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FinCEN’s Marijuana Banking Data … What Is Not There That Should Be There

FinCEN’s quarterly Marijuana Banking update: it is not what is being reported … it is what is NOT being reported!

I’ve hired, trained, coached, and mentored hundreds of AML analysts and investigators over the years. When it came to conducting AML investigations and scouring through thousands of transactions looking for patterns, trends, and anomalies, or reviewing publicly available information, I reminded them that they needed to look for:

  1. What is there that should be there
  2. What is there that should not be there
  3. What is not there that should not be there
  4. What is not there that should be there

Let’s apply that to FinCEN’s quarterly Marijuana Banking update – see FinCEN Marijuana Update 3Q 2019. Like the other quarterly updates, FinCEN gives us two charts showing the total number of banks and total number of credit unions that, according to FinCEN, are “actively banking” marijuana related businesses or MRBs in the United States. According to FinCEN, which looks at the number of Suspicious Activity Reports (SARs) filed by banks and credit unions that contain one or more of the required phrases – Marijuana Limited, Marijuana Priority, or Marijuana Termination – as of September 30, 2019 there were 563 banks and 160 credit unions actively banking marijuana businesses. Most observers have noticed that the total number of each type of depository institution seems to have flattened out: a quarter-by-quarter increase of only 10 banks to 563, and a decrease of 2 credit unions to 160.

FinCEN also provides the total number of “marijuana” SARs FinCEN has received. As of September 30, 2019 “FinCEN had received a total of 102,807 SARs using the key phrases associated with MRBs:

  • FinCEN received 76,203 SARs from filers using the key phrase “Marijuana Limited.”
  • FinCEN received 7,821 SARS from filers using the key phrase “Marijuana Priority.”
  • FinCEN received 25,288 SARs from filers using the key phrase “Marijuana Termination.”

So from this we know that about 723 banks and credit unions have filed over 102,000 SARs since April 2014 that have included the marijuana-related key phrases. That is what is there that should be there. There appears to be nothing that is there that should not be there, and there certainly isn’t anything that is not there that should not be there (let’s leave that to the AML analyst looking at transactional data). But what is not there that should be there? There are at least four key pieces of information that would be helpful to banks and credit unions trying to decide whether to provide financial services to marijuana related businesses, as well as to policymakers and regulators …

1. What Percentage of Depository Institutions Are Actively Banking MRBs?

First, what is not there that should be there is the percentages of banks and credit unions that are actively banking MRBs. Looking at FDIC and NCUA quarterly data (the most recent data is for 2Q 2019), there are 5,303 banks and 5,308 credit unions in the United States, and the number of each has been steadily dropping over the last 3 years. So as the number of banks and credit unions serving the marijuana industry is slowly going up and the total number of banks and credit unions is slowly going down, the percentage of banks and credit unions serving the industry is actually going up faster than the numbers. As of 2Q 2019, approximately 10.4% of banks and 3.1% of credit unions were actively banking MRBs. This is useful context for policymakers.

2. What Types of Financial Services Are Available to MRBs?

Second, what is not there that should be there is the types of financial services that these banks and credit unions are providing MRBs, and which of those services result in Marijuana Priority and Termination SARs. Depository institutions offer a broad array of products and services, from investment advice to insurance to treasury management to loans to deposit accounts: which of those products and services are riskier than others? Knowing that insurance or treasury management products are not leading to Marijuana Priority or Termination SARs may encourage more banks and credit unions to engage with MRBs.

3. What Types of Banks and Credit Unions Are Actively Banking MRBs?

Third, what is not there that should be there is the types and sizes of banks and credit unions that are providing banking services to MRBs: FinCEN could identify the number of banks by primary regulator, by size (community, mid-size, and large are designations used by the bank regulatory agencies), and by location (which state).

4. How Many, What Types of, and in Which States do MRBs Have Access to Banking Services?

Fourth, what is not there that should be there is the number and types and locations of marijuana related businesses that are receiving banking services. There is a clue in the FinCEN data as to the number of MRBs being banked: a Marijuana Limited SAR is required to be filed every quarter for every MRB that is simply receiving banking services, with nothing unusual or suspicious about its activity, and a Marijuana Priority SAR is required to be filed when a depository institution is providing banking services to the MRB while further investigation is being conducted to determine if the MRB is violating any of the Cole Memo priorities. What we do not know, though, is how many MRBs are being reported in each SAR. But assuming that each SAR reports one MRB, we can look at the total number of Marijuana Limited and Priority SARs over time to get a rough estimate (guess?) that there are less than 9,000 MRBs being actively banked in the United States:

  • Total Number of Marijuana Limited and Priority SARs 1Q 2019 – 61,036 + 6,067 = 67,103
  • Total Number of Marijuana Limited and Priority SARs 2Q 2019 – 68,378 + 6,894 = 75,272 (an increase of 8,169)
  • Total Number of Marijuana Limited and Priority SARs 3Q 2019 – 76,203 + 7,821 = 84,024 (an increase of 8,752)

If this “one SAR/one MRB” assumption is wrong – and it probably is wrong, then there may be many more MRBs with access to banking services. But without having the information, we simply don’t know.

Other Articles

For the background on these quarterly marijuana reports, see a number of articles I’ve written, most recently in a June 25, 2019 article titled “FinCEN Updates Its Marijuana SAR Data, But Actionable Information is Still Needed” FinCEN Marijuana Article 6-25-19.

USDA’s Interim Final Rules for Hemp Production – Summary & Highlights

“The future of the hemp industry in the United States is anything but certain.” – page 71

The Interim Final Rule

On October 31, 2019 the US Department of Agriculture published an Interim Final Rule titled “Establishment of a Domestic Hemp Production Program.” The Rule can be found at Hemp Interim Final Rule 10-31-19.

And the Department’s Secretary, Sonny Purdue, even took the time to sit down and film an announcement about the rule. There are lots of social media choices, but the YouTube version is as good as any and available at Secretary Purdue – YouTube Hemp .

Notwithstanding the “Interim” modifier, the Rule goes into effect immediately. The public has 60 days to comment. Those comments will be taken into consideration by the USDA, which is then required to publish a final rule within two years.

The Rule is a requirement of the 2018 Farm Bill, which de-scheduled hemp from the scheduling provisions of the Controlled Substance Act. The definition of hemp has not changed: it is the Cannabis Sativa L plant and its derivatives containing less than 0.3% THC on a dry weight basis.

The Interim Final Rule makes it clear that the FDA retains authority under the Food, Drug & Cosmetics Act to regulate hemp products marketed and sold as food (or as a supplement to food), dietary supplement, drug, or cosmetic. To date, the FDA has not issued regulations nor approved any hemp-derived CBD foods, food supplements, or dietary supplements. In California, the Department of Public Health issued an FAQ in July 2018 that provided that “the use of industrial hemp as the source of CBD to be added to food products is prohibited.”

The Rule sets out the standards for (i) the USDA’s approval of State and Tribal hemp production programs, and (ii) to the extent any State or Tribe does not have a program, the USDA’s hemp production program. At a minimum, the programs will include: (i) licensing requirements for hemp producers, (ii) requirements for reporting land used for hemp production, (iii) testing for total THC concentration, (iv) procedures for disposing of non-compliant plants (known in the trade as “hot hemp”), (v) ongoing compliance provisions, and (vi) procedures for handling violations.

To summarize: the 2018 Farm Bill and this Interim Final Rule legalize and provide rules for the production of hemp. Neither the Bill nor this rule deal with hemp-derived CBD products, which remain subject to FDA rules and approvals. No hemp or hemp-derived CBD foods, food supplements, dietary supplements, drugs, or beverages have been approved by the FDA, and many states, including California, have specifically prohibited the use of industrial hemp or hemp-derived CBD in food products.

State & Tribal Plan Requirements

The Supplementary Information section of the Interim Final Rule is 100+ pages (of the total 160 pages). It first goes through the requirements for the estimated 100 State and Tribal plans, then the requirements for the USDA plan.  The State/Tribal Plan section is probably the key section, however, as the USDA estimates that there will be 6,700 licensed producers under these plans, and only 1,000 under the USDA plan. Some of the key aspects of the State/Tribal Plans are set out in Parts A-D:

Part A describes the requirements for identifying the land to be used for hemp production: each field and greenhouse shall be identified, and each producer shall be identified. Producers must be licensed. Producers that are legal entities must provide the names of their “key participants”. I have written an article that describes the differences between “entities” and “key participants” in this proposed rule under Title 7, and the definitions of “legal entities” and “beneficial owners” in the existing CDD rule under Title 31. Failure to reconcile these differences will create confusion for banks and hemp producers seeking banking services. see RegTech Article October 31.

Part B describes the sampling and testing for THC. There are two controversial aspects here. First, the sampling must be done within 15 days of harvest, which will create logistical strains for producers, as any sample that comes back with a THC concentration of more than 0.3% will require that the entire crop be disposed of. Second, the THC test will be of the total THC, which is THC and THCA: it is believed that most current hemp strains that are currently be tested at under 0.3% THC will not be under when (what is known as) total THC is tested. However, there is a “Measurement of Uncertainty” or “MU” built into the testing standard, which is essentially a “plus or minus” based on the accuracy of the testing. That may alleviate some of the concerns. Finally, only DEA-approved testing labs will be used for testing. There are currently not enough of these labs to test expected crop yields in enough of the producing states.

Part C deals with the disposal of non-compliant plants, or “hot hemp”. This must be done by law enforcement or DEA registered reverse distributors. Note that these distributors could be treated as high risk customers for purposes of a financial institution’s CDD/EDD program.

Part D deals with compliance and enforcement procedures, including annual inspections of hemp producers. Given that the biggest issue with hemp is the 0.3% THC levels, there are interesting provisions for producers that are (frankly) unlucky with a non-compliant crop. The Interim Final Rule provides that a producer cannot be found to be negligent (the standard for sanctions) for growing hemp with less than 0.5% THC; a negligent violation requires a corrective action plan; and three negative violations in five years will result in a five-year ban from hemp production. Negligent violations cannot lead to criminal violations.

Parts E, F, and G deal with information sharing and other more technical issues.

Regulatory Impact Analysis

About one-third of the document (pages 71 to 117) is taken up by the required regulatory impact analysis that attempts to answer questions like what will it cost to implement the rule, what are the benefits, etc.  In answering those questions, the USDA goes to great length to describe the history and potential future for the hemp industry in the United States. For example, at page 82 the USDA provides that as of 2018 there were 3,543 licensed hemp producers in twenty-four states with ~78,000 acres of hemp under cultivation. The USDA estimates that 2/3 to ¾ of cultivated hemp is intended for “flower” or CBD production, with ~1/6 for fiber, and ~1/6 for grain. Flower can yield anywhere from a loss of $17,000 per acre to a profit of $6,000 per acre (according to the Supplemental Information) based on the following price ranges: hemp fiber $0.07 to $0.67 per pound; hemp grain or seed $0.65 to $1.70 per pound; and hemp flower $3.50 to $30.00 per pound, depending on the CBD Content. The USDA seems to conclude that hemp grown for fiber and grain is marginally profitable. Although state-by-state hemp acreage is not included in the interim final rule, other sites referred to by the USDA, including www.votehemp.com generally have acreage data that supports the USDA’s data that there was ~78,000 acres of hemp under cultivation in 2018.  Using the Vote Hemp data, it appears that production is concentrated in a few states:

Montana            22,000 acres                    North Dakota     2,778 acres

Colorado            21,578 acres                     New York           2,240 acres

Oregon               7,808 acres                      Nevada               1,881 acres

Kentucky            6,700 acres                      Wisconsin           1,855 acres

Tennessee          3,338 acres                      Vermont             1,820 acres

North Carolina   3,184 acres

The USDA believes that there is ~160,000 acres under cultivation in 2019, with more acreage expected to be planted in 2020. This is double what it was in 2018, which was double what it was in 2016.

