounts, which often impose heavy service fees to help offset high compliance costs. The SAFER Banking Act could address the need for heavy fees and a lack of financial resources often experienced by the banks by increasing access to capital and credit for cannabis businesses. Additionally, the legislation would improve the transparency and accountability of the cannabis industry by requiring financial institutions to track and report on activities in compliance with anti-money laundering laws regarding the marijuana industry. The SAFER Banking Act, if passed, would also stimulate the development of the cannabis industry and its related sectors by enabling legal, federally regulated transactions for businesses within the industry.
The legislation, however, would not solve all industry-wide issues or remove all risks. Most importantly, the act does not affect cannabis’ federal legality status. Instead, it seeks to resolve the tension between state and federal law regarding financial services for the industry. Cannabis businesses will continue to face legal uncertainties even if the act is passed, including conflict between state and federal law, legal liabilities for financial institutions, and federal taxation issues.
Also, banks that begin to provide financial services to the industry would continue to encounter risks related to potential reputational damage, internal operations, and stringent compliance. Additionally, while the SAFER Banking Act provides protections for banks and credit unions, it does not provide specific protections for other capital market participants. The definitions within the act are limited to “financial services” and “depository institutions,” and these definitions do not explicitly include Securities and Exchange Commission-regulated businesses.
How Financial Institutions Can Prepare
New regulatory requirements proposed by the act include enhanced reporting requirements and transaction monitoring. If the SAFER Banking Act passes, financial institutions that choose to do business in the cannabis industry will need to update their internal processes and policies, including their anti-money laundering programs and monitoring systems, to comply with new regulations. Additionally, financial institutions will need to be diligent in ensuring cannabis-related clients are properly licensed at both the state and federal levels. Internal and government auditors would examine how well institutions are meeting the new standards.
Financial institutions also should consider adjusting their internal controls to better address the emerging risks to reputation, operations, and compliance. Since the bill would facilitate banking for the cannabis industry, auditors and examiners will assess the risk management strategies being used with financial institution clients.
How Can PYA Help?
If the SAFER Banking Act passes, financial institutions will be offered federal protections if they provide services to state-sanctioned cannabis businesses. While the opportunity could increase an institution’s bottom line, it is also fraught with challenges, including complex regulations and reporting standards, risk to reputation, new compliance requirements, potential legal issues, and changes to internal controls.
PYA can assist clients in preparing for the SAFER Banking Act by conducting a thorough risk assessment to identify gaps in policies and procedures. PYA also can help ensure compliance with new regulations and offer guidance on reporting requirements, such as revising financial statement disclosures to ensure they meet the new standards. Items such as risk exposure, capital adequacy, and liquidity are likely to need to be adjusted to comply with the new legislation. PYA can test and monitor internal controls on an ongoing basis to ensure they are adequate in complying with new regulations and help clients identify potential legal risks that can arise from the SAFER Banking Act.
Sources:
www.reuters.com/legal/litigation/what-would-passage-safer-banking-act-mean-2024-2024-03-13/
www.herringbank.com/business-banking/cannabis-banking/safe-banking-act/#:~:text=The%20SAFER%20Banking%20Act%20is,supports%20the%20SAFER%20Banking%20Act%3F
www.congress.gov/bill/118th-congress/senate-bill/2860
www.congress.gov/bill/118th-congress/house-bill/2891