NOTE: The November 2018 passage of the Farm Bill resulted in a surge in the number of registered hemp producers and acres under cultivation. Hemp cultivation figures are changing quickly, become dated very quickly, and are inconsistent. For example, the USDA acreage totals are consistent with those from www.votehemp.com, a pro-hemp site. That site shows California with zero acres of hemp cultivation. However, the California Department of Food & Agriculture (CDFA) reports that, as of August 2019, there are 258 registered hemp growers and 34 seed breeders with 16,899 acres under cultivation (there are 419 people and entities on the list of registered growers and seed breeders as of October 28, 2019).

Impact on Banking

Although the cultivation of hemp is now legal in the United States, hemp-derived CBD products (edibles, tinctures, beverages) remain subject to FDA regulations and approvals, and none have been approved. However, other than warning letters from the FDA, there is little in the way of federal enforcement. To my knowledge, there is no state or federal regulatory agency guidance on providing banking services to hemp producers or those that are selling hemp-derived CBD products.

As set out above, the “hemp” definition of “key participant” is different than the BSA definition of “beneficial owner” (I have written about the need to reconcile these definitions: see RegTech Article October 31 ). To the extent a bank has a program to knowingly provide financial services to a hemp producer, it will need to recognize that those producers may struggle to provide beneficial ownership information, and that information may not reconcile with what they provide to the USDA or their State or Tribal licensing authority under the key participant requirements. From a customer due diligence perspective, knowing which customers are licensed cannabis businesses as well as registered hemp growers (and possibly DEA registered reverse distributors), and tying the beneficial owners and key participants, will be challenging.

With the publication of the Interim Final Rule for hemp production, banks’ policies relating to cannabis – whether an outright prohibition, risk-based exceptions, or full program – should be reviewed to ensure that hemp producers and hemp-related “service providers” (also known as Tier 2 and Tier 3 entities) are properly accounted for.

The new Hemp Production Regulation

Pages 117 – 160 of the text is the actual new regulation or rule. This new rule is added onto title 7 of the Code of Federal Regulations as Part 990 – Domestic Hemp Production Program.

Hemp’s “Key Participants” ≠ Banking’s “Beneficial Owners” … Pick One!

On October 31st the US Department of Agriculture published proposed regulations (technically, an interim final rule with request for comments) establishing a federal hemp production program  Proposed Federal Hemp Production Program Regulations.

There is lots in there to consider, and even comment on, but one thing caught my eye. So much so that I submitted a formal comment through the Federal Register portal. What caught my eye was that the interim final rule for the establishment of a domestic hemp production program under the Department of Agriculture includes definitions for “entity” and “key participants” of entities for the purposes of licensing and, for the key participants, or individuals, criminal background checks. Those definitions are different from the definitions of “legal entities” and “beneficial owners” contained in Department of the Treasury anti-money laundering and Bank Secrecy Act (BSA) regulations requiring banks to perform customer due diligence on those legal entities, including verifying the identity or identities of the legal entities’ beneficial owner(s).

Proposed Hemp Producers’ “Key Participants” ≠ Existing Banking Customers’ “Beneficial Owners”

The definitions of “entity” and “key participants” in the proposed 7 CFR section 990.1 should be reconciled with the existing definitions of “legal entities” and “beneficial owners” in the existing 31 CFR section 1020.230. It is generally accepted that marijuana related businesses or cannabis related businesses, as well as producers and manufacturers of hemp and hemp-related products, are finding it challenging to get and maintain financial services. Financial institutions have existing requirements to perform risk-based customer due diligence on all customers and clients, including “legal entities” and the beneficial owner or owners of those legal entities.

A consistent definition of “legal entity” and “beneficial owner” in titles 7 and 31, or definitions of “entity” and “key participant” in title 7 that are consistent with the definitions of “legal entity” and “beneficial owner” in title 31 would encourage financial institutions to provide financial services to hemp producers, and ease the burden on hemp producers needing to meet their licensing and reporting obligations under title 7 and their due diligence obligations under title 31.

Background

The Supplementary Information section, Part I Introduction, at page 19, provides that “the State or Indian Tribe will need to review criminal history reports for each applicant. When an applicant is a business entity, the State or Indian Tribe must review the criminal history report for each key participant in the business.” And at page 20 is a description of the procedures for reporting specific information to USDA by the State and Tribal plans. That information “includes contact information for each hemp producer covered under the plan including name, address, telephone number, and email address (if available).  If the producer is a business entity, the information must include the full name of the business, address of the principal business location, full name and title of the key participants, an email address if available, and EIN number of the business entity.”

So the new hemp regulations refer to hemp producers’ “key participants”. And at page 94 the agency estimates that each producer would have three key participants (“the AMS estimates each producer to have three key participants that would submit criminal history reports to USDA.”).

The term “key participants” is defined in two different ways in two places. In the Supplementary Information section, Part IV Definitions, at page 43, it is defined as follows:

“A ‘key participant’ is a person or persons who have a direct or indirect financial interest in the entity producing hemp, such as an owner or partner in a partnership.  A key participant also includes persons in a corporate entity at executive levels including chief executive officer, chief operating officer and chief financial officer.  This does not include such management as farm, field or shift managers.”

However, the actual proposed regulations provide for a different definition. The draft 7 CFR Part 990 -Domestic Hemp Production Program begins on page 117. Subpart A – Definitions includes section 990.1 that lists terms alphabetically. At page 122 is the definition of “entity” and at page 124 is the definition of “key participants” (the Supplementary Information section does not include a definition of “entity”). They must be read together:

“Entity. A corporation, joint stock company, association, limited partnership, limited liability partnership, limited liability company, irrevocable trust, estate, charitable organization, or other similar organization, including any such organization participating in the hemp production as a partner in a general partnership, a participant in a joint venture, or a participant in a similar organization.”

 “Key participants. A sole proprietor, a partner in partnership, or a person with executive managerial control in a corporation.  A person with executive managerial control includes persons such as a chief executive officer, chief operating officer and chief financial officer.  This definition does not include non-executive managers such as farm, field, or shift managers.”

A side-by-side comparison of the definitions is set out in the table below:

Supplemental Information
Part IV Definitions
Page 43
7 CFR Part 990 -Domestic Hemp Production Program Subpart A – Definitions
Section 990.1 Pages 122, 124
 

 

 

 

 

“A ‘key participant’ is a person or persons who have a direct or indirect financial interest in the entity producing hemp, such as an owner or partner in a partnership.  A key participant also includes persons in a corporate entity at executive levels including chief executive officer, chief operating officer and chief financial officer.  This does not include such management as farm, field or shift managers.”

“Entity. A corporation, joint stock company, association, limited partnership, limited liability partnership, limited liability company, irrevocable trust, estate, charitable organization, or other similar organization, including any such organization participating in the hemp production as a partner in a general partnership, a participant in a joint venture, or a participant in a similar organization.”

 

“Key participants. A sole proprietor, a partner in partnership, or a person with executive managerial control in a corporation.  A person with executive managerial control includes persons such as a chief executive officer, chief operating officer and chief financial officer.  This definition does not include non-executive managers such as farm, field, or shift managers.”

 

Compare this definition of “key participants” and “entity” with the definitions of “beneficial owner” and “entities” used for purposes of customer due diligence in the various anti-money laundering and terrorist financing prevention laws in the US Code, Title 31, known as the Bank Secrecy Act, or BSA:

31 CFR 1010.230(d) Beneficial owner. For purposes of this section, beneficial owner means each of the following:

(1) Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer; and

(2) A single individual with significant responsibility to control, manage, or direct a legal entity customer, including: (i) An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or (ii) Any other individual who regularly performs similar functions.

31 CFR 1010.230 (e) Legal entity customer. For the purposes of this section:

(1) Legal entity customer means a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.

(2) Legal entity customer does not include … [lengthy list]

Conclusion and Recommendation

The definitions of “entity” and “key participants” in the proposed 7 CFR section 990.1 should be reconciled with the existing definitions of “legal entities” and “beneficial owners” in the existing 31 CFR section 1020.230. A consistent definition of “legal entity” and “beneficial owner” in titles 7 and 31, or definitions of “entity” and “key participant” in title 7 that are consistent with the definitions of “legal entity” and “beneficial owner” in title 31 would encourage financial institutions to provide financial services to hemp producers, and ease the burden on hemp producers needing to meet their licensing and reporting obligations under title 7 and their due diligence obligations under title 31.

 

Cannabis Banking Legislation – Will the SAFE Banking Act Actually Result in More Banks Providing Financial Services to Marijuana Related Businesses?

In the last two years, the percentage of banks actively banking (federally illegal and unregulated) marijuana related businesses (MRBs) has gone from 5% to more than 10% – why do we need Congress to interfere? Our experience with (federally legal and regulated) money services businesses (MSBs) shows that relief is hard to come by … and may not dramatically increase the number of banks willing to take on MRBs.

I have written three articles on FinCEN’s quarterly “marijuana banking update”. The most recent, published on June 25, 2019, is available at Richards article on FinCEN MRB reports.  Those reports, published by FinCEN since 1Q 2017 and tracking marijuana-related Suspicious Activity Reports (SARs) filed since the FinCEN guidance was published in February 2014, show two broad categories of data: (1) the total number of banks and credit unions that are “actively banking marijuana related businesses”; and (2) the number of each of the three types of SARs that FinCEN has directed financial institutions to file: Marijuana Limited, Marijuana Priority, and Marijuana Termination. I won’t describe what type of activity each type of SAR is meant to report, as the descriptions in the quarterly updates are inconsistent with the actual 2014 guidance. You’ll have to read the articles to find out about those inconsistencies.

I’ve also written about the proposed SAFE Banking Act – Richards article on SAFE Banking Act – which is the Democratic-controlled House of Representatives’ attempt at getting a federal law passed to give financial institutions some comfort that they simply by knowingly providing financial services to (what the bill describes as) “cannabis related legitimate businesses” and “service providers”, they won’t be sanctioned by their regulatory agencies.

Let’s put those two things together – FinCEN’s quarterly updates on the number of banks and credit unions “actively banking marijuana related businesses”, and the push in Congress (or at least one of the two chambers of Congress) to pass a law to encourage banks and credit unions to knowingly provide financial services to the federally illegal and unregulated “cannabis related legitimate businesses” and their “service providers”.

The most recent (June 2019) FinCEN update is available at FinCEN 2Q 2019 MRB Update. It shows that as of June 30, 2019, there were 553 banks and 162 credit unions “actively banking marijuana related businesses.” (I have put this phrase in quotes because industry experts believe that the number of banks and credit unions that are actively, knowingly providing depository or transactional services to licensed cannabis or marijuana businesses is much less than what FinCEN reports … and closer to 50 than 715. But let’s go with what FinCEN has been publishing.).  The slow but steady increase in the number of banks and credit unions providing banking services to MRBs is shown in the FinCEN chart below:

What is not shown, though, is the percentage of banks and credit unions that are providing financial services to marijuana related businesses. Using data provided by the FDIC, which insures all commercial banks and savings institutions, and the NCUA, which insures all credit unions, we can see that (1) the total number of banks and credit unions has been falling, while (2) the total number of banks and credit unions that are providing banking services to MRBs has more than doubled in the last two years:

The total number of banks and credit unions has been dropping over the last 2+ years (by about 9%), while the total number of banks and credit unions providing financial services to MRBs has been going up (by almost 200%). The result is that as of June 2019, about one in ten federally insured banks and more than one in sixteen depository institutions overall, are, according to the Treasury Department, “actively banking marijuana related businesses”. It’s perplexing why relatively so few credit unions are engaged in the MRB space.

Which begs the question: if the percentage of depository institutions actively banking marijuana related business has more than doubled in the last two years, and if one in ten federally insured banks and more than one in sixteen depository institutions overall, are actively banking marijuana related businesses, do we even need Congress to intervene and pass new laws to encourage those depository institutions? New laws mean new regulations. New regulations certainly mean new regulatory guidance and expectations, and probably mean more government expense and oversight.

A fair argument can be made that if only 10% of banks and 3% of credit unions are actively banking marijuana related businesses, we absolutely need Congress (and the President) to step in and pass a law or laws to encourage more banks and credit unions to participate in the marijuana/cannabis industry. But even if a SAFE Banking Act, or equivalent, is passed by Congress and signed into law by the President, regulations and regulatory guidance will still need to be published and written, and banks and credit unions will still need to have a risk-based program with the panoply of required preventative and detective controls. Those programs are expensive to build, more expensive to maintain, and bring uncertain regulatory, legal, and reputational risk to the institution. And, of course, MRBs will still be federally illegal, and remain unregulated by any federal agencies.

Money Services Businesses (MSBs) – a lesson for banking Marijuana Related Businesses (MRBs)?

Money Services Businesses, or MSBs (check cashers, money transmitters, currency exchangers) are all perfectly legal, state-licensed, federally-registered financial institutions that, since 2002 have been required to have their own BSA/AML compliance programs and to report suspicious activity. Just like banks and credit unions. And in March 2005 the financial services regulators issued guidance to the industry on how to provide banking services to MSBs. The FinCEN press release provided the following explanation:

“The Financial Crimes Enforcement Network (“FinCEN”), together with the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration (collectively, the “Federal Banking Agencies”) are jointly issuing this Statement to address our expectations regarding banking institutions’ obligations under the Bank Secrecy Act for money services businesses, such as check cashers and money transmitters. Money services businesses are losing access to banking services as a result of concerns about regulatory scrutiny, the risks presented by money services business accounts, and the costs and burdens associated with maintaining such accounts. Concerns may stem, in part, from a misperception of the requirements of the Bank Secrecy Act, and the erroneous view that money services businesses present a uniform and unacceptably high risk of money laundering or other illicit activity.”

Notwithstanding that MSBs are legal businesses, are federally-regulated, and the regulators have encouraged banks to provide financial services to them, the vast majority of financial institutions today will not bank MSBs. Why? The real or perceived regulatory burdens are too onerous, and the regulatory, legal, and reputational risks are too great. There may be some data on what percentage of banks and credit unions are knowingly, actively banking MSBs, but I haven’t seen it. Anecdotes suggest that less than one in five banks and credit unions have an MSB banking program and are knowingly, actively providing depository and transactional services for MSBs.

So if less than one in five depository institutions are banking federally legal and regulated Money Services Businesses more than fifteen years after given a Congressional “green light”, and if the percentage of depository institutions banking federally illegal and unregulated Marijuana Related Businesses has more than doubled in the last two years to one in sixteen … do we really need Congress to pass a law encouraging depository institutions to bank these illegal, unregulated businesses, or do we simply wait until marijuana is federally legal, and then regulate the marijuana industry … hopefully better than we’ve done with the money services industry?

In December 2018 I proposed an idea to provide relief to depository institutions looking at knowingly, actively providing financial services to MRBs: have the regulatory agencies publish guidance that would treat MRBs like MSBs. The idea was simple … replace the terms “money services business” and “MSB” in the interagency 2005 guidance on MSBs, with “marijuana related business” and “MRB”. At least we might find that 20% of banks and credit unions would be able to balance the meager rewards with the uncertain risks and provide financial services to marijuana related businesses. See Richards – 2005 MSB Guidance = 2019 MRB Guidance

SAFE Banking Act of 2019 – Some Suggestions for the Senate

The SAFE Banking Act, HR 1595, was approved by the House on September 25, 2019. As written, it is a “bill to create protections for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers for such businesses, and for other purposes.” There has been much written about the SAFE Banking Act, but as I went through it, I saw a number of things that need to be addressed.  So below are some general comments and observations – written in blue italics – and some suggestions for the Senate – written in red bold italics – as the Senate considers what, if any, changes to make to the House version, and whether to actually vote on their version of the SAFE Banking Act.

The link to the text is SAFE Banking Act – congress.gov

SAFE Banking Act, HR 1595 as approved by the House of Representatives, September 25, 2019

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; PURPOSE.

(a) SHORT TITLE.—This Act may be cited as the ‘‘Secure And Fair Enforcement Banking Act of 2019’’ or the ‘‘SAFE Banking Act of 2019’’.

(b) PURPOSE.—The purpose of this Act is to increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses.

Comment – The purpose statement focuses on public safety and getting cash out of cannabis businesses. But there is very little else in the Act that specifically addresses public safety or cash. Note the modifier “legitimate” (see section 14 definition)

SEC. 2. SAFE HARBOR FOR DEPOSITORY INSTITUTIONS.

(a) IN GENERAL.—A Federal banking regulator may not—

(1) terminate or limit the deposit insurance or share insurance of a depository institution under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), the Federal Credit Union Act (12 U.S.C. 1751 et seq.), or take any other adverse action against a depository institution under section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818) solely because the depository institution provides or has provided financial services to a cannabis-related legitimate business or service provider;

(2) prohibit, penalize, or otherwise discourage a depository institution from providing financial services to a cannabis-related legitimate business or service provider or to a State, political subdivision of a State, or Indian Tribe that exercises jurisdiction over cannabis-related legitimate businesses;

Comment – Section 2 is clearly a safe harbor from actions taken by a federal banking regulator – not from the Department of Justice. Compare this to section 4’s broader protections. Note that 12 USC 1818 is the “cease and desist” section. The phrase “solely because” is significant: the intent and effect of this is that a federal banking regulator can bring an adverse action against a depository institution providing financial services to a cannabis-related legitimate business if that institution otherwise violates banking laws or regulations.

(3) recommend, incentivize, or encourage a depository institution not to offer financial services to an account holder, or to downgrade or cancel the financial services offered to an account holder solely because— (A) the account holder is a cannabis-related legitimate business or service provider, or is an employee, owner, or operator of a cannabis-related legitimate business or service provider; (B) the account holder later becomes an employee, owner, or operator of a cannabis-related legitimate business or service provider; or (C) the depository institution was not aware that the account holder is an employee, owner, or operator of a cannabis-related legitimate business or service provider;

Comment – Section 2(a)(3) introduces protections for account holders who are employees, owners, and operators. Also, note that (2) provides that regulators cannot discourage financial institutions from providing services, and (3) provides that regulators cannot encourage financial institutions not to provide services. What was the legislative intent?

(4) take any adverse or corrective supervisory action on a loan made to— (A) a cannabis-related legitimate business or service provider, solely because the business is a cannabis-related legitimate business or service provider; (B) an employee, owner, or operator of a cannabis-related legitimate business or service provider, solely because the employee, owner, or operator is employed by, owns, or operates a cannabis-related legitimate business or service provider, as applicable; or (C) an owner or operator of real estate or equipment that is leased to a cannabis-related legitimate business or service provider, solely because the owner or operator of the real estate or equipment leased the equipment or real estate to a cannabis-related legitimate business or service provider, as applicable; or

(5) prohibit or penalize a depository institution (or entity performing a financial service for or in association with a depository institution) for, or otherwise discourage a depository institution (or entity performing a financial service for or in association with a depository institution) from, engaging in a financial service for a cannabis-related legitimate business or service provider.

(b) SAFE HARBOR APPLICABLE TO DE NOVO INSTITUTIONS.—Subsection (a) shall apply to an institution applying for a depository institution charter to the same extent as such subsection applies to a depository institution.

Comment – Section 2(a)(5) is interesting with the addition of “(or entity performing a financial service for or in association with a depository institution) …”. Subsections 2(a)(2) and (5) could be combined without loss of meaning.

SEC. 3. PROTECTIONS FOR ANCILLARY BUSINESSES.

For the purposes of sections 1956 and 1957 of title 18, United States Code, and all other provisions of Federal law, the proceeds from a transaction involving activities of a cannabis-related legitimate business or service provider shall not be considered proceeds from an unlawful activity solely because—

(1) the transaction involves proceeds from a cannabis-related legitimate business or service provider; or

(2) the transaction involves proceeds from— (A) cannabis-related activities described in section 14(4)(B) conducted by a cannabis-related legitimate business; or (B) activities described in section 14(13)(A) conducted by a service provider.

Senate Suggestion 1 – The title of section 3 is the only reference to “ancillary businesses”. This is a left-over from the original SAFE Banking Act. This section should be changed to  “Protections from Federal Laws Relating to Specified Unlawful Activity”

SEC. 4. PROTECTIONS UNDER FEDERAL LAW.

(a) IN GENERAL.—With respect to providing a financial service to a cannabis-related legitimate business or service provider within a State, political subdivision of a State, or Indian country that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of cannabis pursuant to a law or regulation of such State, political subdivision, or Indian Tribe that has jurisdiction over the Indian country, as applicable, a depository institution, entity performing a financial service for or in association with a depository institution, or insurer that provides a financial service to a cannabis-related legitimate business or service provider, and the officers, directors, and employees of that depository institution, entity, or insurer may not be held liable pursuant to any Federal law or regulation— (1) solely for providing such a financial service; or (2) for further investing any income derived from such a financial service.

Comment – Section 4’s protections extend more broadly than the narrower section 2 safe harbor, notably because individuals are protected.

(b) PROTECTIONS FOR FEDERAL RESERVE BANKS AND FEDERAL HOME LOAN BANKS.—With respect to providing a service to a depository institution that provides a financial service to a cannabis-related legitimate business or service provider (where such financial service is provided within a State, political subdivision of a State, or Indian country that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of cannabis pursuant to a law or regulation of such State, political subdivision, or Indian Tribe that has jurisdiction over the Indian country, as applicable), a Federal reserve bank or Federal Home Loan Bank, and the officers, directors, and employees of the Federal reserve bank or Federal Home Loan Bank, may not be held liable pursuant to any Federal law or regulation— (1) solely for providing such a service; or (2) for further investing any income derived from such a service.

(c) PROTECTIONS FOR INSURERS.—With respect to engaging in the business of insurance within a State, political subdivision of a State, or Indian country that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of cannabis pursuant to a law or regulation of such State, political subdivision, or Indian Tribe that has jurisdiction over the Indian country, as applicable, an insurer that engages in the business of insurance with a cannabis-related legitimate business or service provider or who otherwise engages with a person in a transaction permissible under State law related to cannabis, and the officers, directors, and employees of that insurer may not be held liable pursuant to any Federal law or regulation— (1) solely for engaging in the business of insurance; or (2) for further investing any income derived from the business of insurance.

(d) FORFEITURE.— (1) DEPOSITORY INSTITUTIONS.—A depository institution that has a legal interest in the collateral for a loan or another financial service provided to an owner, employee, or operator of a cannabis-related legitimate business or service provider, or to an owner or operator of real estate or equipment that is leased or sold to a cannabis-related legitimate business or service provider, shall not be subject to criminal, civil, or administrative forfeiture of that legal interest pursuant to any Federal law for providing such loan or other financial service. (2) FEDERAL RESERVE BANKS AND FEDERAL HOME LOAN BANKS.—A Federal reserve bank or Federal Home Loan Bank that has a legal interest in the collateral for a loan or another financial service provided to a depository institution that provides a financial service to a cannabis-related legitimate business or service provider, or to an owner or operator of real estate or equipment that is leased or sold to a cannabis-related legitimate business or service provider, shall not be subject to criminal, civil, or administrative forfeiture of that legal interest pursuant to any Federal law for providing such loan or other financial service.

SEC. 5. RULES OF CONSTRUCTION.

(a) NO REQUIREMENT TO PROVIDE FINANCIAL SERVICES.—Nothing in this Act shall require a depository institution, entity performing a financial service for or in association with a depository institution, or insurer to provide financial services to a cannabis-related legitimate business, service provider, or any other business.

(b) GENERAL EXAMINATION, SUPERVISORY, AND ENFORCEMENT AUTHORITY.—Nothing in this Act may be construed in any way as limiting or otherwise restricting the general examination, supervisory, and enforcement authority of the Federal banking regulators, provided that the basis for any supervisory or enforcement action is not the provision of financial services to a cannabis-related legitimate business or service provider.

Comment – Section 5(a) allows financial service providers to decide not to engage with cannabis-related legitimate businesses or service providers. It does not extend that to the employees, officer, or operators of those businesses, though. Section 5(b) gives teeth to the section 2 safe harbor language (“solely because the depository institution provides or has provided financial services to a cannabis-related legitimate business or service provider”). However, section 5(b) could be better written by including the “solely” term.

SEC. 6. REQUIREMENTS FOR FILING SUSPICIOUS ACTIVITY REPORTS.

Section 5318(g) of title 31, United States Code, is amended by adding at the end the following:

‘‘(5) REQUIREMENTS FOR CANNABIS-RELATED LEGITIMATE BUSINESSES.—

‘‘(A) IN GENERAL.—With respect to a financial institution or any director, officer, employee, or agent of a financial institution that reports a suspicious transaction pursuant to this subsection, if the reason for the report relates to a cannabis-related legitimate business or service provider, the report shall comply with appropriate guidance issued by the Financial Crimes Enforcement Network. The Secretary shall ensure that the guidance is consistent with the purpose and intent of the SAFE Banking Act of 2019 and does not significantly inhibit the provision of financial services to a cannabis-related legitimate business or service provider in a State, political subdivision of a State, or Indian country that has allowed the cultivation, production, manufacture, transportation, display, dispensing, distribution, sale, or purchase of cannabis pursuant to law or regulation of such State, political subdivision, or Indian Tribe that has jurisdiction over the Indian country.

Senate Suggestion 2 – Section 6 adds a new subsection (5). Subsection (1) doesn’t change: it provides “The Secretary may require any financial institution, and any director, officer, employee, or agent of any financial institution, to report any suspicious transaction relevant to a possible violation of law or regulation.” This section calls for “guidance” from FinCEN, not a regulation or regulations. First, is this the existing (2014) FinCEN guidance, or does it contemplate new, yet to be issued, guidance? If the latter, there is no time frame for issuing such guidance. I would make this clear: FinCEN guidance to be issued within 180 days. Compare this to section 7. And see comments on section 10. Second, question whether that guidance would satisfy the Administrative Procedures Act. See the (excellent) testimony of Margaret (Meg) Tahyar: https://www.banking.senate.gov/imo/media/doc/Tahyar%20Testimony%204-30-19.pdf and the federal banking regulators Interagency Statement on Clarifying the Role of Supervisory Guidance, https://www.fdic.gov/news/news/press/2018/pr18059a.pdf

‘‘(B) DEFINITIONS.—For purposes of this paragraph: ‘‘(i) CANNABIS.—The term ‘cannabis’ has the meaning given the term ‘marihuana’ in section 102 of the Controlled Substances Act (21 U.S.C. 802). ‘‘(ii) CANNABIS-RELATED LEGITIMATE BUSINESS.—The term ‘cannabis-related legitimate business’ has the meaning given that term in section of the SAFE Banking Act of 2019. ‘‘(iii) INDIAN COUNTRY.—The term ‘Indian country’ has the meaning given that term in section 1151 of title 18. ‘‘(iv) INDIAN TRIBE.—The term ‘Indian Tribe’ has the meaning given that term in section 102 of the Federally Recognized Indian Tribe List Act of 1994 (25 7 U.S.C. 479a). ‘‘(v) FINANCIAL SERVICE.—The term ‘financial service’ has the meaning given that term in section 14 of the SAFE Banking Act of 2019. ‘‘(vi) SERVICE PROVIDER.—The term ‘service provider’ has the meaning given that term in section 14 of the SAFE Banking Act of 2019. ‘‘(vii) STATE.—The term ‘State’ means each of the several States, the District of Columbia, Puerto Rico, and any territory or possession of the United States.’’.

SEC. 7. GUIDANCE AND EXAMINATION PROCEDURES.

Not later than 180 days after the date of enactment of this Act, the Financial Institutions Examination Council shall develop uniform guidance and examination procedures for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers.

Senate Suggestion 3 – See the comments for section 6. Between these two sections, CRLB/SP program requirements, including SAR reporting guidance, won’t be available to financial institutions for ~6 months after the enactment of the Act. That creates problems for the section 10 report. And why is this language – FFIEC guidance and exam procedures in 180 days – different than the similar hemp section 11(b) – federal banking regulators to publish best practices within 90 days?

SEC. 8. ANNUAL DIVERSITY AND INCLUSION REPORT.

The Federal banking regulators shall issue an annual report to Congress containing—

(1) information and data on the availability of access to financial services for minority-owned and women-owned cannabis-related legitimate businesses; and

(2) any regulatory or legislative recommendations for expanding access to financial services for  minority-owned and women-owned cannabis-related legitimate businesses.

SEC. 9. GAO STUDY ON DIVERSITY AND INCLUSION.

(a) STUDY.—The Comptroller General of the United States shall carry out a study on the barriers to market-place entry, including in the licensing process, and the access to financial services for potential and existing minority-owned and women-owned cannabis-related legitimate businesses.

(b) REPORT.—The Comptroller General shall issue a report to the Congress—(1) containing all findings and determinations made in carrying out the study required under subsection (a); and (2) containing any regulatory or legislative recommendations for removing barriers to marketplace entry, including in the licensing process, and expanding access to financial services for potential and existing minority-owned and women-owned cannabis-related legitimate businesses.

SEC. 10. GAO STUDY ON EFFECTIVENESS OF CERTAIN REPORTS ON FINDING CERTAIN PERSONS.

Not later than 2 years after the date of the enactment of this Act, the Comptroller General of the United States shall carry out a study on the effectiveness of reports on suspicious transactions filed pursuant to section 15 5318(g) of title 31, United States Code, at finding individuals or organizations suspected or known to be engaged with transnational criminal organizations and whether any such engagement exists in a State, political subdivision, or Indian Tribe that has jurisdiction over Indian country that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of cannabis. The study shall examine reports on suspicious transactions as follows: (1) During the period of 2014 until the date of the enactment of this Act, reports relating to marijuana-related businesses. (2) During the 1-year period after date of the enactment of this Act, reports relating to cannabis-related legitimate businesses.

Senate Suggestion 4 – Why is this study limited to looking at whether SARs are effective at identifying transnational criminal organization connections to CRLBs? The study should look at whatever patterns, trends, typologies can be identified from all 5318(g)(5) SARs (as well as CTRs), not just connections to TCOs. This is a lost opportunity.

Senate Suggestion 5 – Comparing the MRB SAR regime to the CRLB SAR regime is a sound idea, but the mechanics or timing are not right. CRLB SARs won’t immediately be filed by financial institutions: FinCEN must first either enact a regulation or issue guidance relating to CRLB SAR filings. The triggering event cannot be until/after the date of enactment of this Act, but until/after a regulation or guidance is published or written.

SEC. 11. BANKING SERVICES FOR HEMP BUSINESSES.

(a) FINDINGS.—The Congress finds that— (1) the Agriculture Improvement Act of 2018 (Public Law 115–334) legalized hemp by removing it from the definition of ‘‘marihuana’’ under the Controlled Substances Act; (2) despite the legalization of hemp, some hemp businesses (including producers, manufacturers, and retailers) continue to have difficulty gaining access to banking products and services; and (3) businesses involved in the sale of hemp-derived cannabidiol (‘‘CBD’’) products are particularly affected, due to confusion about their legal status.

(b) FEDERAL BANKING REGULATOR HEMP BANKING GUIDANCE.—Not later than the end of the 90-day period beginning on the date of enactment of this Act, the Federal banking regulators shall jointly issue guidance to financial institutions—(1) confirming the legality of hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products, and the legality of engaging in financial services with businesses selling hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products, after the enactment of the Agriculture Improvement Act of 2018; and (2) to provide recommended best practices for financial institutions to follow when providing financial services and merchant processing services to businesses involved in the sale of hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products.

Senate Suggestion 6 – See section 7, which calls for FFIEC guidance and exam procedures in 180 days. Why is this section calling for the federal banking regulators to publish best practices within 90 days? Also, if a financial institution knows that its customer is selling unapproved hemp-derived CBD products in violation of the FFD&C Act, is it protected by this section?

Senate Suggestion 7 – Why are merchant processing services called out in this section, and nowhere else? If merchant processing services are not “financial services”, then this is a huge gap in the Act, as (arguably) the most important financial service a CRLB can obtain is merchant services. See section 14(7).

(c) FINANCIAL INSTITUTION DEFINED.—In this section, the term ‘‘financial institution’’ means any person providing financial services.

Senate Suggestion 8 – What is the purpose of subsection (c)?

SEC. 12. APPLICATION OF SAFE HARBORS TO HEMP AND CBD PRODUCTS.

(a) IN GENERAL.—Except as provided under subsection (b), the provisions of this Act (other than sections 6 and 10) shall apply to hemp (including hemp-derived cannabidiol and other hemp-derived cannabinoid products) in the same manner as such provisions apply to cannabis.

Senate Suggestion 9 – The House version excludes hemp from Section 6, the SAR reporting section, and Section 10, the study of SARs to determine if there are any transnational criminal organizations connections to the cannabis industry. Is it the intent of Congress that hemp and hemp products are not covered by the SAR reporting obligations but are otherwise covered by FFIEC guidance and examination procedures?

(b) RULE OF APPLICATION.—In applying the provisions of this Act described under subsection (a) to hemp, the definition of ‘‘cannabis-related legitimate business’’ shall be treated as excluding any requirement to engage in activity pursuant to the law of a State or political subdivision thereof.

(c) HEMP DEFINED.—In this section, the term ‘‘hemp’’ has the meaning given that term under section 297A of the Agricultural Marketing Act of 1946 (7 U.S.C. 1639o).

SEC. 13. REQUIREMENTS FOR DEPOSIT ACCOUNT TERMINATION REQUESTS AND ORDERS.

(a) TERMINATION REQUESTS OR ORDERS MUST BE VALID.—

(1) IN GENERAL.—An appropriate Federal banking agency may not formally or informally request or order a depository institution to terminate a specific customer account or group of customer accounts or to otherwise restrict or discourage a depository institution from entering into or maintaining a banking relationship with a specific customer or group of customers unless— (A) the agency has a valid reason for such request or order; and (B) such reason is not based solely on reputation risk.

(2) TREATMENT OF NATIONAL SECURITY THREATS.—If an appropriate Federal banking agency believes a specific customer or group of customers is, or is acting as a conduit for, an entity which— (A) poses a threat to national security; (B) is involved in terrorist financing; (C) is an agency of the Government of Iran, North Korea, Syria, or any country listed from time to time on the State Sponsors of Terrorism list; (D) is located in, or is subject to the jurisdiction of, any country specified in subparagraph (C); or (E) does business with any entity described in subparagraph (C) or (D), unless the appropriate Federal banking agency determines that the customer or group of customers has used due diligence to avoid doing business with any entity described in subparagraph (C) or (D), such belief shall satisfy the requirement under paragraph (1).

(b) NOTICE REQUIREMENT.—

(1) IN GENERAL.—If an appropriate Federal banking agency formally or informally requests or orders a depository institution to terminate a specific customer account or a group of customer accounts, the agency shall— (A) provide such request or order to the institution in writing; and (B) accompany such request or order with a written justification for why such termination is needed, including any specific laws or regulations the agency believes are being violated by the customer or group of customers, if any.

(2) JUSTIFICATION REQUIREMENT.—A justification described under paragraph (1)(B) may not be based solely on the reputation risk to the depository institution.

(c) CUSTOMER NOTICE.—

(1) NOTICE REQUIRED.—Except as provided under paragraph (2) or as otherwise prohibited from being disclosed by law, if an appropriate Federal banking agency orders a depository institution to terminate a specific customer account or a group of customer accounts, the depository institution shall inform the specific customer or group of customers of the justification for the customer’s account termination described under subsection (b).

(2) NOTICE PROHIBITED.— (A) NOTICE PROHIBITED IN CASES OF NATIONAL SECURITY.—If an appropriate Federal banking agency requests or orders a depository institution to terminate a specific customer account or a group of customer accounts based on a belief that the customer or customers pose a threat to national security, or are otherwise described under subsection (a)(2), neither the depository institution nor the appropriate Federal banking agency may inform the customer or customers of the justification for the customer’s account termination. (B) NOTICE PROHIBITED IN OTHER CASES.—If an appropriate Federal banking agency determines that the notice required under paragraph (1) may interfere with an authorized criminal investigation, neither the depository institution nor the appropriate Federal banking agency may inform the specific customer or group of customers of the justification for the customer’s account termination.

(d) REPORTING REQUIREMENT.—Each appropriate Federal banking agency shall issue an annual report to the Congress stating— (1) the aggregate number of specific customer accounts that the agency requested or ordered a depository institution to terminate during the previous year; and (2) the legal authority on which the agency relied in making such requests and orders and the frequency on which the agency relied on each such authority.

(e) DEFINITIONS.—For purposes of this section: (1) APPROPRIATE FEDERAL BANKING AGENCY.—The term ‘‘appropriate Federal banking agency’’ means— (A) the appropriate Federal banking agency, as defined under section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); and (B) the National Credit Union Administration, in the case of an insured credit union. (2) DEPOSITORY INSTITUTION.—The term ‘‘depository institution’’ means— (A) a depository institution, as defined under section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); and (B) an insured credit union.

SEC. 14. DEFINITIONS.

In this Act:

(1) BUSINESS OF INSURANCE.—The term ‘‘business of insurance’’ has the meaning given such term in section 1002 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5481).

(2) CANNABIS.—The term ‘‘cannabis’’ has the meaning given the term ‘‘marihuana’’ in section 102 of the Controlled Substances Act (21 U.S.C. 802).

(3) CANNABIS PRODUCT.—The term ‘‘cannabis product’’ means any article which contains cannabis,  including an article which is a concentrate, an edible, a tincture, a cannabis-infused product, or a topical.

(4) CANNABIS-RELATED LEGITIMATE BUSINESS.—The term ‘‘cannabis-related legitimate business’’ means a manufacturer, producer, or any person or company that— (A) engages in any activity described in subparagraph (B) pursuant to a law established by a State or a political subdivision of a State, as determined by such State or political subdivision; and (B) participates in any business or organized activity that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products.

Senate Suggestion 10 – This appears to be an unnecessarily complicated definition. It could be simplified to: “CRLB “means any person or legal entity that engages in or participates in any business or organized activity pursuant to a law established by a State or a political subdivision of a State, as determined by such State or political subdivision, that involves cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products.” Does the inclusion of the word “legitimate” mean that those cannabis-related businesses that are in violation of their state-licensing requirements are not covered by the SAFE Banking Act, and banks providing services to those non-legitimate cannabis-related businesses also not protected?

(5) DEPOSITORY INSTITUTION.—The term ‘‘depository institution’’ means— (A) a depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); (B) a Federal credit union as defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752); or (C) a State credit union as defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752).

(6) FEDERAL BANKING REGULATOR.—The term ‘‘Federal banking regulator’’ means each of the Board of Governors of the Federal Reserve System, the Bureau of Consumer Financial Protection, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Financial Crimes Enforcement Network, the Office of Foreign Asset Control, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Department of the Treasury, or any Federal agency or department that regulates banking or financial services, as determined by the Secretary of the Treasury.

(7) FINANCIAL SERVICE.—The term ‘‘financial service’’— (A) means a financial product or service, as defined in section 1002 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5481); (B) includes the business of insurance; (C) includes, whether performed directly or indirectly, the authorizing, processing, clearing, settling, billing, transferring for deposit, transmitting, delivering, instructing to be delivered, reconciling, collecting, or otherwise effectuating or facilitating of payments or funds, where such payments or funds are made or transferred by any means, including by the use of credit cards, debit cards, other payment cards, or other access devices, accounts, original or substitute checks, or electronic funds transfers; (D) includes acting as a money transmitting business which directly or indirectly makes use of a depository institution in connection with effectuating or facilitating a payment for a cannabis-related legitimate business or service provider in compliance with section 5330 of title 31, United States Code, and any applicable State law; and (E) includes acting as an armored car service for processing and depositing with a depository institution or a Federal reserve bank with respect to any monetary instruments (as defined under section 1956(c)(5) of title 18, United States Code.

Senate Suggestion 11 – See section 7, which provides, in part, “financial services and merchant processing services to businesses involved in the sale of hemp, hemp-derived CBD products, and other hemp-derived cannabinoid products.” This definition of “financial services” appears to include merchant services. Sections 7 and 14 need to be reconciled.

(8) INDIAN COUNTRY.—The term ‘‘Indian country’’ has the meaning given that term in section 1151 of title 18.

(9) INDIAN TRIBE.—The term ‘‘Indian Tribe’’ has the meaning given that term in section 102 of the Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C. 479a).

(10) INSURER.—The term ‘‘insurer’’ has the meaning given that term under section 313(r) of title 31, United States Code.

(11) MANUFACTURER.—The term ‘‘manufacturer’’ means a person who manufactures, compounds, converts, processes, prepares, or packages cannabis or cannabis products.

(12) PRODUCER.—The term ‘‘producer’’ means a person who plants, cultivates, harvests, or in any way facilitates the natural growth of cannabis.

(13) SERVICE PROVIDER.—The term ‘‘service provider’’— (A) means a business, organization, or other person that— (i) sells goods or services to a cannabis-related legitimate business; or (ii) provides any business services, including the sale or lease of real or any other property, legal or other licensed services, or any other ancillary service, relating to cannabis; and (B) does not include a business, organization, or other person that participates in any business or organized activity that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products.

Comment – This is an expansive definition as it includes those that sell a good or service to a CRLB that could have no connection to the actual cannabis business (e.g. is a Starbucks a “service provider” if it sells coffee to budtender?). Perhaps regulations or regulatory guidance will narrow this down.

(14) STATE.—The term ‘‘State’’ means each of the several States, the District of Columbia, Puerto Rico, and any territory or possession of the United States.

SEC. 15. DISCRETIONARY SURPLUS FUNDS.

Section 7(a)(3)(A) of the Federal Reserve Act (12 U.S.C. 289(a)(3)(A)) is amended by striking ‘‘$6,825,000,000’’ and inserting ‘‘$6,821,000,000’’.

SEC. 16. DETERMINATION OF BUDGETARY EFFECTS.

The budgetary effects of this Act, for the purpose of complying with the Statutory Pay-As-You-Go Act of 2010, shall be determined by reference to the latest statement titled ‘‘Budgetary Effects of PAYGO Legislation’’ for this Act, submitted for printing in the Congressional Record by the Chairman of the House Budget Committee, provided that such statement has been submitted prior to the vote on passage.

The WayBack Machine … and the Marihuana Problem in New York (circa 1944) – updated with the OFAC Fentanyl Drug Trafficking Organization Designation of August 21, 2019

One of the greatest investigative tools available today is the Internet Archive, a “non-profit library of millions of free books, movies, software, music, websites, and more” – https://archive.org/. The best tool in this online library is the WayBack Machine. It is described as follows:

The Internet Archive has been archiving the web for 20 years and has preserved billions of webpages from millions of websites. These webpages are often made up of, and link to, many images, videos, style sheets, scripts and other web objects. Over the years, the Archive has saved over 510 billion such time-stamped web objects, which we term web captures.

We define a webpage as a valid web capture that is an HTML document, a plain text document, or a PDF.

domain on the web is an owned section of the internet namespace, such as google.com or archive.org or bbc.co.uk. A host on the web is identified by a fully qualified domain name or FQDN that specifies its exact location in the tree hierarchy of the Domain Name System. The FQDN consists of the following parts: hostname and domain name.  As an example, in case of the host blog.archive.org, its hostname is blog and the host is located within the domain archive.org.

We define a website to be a host that has served webpages and has at least one incoming link from a webpage belonging to a different domain.

As of today, the Internet Archive officially holds 273 billion webpages from over 361 million websites, taking up 15 petabytes of storage.

Here’s an example of how the WayBack Machine can be used. In a federal criminal complaint unsealed on August 15, 2019 in the case of United States v Manish Patel (Eastern District of California, case no 19-MJ-0128), the affidavit supporting the complaint provided that the defendant had business cards that showed he was the CEO of The Sentient Law Group PC in New York City, but the website for that entity – http://www.sentientlawgroup.com – as accessed on August 5, 2019 did not show him as CEO.  But by simply typing that URL into the WayBack Machine’s search bar you find every instance of that website that was captured by the WayBack Machine. Viewing the first and last captures (on April 13, 2017 and February 12, 2019) shows the defendant Patel as the CEO, his practice focus areas (including cannabis law, which is ironic given that Patel was charged with multiple counts involving possession with intent to distribute marijuana).  This tool is particularly helpful in online child pornography cases, where defendants move and change websites, and was instrumental in a number of post-9/11 cases, where the English language Al Qaeda website changed dramatically after 9/11 … but its historical web pages remained accessible, thanks to the Internet Archive and its WayBack Machine.

OFAC Designation of the Zheng Drug Trafficking Organization – August 21, 2019

Another great example of the power of the WayBack Machine can be found in a series of federal criminal cases that culminated in OFAC designating the criminal defendants as Foreign Narcotics Kingpins. See the Treasury press release at https://home.treasury.gov/news/press-releases/sm756

One of those designated, Fujing Zheng, was indicted in federal court in Ohio in August 2018 (US v Zhang et al, Northern District of Ohio, case 18CR00474). In that 86-page indictment, the Government alleges that the Zhang organization used a website to market its illegal drugs – www.globalrc.net

What has happened to www.globalrc.net?

If you search for that URL today, you get the following:

As it shows, that domain has been seized by the DEA and is no longer accessible. But the WayBack Machine has captured and saved that website 65 times between April 8, 2009 and February 15, 2019:

And simply by selecting any of the 65 dates, you can access the captured website. An example is from January 6, 2017:

You can see the actual website used by the Zheng DTO back in 2017. A powerful investigative tool!

But there is more to be found on the Internet Archive. The twenty or so archived collections are incredible sources. Here is an example of a document from the “Journals” collection:

https://archive.org/details/TheMarihuanaProblemInTheCityOfNewYork-19441973Edition/page/n19

In 1944, Legendary New York Mayor F.H. LaGuardia commissioned a report to look into “The Marihuana Problem in the City of New York.” The forward is interesting. It provides:

“As Mayor of New York City, it is my duty to foresee and take steps to prevent the development of hazards to the health, safety, and welfare of our citizens. When rumors were recently circulated concerning the smoking of marihuana by large segments of our population and even by school children, I sought advice from The New York Academy of Medicine, as is my custom when confronted with problems of medical import.”

“The report of the present investigation covers every phase of the problem and is of practical value not only to our own city but to communities throughout the country. It is a basic contribution to medicine and pharmacology.”

“I am glad that the sociological, psychological, and medical ills commonly attributed to marihuana have been found to be exaggerated insofar as the City of New York is concerned. I hasten to point out, though, that the findings are to be interpreted only as a reassuring report of progress and not as encouragement to indulgence, for I shall continue to enforce the laws prohibiting the use of marihuana until and if complete findings may justify an amendment to existing laws. The scientific part of the research will be continued in the hope that the drug may prove to possess therapeutic value for the control of drug addiction.”

Try out the Internet Archive!

Is the Clinical Cannabis Catch-22 Coming to Closure?

The Scottsdale Research Institute case may be a significant step forward in the normalization of cannabis. And it may address one of the most vexing clinical cannabis catch-22 situations there is today.

Schedule I of the Controlled Substances Act lists drugs that are both harmful and have no currently accepted medical use. Marijuana or cannabis was included in Schedule I since the passage of the Controlled Substances Act in 1970, and has remained there, notwithstanding great public, political, and other pressure to reschedule or even deschedule it.

Congress has the ability to reschedule marijuana. Let’s assume that they’re not prepared to act anytime soon: that would take courage and compromise, two things that appear to be lacking in this Congress. But the DEA also has the ability to reschedule marijuana, but it has not done so, and various DEA publications have indicated that it won’t do so because of a dearth of clinical trials demonstrating currently accepted medical use, or medical efficacy. One of the reasons for the dearth of clinical trials is a lack of availability of approved research-grade cannabis. Under the Controlled Substance Act, the DEA controls who gets to product cannabis for clinical trials. Currently, there is one such approved facility, the University of Mississippi. And the cannabis produced by that facility is, by most accounts, not very good (the picture here is from the Scottsdale Research Institute court filing, mentioned below). So why aren’t there more facilities approved to grow cannabis for medical research?

The DEA controls that, too. From 1970 (when the CSA was passed and cannabis was included in Schedule I), dozens of applications to produce cannabis for medical research were filed, and none were approved. In late 2015 a federal law was passed that compelled the DEA to act on these applications – to approve or deny them – within 90 days. Again, dozens of applications have been filed. And none have been acted on.

An interesting case is now before the US Court of Appeals (District of Columbia) called In re: Scottsdale Research Institute, LLC, District of Columbia Court of Appeals, case No. 19-1120, where a medical research company is seeking to compel the DEA to act on its application to produce pharmaceutical-grade cannabis. The facts are important …

A doctor in Arizona, Dr. Suzanne Sisley, has the necessary federal approvals to run a clinical trial to determine whether cannabis is effective in treating veterans’ PTSD (as Dr. Sisley writes in her Declaration supporting the petition, she “struggled for seven years [from 2009 to 2016] to get approval from four different federal agencies to conduct clinical trials of cannabis as a treatment for PTSD symptoms in veterans.”). But she cannot begin those trials without pharmaceutical grade cannabis, which the only approved supplier cannot provide. In 2016 she (actually, her company and the appellant in this case, Scottsdale Research Institute, LLC, or “SRI”) submitted an application to grow her own cannabis for her clinical trials, but the DEA hasn’t acted on that application, notwithstanding the law that says it has to. Without pharmaceutical-grade cannabis to run her FDA-approved clinical trials, she was stuck. This petition, called a Writ of Mandamus, was brought to compel the DEA to act. Notably, the Writ of Mandamus does not seek to compel the DEA to grant the application to produce cannabis for research: as SRI writes in its petition, “mandamus here will not divest the agency of its discretion. It simply allows the process contemplated by the statute to begin, not end. The agency still maintains discretion to deny or delay the application.”

So let’s sum up:

  • The DEA won’t consider rescheduling cannabis without clinical trials.
  • Clinical trials require approved, pharmaceutical-grade cannabis.
  • The DEA decides who produces pharmaceutical-grade cannabis.
  • The only DEA-approved producer of pharmaceutical-grade cannabis cannot produce pharmaceutical-grade cannabis.
  • Since 2016, the DEA has been required by law to either approve or reject applications to produce cannabis for medical research within 90 days of receiving the application.
  • The DEA has received dozens of applications from entities seeking to produce pharmaceutical-grade cannabis.
  • The DEA has neither approved nor rejected any of those applications in the 3+ years it has been compelled by law to do so.
  • SRI is bringing a federal court action to compel the DEA to consider its application.

As Dr. Sisley and SRI’s petition to the District of Columbia Court of Appeals provides:

“Millions of Americans believe cannabis holds the key to ending their pain and suffering, making the need for clinical trials acute no matter the outcome of SRI’s clinical trials. If those studies show that thirty-eight states (and counting), doctors, legislators, and the American public are all wrong—i.e., that cannabis lacks medical utility—then we must know this now. Those using cannabis to treat conditions like PTSD may be jeopardizing their health and welfare. But in the more likely alternative— i.e., SRI’s studies prove that cannabis has medical value—DEA’s delay inexcusably deprives combat veterans and others of a treatment option necessary to ease their pain. Either way, more delay is unconscionable.”

The Court of Appeals issued a preliminary ruling on July 29th regarding SRI’s June 11th petition: the DEA has 30 days to file a response, and SRI then has 14 days to file a reply to that response. Notably, after receiving SRI’s 284-page petition, the Court of Appeals has limited the DEA’s response to 7,800 words, and SRI’s reply to 3,900 words. (This article is 800 words long, by the way).

I doubt that clinical trials will prove that cannabis lacks medical utility – but whether something has medical utility isn’t really the question. Many non-approved, and unapprovable, products have some medical utility, but can’t be safely used as federally-approved medicines. Let’s allow the clinical researchers to do their jobs. Let’s allow – perhaps we need to compel – federal regulatory agencies to do their jobs. And wherever and however this comes out at the end, at least we will know what safe and appropriate medical uses there are for cannabis, or components of cannabis.

One in Two Cannabis Dispensaries is Robbed or Burglarized? Perhaps not …

Are there any good studies on robbery and burglary rates of cannabis related businesses as compared to other businesses? Are cannabis related businesses robbed or burglarized at higher rates than other cash intensive businesses?

These questions may not be answered – I know I haven’t found good answers, and I have looked. Two written statements by the Credit Union National Association (CUNA) and American Bankers Association (ABA) provide two very different answers.

The Senate Committee on Banking, Housing, and Urban Affairs held a hearing on “Challenges for Cannabis and Banking: Outside Perspectives” on July 23, 2019. Both CUNA and the ABA had representatives provide written testimony and answers questions from the Senators. The written statement from the representative of CUNA included the following statement (which was picked up by one of the Senators during the question and answer session):

“A 2015 analysis by the Wharton School of Business Public Policy Initiative found that, in the absence of being banked, one in every two cannabis dispensaries were robbed or burglarized—with the average thief walking away with anywhere from $20,000 to $50,000 in a single theft.”

One in every two cannabis dispensaries is robbed or burglarized! That is a stunning statistic. Actually, it is really two statistics because of the significant difference between a burglary and a robbery. Without getting into legal minutia, burglary is entering into a structure or dwelling with the intent to commit a crime; robbery is taking something from a person using force, or the threat of force, to do it. Put another way, a burglary becomes a robbery if there is someone in the structure or dwelling and the perpetrator uses force or the threat of force to take something. Both are serious crimes, but robbery is much more serious than burglary, as it (the robbery) involves direct victims.

The written statement from the American Bankers Association included the following:

“In Denver, [the roughly 500] cannabis businesses make up less than 1% of all local businesses but have accounted for 10% of all reported business burglaries from 2012-2016. On average, more than 100 burglaries occur at cannabis businesses each year according to the Denver Police Department, and burglaries and theft comprise almost 80% of Denver’s cannabis industry-related crime.”

CUNA’s statement that one in every two cannabis dispensaries is robbed or burglarized caught me by surprise.  The ABA’s statement – that roughly one in five cannabis business is burglarized – seems more reasonable. Logically, if one in every two dispensaries was robbed or burglarized, there would be headlines. I can’t find them. So I looked into CUNA’s source for its one in two conclusion, what they called “the Wharton analysis.”

It doesn’t exist.

Here’s a link to the Wharton “analysis” … https://publicpolicy.wharton.upenn.edu/live/news/2214-cash-crime-and-cannabis-banking-regulations-in-an/for-students/blog/news#_edn2.

First, it is a 2017 student blog written by three students which bears the following disclaimer: “The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.”

This November 20, 2017 student blog – not a Wharton Public Policy Institute publication at all – is titled “Cash, Crime, and Cannabis: Banking Regulations in an Illegal Market”. Under the heading “Risky Business”, the three student authors write:

“Not only are cash businesses conducive to tax manipulation, they also hurt many individuals, because of the risk of crime. In 2015, one in two cannabis dispensaries were robbed or burglarized, with the average thief walking away with anywhere from $20,000 to $50,000 in a single act [citation]. Mitch Morrissey, district attorney of Denver, notes a direct increase in crime cases related to the marijuana industry, and sees the reasoning behind the robberies stating: ‘You hit a 7-Eleven, you’ll get 20 bucks. You hit a dispensary, you’ll get $300,000 on a good day’ [citation].”

The citation the students provide is http://www.sivallc.com/the-growing-need-for-a-cannabis-dispensary-security-plan-infographic/

That page is no longer available. But the citation is not to an article or study, but simply to the infographic, which they label “Dispensary Security Infographic” and the source is shown as “Bubulyan Consulting Group”.  Bubulyan Consulting Group is actually Bulbulyan Consulting Group, which was the original name of Siva Enterprises. Avis Bulbulyan is the CEO of Siva Enterprises (www.sivallc.com).

I haven’t reached out to Mr. Bulbulyan to ask him where he obtained the data for the inforgraphic, but it appears that the source was an NBC news story from February 4, 2014 (available at https://www.nbcnews.com/storyline/legal-pot/high-crimes-robber-gangs-terrorize-colorado-pot-shops-n20111). That story includes the following:

“In 2009, the Denver Police Department estimated that about 17 percent of marijuana retail shops had been robbed or burglarized in the last year. That was good news: a bit less than liquor stores (20 percent) and banks (34 percent), and on par with pharmacies. Today, however, a darker picture has emerged. There are about 325 marijuana companies in Denver, based on an analysis of licensing data done for NBC News by Marijuana Business Daily, a leading trade publication. (Most companies hold numerous licenses.) At the same time, there have been about 317 burglaries and seven robberies reported by these companies in the last two years, according to police data. That’s an annual robbery and burglary rate of about 50 percent, more than double what it was in 2009. While a Denver Police spokesperson disputed these figures, the department doesn’t have its own.”

As written above, there is a significant difference between a burglary and a robbery. Using NBC’s numbers from its 2014 story, “that’s an annual robbery rate of about 1% and a burglary rate of about 49%.”

So what is the experience of law enforcement and the cannabis industry?

Colorado statistics seem to paint a very different picture

The City of Denver has an “Open Data” effort that includes marijuana-related crime (“crimes reported to the Denver Police Department which, upon review, were determined to have clear connection or relation to marijuana.”). It is available at County of Denver Marijuana Crime . That data suggests that marijuana-related business burglaries peaked in 2013 at 101, and dropped to 74 for the first eleven months of 2018. That suggests a burglary rate of 12% – 15%. Marijuana-related business robberies peaked in 2014 at 5: they recorded 1 such event in 2018. That rate is between 0.2% and 1%. Notably, these statistics are not comparing the marijuana-related crime rates with overall crime rates. It may well be that marijuana dispensaries are burglarized and robbed at roughly the same rate as other cash intensive businesses.

In an October 2018 report by the Colorado Division of Criminal Justice on organized crime cases in Colorado, the DCJ wrote “there has been concern that, due to the cash-only nature of the industry, robbery would be prevalent, but this has not been the case.” This seems in keeping with the 2014 NBC story that anecdotally suggests a robbery rate of 1% for cannabis dispensaries (in the Denver area).

Some research also suggests that the crime/cannabis nexus isn’t as strong as the anecdotes suggest, and in fact state-legal cannabis dispensaries may help reduce crime.

In a paper published in May 2018 “High on Crime? Exploring the Effects of Marijuana Dispensary Laws on Crime in California Counties” (http://ftp.iza.org/dp11567.pdf) the authors looked at violent and property-related crimes in California on a county-by-county level, and concluded that:

“The results suggest no relationship between county laws that legally permit dispensaries and reported violent crime. We find a negative and significant relationship between dispensary allowances and property crime rates, although event studies indicate these effects may be a result of pre-existing trends. These results are consistent with some recent studies suggesting that dispensaries help reduce crime by reducing vacant buildings and putting more security in these areas.”

Although this study doesn’t refer to robberies or burglaries at cannabis dispensaries, it seems logical that if those dispensaries were being robbed or burglarized at a rate of 50%, the study would have pointed that out.

A study published in the Journal of Preventive Medicine in March 2018 https://www.sciencedirect.com/science/article/pii/S0091743517305078 by university researchers funded by the Centers of Disease Control and Prevention looked at “the geography of crime and violence surrounding tobacco shops, medical marijuana dispensaries [MMDs], and off-sale alcohol outlets in a large, urban low-income community of color” using data from 2014. The abstract provides:

“Results indicated that mean property and violent crime rates within 100-foot buffers of tobacco shops and alcohol outlets—but not MMDs—substantially exceeded community-wide mean crime rates and rates around grocery/convenience stores (i.e., comparison properties licensed to sell both alcohol and tobacco) …”

Conclusion

There is no doubt that cash intensive businesses – bars, restaurants, convenience stores, casinos, cannabis dispensaries – are more likely to suffer burglaries and/or robberies than those businesses that are not cash intensive. And it seems logical that cannabis dispensaries, which struggle to get and maintain banking relationships and are therefore more cash intensive than other businesses, and have a very valuable and largely untraceable product on their premises, are more likely to suffer burglaries and/or robberies at an even higher rate. But that combined rate is probably not 50%. It is probably closer to the ABA’s figure (from the Denver Police Department, apparently) of 20%, or even the County of Denver data that suggests a rate of 12% – 15%.  Regardless, public policy should be driven by accurately reported and cited information: citing a 2015 Wharton Business School study is very different than citing a 2014 NBC News report. Although the robbery rates and burglary rates may in fact be high, and the NBC News report accurate, we are all better served if the bases of our collective public policy decisions are known and accurate.

The Federal Government must step up and provide legislation, regulation, and regulatory guidance to the financial services industry so that cannabis businesses and cannabis related businesses can have access to the full suite of banking services – notably deposit accounts, cash management services, payroll services, merchant banking services, credit, and insurance. The SAFE Banking Act might be a good first step.

FinCEN Updates its Marijuana SAR Data… but Actionable Information is Still Needed!

I previously wrote about the FinCEN quarterly Marijuana Banking Report in an article published August 26, 2018: August 26, 2018 Article

The FinCEN Report is available at FinCEN Marijuana Banking Report.

FinCEN appears to be doing its best with the limited resources that the Administration has allocated and Congress has provided. If properly resourced with the needed technology, capability, and staffing resources, I expect that FinCEN could do much more with the valuable information that the 633 depository institutions are providing through the 81,725 marijuana-related SARs they have filed over the last 5 years.  Here’s hoping that the Administration and Congress step up.

Until those resources are deployed, it appears that the public will continue to receive some good data through the quarterly Marijuana Banking Reports, but not much usable information.  The raw data that was provided indicates that since the FinCEN Guidance introduced the “marijuana-related SAR” concept in February 2014, 493 banks and 140 credit unions have filed one or more of the three types of marijuana-related SARs. Leaving aside what constitutes each of the three types of marijuana-related SARs (the quarterly Marijuana Report doesn’t accurately describe the three types, as I discuss below), FinCEN reports that 81,725 marijuana-related SARs have been filed since Q2 2014. That is good data, but it would be useful information if, for example, that number was compared to the total number of SARs filed by depository institutions in the same period of time (according to FinCEN’s SAR data, that is 4,653,076 SARs) so that we would know that marijuana-related SARs make up 1.76% of all depository institution SARs and are being filed by about 5% of all depository institutions. Other examples of useful and useable (actionable) information include:

Actionable Information

  1. The size and locations of the banks and credit unions filing the marijuana SARs
  2. The locations of the Marijuana Related Businesses (MRBs)
  3. Whether the activity involves medicinal/medical or recreational/adult-use MRBs
  4. The types of MRBs: growers/cultivators, producers, manufacturers, distributors, testing labs, retailers, dispensaries
  5. How many MRBs are being reported and why
  6. Whether the MRBs are part of larger, national (or even international) companies that are coming to dominate the US cannabis industry.
  7. The types of marijuana-related SARs the banks and credit unions are filing: for example, how many banks are only filing Marijuana-Termination SARs, how many of the Marijuana-Limited SARs are 90-day follow-ups rather than net new customers.
  8. Quarter-over-quarter and year-over-year trends: e.g., from Q4 2018 to Q1 2019, the total number of marijuana-related SARs is up 12% but Marijuana Termination SARs are up 14% … what is FinCEN seeing in those filings that could be useful for depository institutions considering whether to provide banking services to MRBs?
  9. There are ten times as many Marijuana Limited SARs (61,036) as there are Marijuana Priority SARs (6,067), and three times as many Marijuana Limited SARs as Marijuana Termination SARs (19,368): why is that? How many of the Marijuana Limited SARs are “continuing activity” SARs (where FinCEN has instructed financial institutions to file a marijuana-related SAR every 90 days regardless of the nature of the activity)?
  10. Whether, and to what extent, the voluntary information sharing provisions of 314(b) and 31 CFR 101.540 are being used by these institutions?

Banks and Credit Unions Aren’t the Only SAR Filers, and What About Marijuana-related CTRs?

There are two other limitations on the Marijuana Banking Report that stand out to me.

First, the Report is limited to banks and credit unions, which, for FinCEN’s reporting purposes, are collectively “Depository Institutions”. Overall, Depository Institutions filed about 45% of all SARs in 2018: MSBs filed 40%, casinos filed about 2.5%, Broker/Dealers filed about 1.2%, and “Other” filed about 11%. It would be instructive to know what other reporting entities are filing marijuana-related SARs.

Second, the original FinCEN Guidance also referred to the two primary large cash transaction reports: CTRs for financial institutions and Form 8300s for non-financial trades and businesses. It would be instructive to know how many of these reports are filed on known marijuana related businesses (linkages between SAR data and CTR/Form 8300 data can be made by TIN or other identifiers on conductors and beneficiaries of the cash transactions).

The Quarterly Marijuana Banking Reports Misstate the 2014 Guidance

In addition, FinCEN should consider “cleaning up” the report. I re-offer (having originally offered in August 2018) four suggestions.

First, when describing the three marijuana SAR categories (Limited, Priority, and Termination), FinCEN refers to Cole Memo “red flags” … but none of the three Cole Memos (or the Ogden Memo) have any “red flags”. The red flags are actually set out in the FinCEN guidance – and there are 23 red flags to consider – and that original guidance correctly refers to the Cole Memo “priorities” when describing the three marijuana SAR types.  Although some may quibble with my distinction, the term “red flags” is a red flag for banking auditors and regulators … the Cole Memo has priorities, the FinCEN guidance has red flags.

Second, footnote 1 of this Report describes when to use each of the three marijuana SAR types. For the marijuana “Termination” SAR, FinCEN indicates that it is to be used when the financial institution has decided to terminate its relationship with the MRB because (1) the financial institution “has decided not to have marijuana related customers for business reasons” or (2) the MRB is not fully compliant with the appropriate state’s marijuana regulations, or (3) the MRB raises one or more of the Cole Memo red flags. (Note the use of the alternative “or”). This language is different than the 2014 guidance, which has nothing about deciding not to have marijuana related customers for business reasons.  I would like to see FinCEN provide the industry with guidance for not only exiting MRBs, but also about simply not providing banking services to marijuana related customers for business/risk reasons.  It is clearly needed if less than 650 of more than 11,000 banks and credit unions are knowingly or unknowingly providing banking services to MRBs.

Third, there is nothing in the 2014 guidance, nor in the FinCEN Marijuana Banking report, that defines a “marijuana related business”.  It is certainly implied that to be an MRB requires being subject to state marijuana regulations, but clear guidance would be helpful. Also, there are many businesses that do not have to be licensed and are not governed by state marijuana regulations, but are indirectly dealing with MRBs. Footnote 7 of the 2014 guidance referred to indirect services (“a financial institution could be providing services to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.”): but it did not differentiate between (what I’ll call) Direct MRBs (those that are required to be licensed under state marijuana regulations) and Indirect MRBs (those that capital, services, products, property to Direct MRBs).

Finally, the Marijuana Banking Report describes the marijuana Limited-Priority-Termination SAR categories as “three phases for describing a financial institution’s relationship to marijuana-related businesses.” That isn’t accurate: there is not a progression or phasing of these categories, and the original 2014 guidance didn’t describe them that way. A bank or credit union (or any filer) doesn’t have to start with a Limited SAR, then progress to a Priority SAR, then end with a Termination SAR: they are three distinct SARs, dependent on the circumstances of each case.

The Marijuana Data Is Good, But Actionable Information Would Be Better!

 

 

Cannabis Reform in America: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”

 

Winston Churchill – https://www.youtube.com/watch?v=pdRH5wzCQQw

Any Fast and Clean Solutions Will Be Slow and Sloppy to Implement

Advocates on both (all?) sides of the cannabis, marijuana, and hemp debates are looking for fast and sure solutions to whatever problems they feel are most pressing, whether decriminalization, descheduling cannabis, rescheduling cannabis, righting past societal and racial wrongs, etc. Whether it is the proposed STATES Act or the SAFE Banking Act, some advocates suggest that Congressional action will quickly and easily solve many of the issues around accessibility, safety, access to banking, etc.

But is it that simple?

Today, the cannabis and financial services industries, local, county and state governments, and law enforcement agencies and prosecutors, are all in limbo, waiting for Congress to pass, and the President to enact, federal legislation that will pave the way for regulations and regulatory guidance that will truly open up banking services to cannabis related businesses. But it will take time, as there is always “regulatory lag” between new legislation being passed, regulations being written, and regulatory guidance being published. And then it takes even longer for financial institutions to implement those regulatory changes: to build programs, write policies, implement new technologies, etc. So even if Congress acted today, all of the cannabis industry actors won’t have a clear path forward for (at least) a couple of years. Until then, many of those actors – notably financial institutions looking to provide safe and effective banking services to the industry – will manage the risks through luck and chance, not knowing whether, how, or when financial regulators or prosecutors could pounce on them for failing to do perfectly that which they didn’t know they had to do.

What must be done? Until there are legislative changes, the federal banking regulators need to provide more current, clearer guidance for banks and credit unions.  It has been more than five years since FinCEN issued its Valentine’s Day 2014 guidance, and none of the banking and credit union regulators have formally opined on it or provided written guidance. What has been said about the Guidance?

  • The Courts: I’m aware of one federal court judge who has commented on the FinCEN guidance. In a December 28, 2015 hearing in the Fourth Corner Credit Union v Federal Reserve Bank of Kansas City case (District Court of Colorado, 15CV01633), Judge Brooke Jackson responded to a statement by the credit union’s lawyer that the FinCEN guidance “authorized financial institutions to serve marijuana related businesses” by saying: “No, it didn’t do that, did it? … It seems to me that the DOJ and guideline people are just saying, well, maybe we can put our head in the sand and this will go away.” (Transcript of hearing, page 3). And later in the same hearing, Judge Jackson stated: “But in [the credit union’s] brief, in black and white, you say the FinCEN guidance authorizes banks to serve marijuana related businesses. I don’t agree with you. I don’t think it does.” (Transcript, page 63).
  • Federal Reserve: in a June 17, 2018 press conference, Federal Reserve Chairman Jerome Powell is reported (by MarketWatch) to have said: “This is a very difficult area, because many state laws permit the use of marijuana and federal law still doesn’t. So it puts federally-chartered banks in a very difficult situation … it puts the supervisor in a very, very difficult position. Of course, our mandate has nothing to do with marijuana … We just would love to see it clarified, I think.”
  • OCC: on January 17, 2019, OCC Comptroller Joseph Otting told reporters that Congress has “to act at the national level to legalize marijuana if they want those entities involved in that business to utilize the US banking system” and that he “hopes for resolution to marijuana banking issues in 2020” (quoting a PoliticoPro tweet).

Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer. 

History tells us that changes take place over many years

An abbreviated timeline of cannabis in America makes us appreciate that any changes do, in fact, take many years to come about. I’ve broken this timeline or history into six periods.

1600s – 1919 – Hemp is part of the culture

  • Hemp farming
  • 1914 Harrison Narcotics Tax Act re opiates, coca

1919 – 1933 – Prohibition

  • 1919 – 18th Amendment brought in Prohibition – exception for 200 gallons of house-made wine, and physicians could prescribe whiskey. Note the parallels with cannabis, where many states allow home grows and medicinal cannabis.
  • 1930 – creation of the Federal Bureau of Narcotics (became the DEA in July 1973). First Commissioner Harry Anslinger (Commissioner 1930 – 1962), then US Representative to the UN Narcotics Commission 1962-1964. Anslinger wrote “The Protectors” in 1964 which included: “marijuana is taken by musicians. And I’m not speaking about good musicians, but the jazz type.”
  • By 1931, 29 states outlawed marijuana use
  • 1933 – 21st Amendment ended Prohibition

1933 – 1970 – Criminalizing of Cannabis

  • 1937 – Marihuana Tax Act (note the spelling of marihuana: this is the way it has been spelled in all federal laws and the US Sentencing Guidelines. The act was overturned in 1969 in a US Supreme Court case (Timothy) Leary v US as a violation of the 5th Amendment because in order to get a tax stamp you had to incriminate yourself; repealed in 1970 by the Controlled Substances Act
  • 1952 – Boggs Act: mandatory sentences for drug possession, and for marihuana, 2 years
  • 1961 – UN Single Convention on Narcotic Drugs (one of three UN treaties on narcotics, the others in 1971 and 1988). US is a signatory. Cannabis must be either a Schedule I or II drug per 21 USC 811(d)(1). Affirmed in NORML v DEA, 559 F3d 735, 751 (DC Cir 1977)
  • 1970 – Foreign Bank Secrecy Act of 1970, PL 91-508 (October 26, 1970)
  • 1970 – Comprehensive Drug Abuse Prevention & Control Act of 1970, PL 91-513 (October 27, 1970). Title II is the Controlled Substances Act. Five schedules of drugs based on potential for abuse, accepted medical use, and safety and potential for psychological or physical addiction:

Schedule  Potential for Abuse  Accepted Medical Use  Potential for Addiction

       I                      High                               None                              High

      II                      High                               Yes                                 High

      III                     Potential                       Yes                          Moderate/Low

      IV                     Low                                Yes                                 Low

      V                       Low/Little                     Yes                            Little/None

1970 – 1996 – The War on Drugs

  • 1970 – National Commission on Marihuana & Drug Abuse (Schafer Commission) created by President Nixon (actually, it was created by PL 91-513 Title II, section 601). Nixon’s intent was to get support for the temporary scheduling of marijuana onto Schedule I by AG John Mitchell.
  • 1972 – Schafer Commission Report released, arguing for decriminalization of marijuana possession and removal of marijuana from Schedule I. Title of report: “Marihuana, A Signal of Misunderstanding”
  • 1972 – NORML petitioned the Bureau of Narcotics & Dangerous Drugs to reschedule marijuana. BNDD, then the DEA, didn’t hear the petition until 1986, and rejected the request in 1989.
  • 1973 – Oregon became the first state to decriminalize possession (< 1 ounce). Between 1973 and 1978, 13 more states followed
  • 1982 – Tax Equity & Fiscal Responsibility Act of 1982 added section 280E to the Internal Revenue Code. Prior to this, criminals could write off normal business expenses in determining the federal income tax on illegal proceeds. Section 280E restricted what a person or business could write off to only cost of goods sold, not operating or other expenses.
  • 1984 – Reagan’s War on Drugs – included the passage of the Comprehensive Crime Control Act of 1984
  • 1986 – Anti-Drug Abuse Act of 1986, PL 99-570 (October 27, 1986). Brought in sentencing guidelines, mandatory minimums, 3 strikes. Total of 15 titles, including Title I, the Anti-Drug Enforcement Act, which had 15 sub-titles, including sub-title H, the Money Laundering Control Act (MLCA), which criminalized money laundering.

1996 – 2012 – The Beginning of  Decriminalization and Medicinal Use

  • 1996 – California Proposition 215 led to the Compassionate Use Act – first state to adopt medical marijuana law
  • 2000 – Conant v Walters, 309 F3d 629 (9th Circuit) affirmed a physician’s right to recommend, but not prescribe, marijuana
  • 2001 – US v Oakland Cannabis Buyers’ Cooperative, 532 US 483 – US Supreme Court rejected the medical necessity defense to CSA crimes notwithstanding the medical marijuana possession was legal under state law
  • 2001 – Congress petitioned the DEA to reschedule marijuana to Schedule II. Fifteen years later, in August 2016, the petition was denied by the US Department of Health & Human Services re “more research is needed”
  • 2005 – Gonzales v Raich, 545 US 1 – US Supreme Court held that the Commerce Clause grants the federal government jurisdiction over intrastate marijuana production, distribution, and use
  • 2009 – Ogden Memo (October 19) Subject: “Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana”. By this time, 13 states had medical marijuana regimes. The memo mentioned patients and caregivers, warned against for-profit, commercial enterprises. Listed seven indicators of “federal interest” including firearms, violence, minors, money laundering, and organized crime.
  • 2011 – Cole Memo (June). Subject: “Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use”. Repeated the Ogden language and warned against large-scale cultivation.

2012 – Present – Adult-Use Begins

  • 2012 – November: Washington and Colorado voter propositions approve adult-use marijuana (states 1 and 2)
  • 2013 – Cole Memo (Cole II – August 23). Press release specifically called out Washington and Colorado. Subject: “Guidance Regarding Marijuana Enforcement”. The accompanying press release specifically mentioned Colorado and Washington, which had passed the first adult-use laws. Set out 8 priorities: Preventing distribution to minors; Preventing revenue from marijuana going to criminal enterprises, gangs, cartels; Preventing interstate diversion; Preventing marijuana businesses from being covers for other illegal activities; Preventing violence, use of firearms, in cultivation and distribution; Preventing drugged driving and exacerbation of other public health consequences; Preventing growing of marijuana on public lands; and Preventing marijuana possession or use on federal property.
  • 2014 – Cole Memo (Cole III – February 14) and FinCEN Guidance, also February 14th. Cole III Subject: “Guidance Regarding Marijuana Related Financial Crimes”. Repeated Cole II, but noted that Cole II “did not specifically address what, if any, impact it would have on certain financial crimes for which marijuana-related conduct is a predicate.”The FinCEN (Treasury) Guidance had a Subject: “BSA Expectations Regarding Marijuana-Related Businesses” and “clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.” Repeated 8 priorities from Cole III. Set out 23 red flags. Required FIs to file three types of marijuana Suspicious Activity Reports: Marijuana Limited for all activity that doesn’t violate state law of any of the priorities; Marijuana Priority for all activity that either violates state law or one or more of the priorities; and Marijuana Termination for all activity that either violates state law or one or more of the priorities and the FI is going to or has exited the MRB relationship.
  • 2014 – November: Washington, DC, Alaska, and Oregon approve adult-use marijuana (States 3 and 4, DC)
  • 2014 – Rohrabacher-Farr Amendment to the Omnibus Federal Spending Bill, prohibiting the DOJ from using appropriated funds to target state legal medical marijuana programs (similar amendments in every federal spending bill since)
  • 2016 – November: California, Massachusetts, Nevada, Maine (states 5 to 8) approve adult-use marijuana
  • 2018 – January 4th AG Sessions memo.  Subject: “Marijuana Enforcement”. Three paragraphs and one page. Paragraph 1 indicated that the CSA carries significant penalties and can form the basis for other crimes including money laundering and BSA violations. Paragraph 2 provided that prosecutorial direction and discretion is set out in the US Attorney’s Manual. Paragraph 3 provided that specific memos on marijuana were unnecessary and therefore rescinded.

    Bottom Line: Treasury’s 2014 Guidance has resulted in ~50 banks and credit unions, out of more than 11,000, knowingly and actively banking marijuana related businesses. And former AG Jeff Sessions didn’t really rescind anything. Marijuana businesses and those financial institutions that provide banking services to them, do so at their own peril.

  • 2018 – November: Vermont and Michigan approve adult-use marijuana (states 9 and 10 plus DC)
  • 2019 – January: SAFE Banking Act introduced in Congress
  • 2019 – January: STATES Act introduced in Congress

But even with Congressional action, what issues could remain that need to be dealt with? Below are some observations on some issues to consider as these debates continue and, to some degree, are resolved.

Eleven Things to Consider in the Cannabis Debate

  1. Lotteries, casinos, and liquor stores are all examples of legalized vices that have been found to disproportionally harm, or at least not appropriately benefit, lower income and communities of color. Despite efforts to prefer local, minority, and women-run businesses, most local, county, and state regimes are becoming dominated by large, interstate (international) corporations financed by (white) male-dominated venture capitalists and private equity. More action needs to be taken to understand the problems that have arisen with lotteries, casinos, and liquor stores (and pawnshops) to understand whether and how cannabis production, manufacturing, processing, and distribution can result in similar problems, and then to prevent those problems. Let’s learn from what we know and be better for it.
  2. Cannabis and cannabis products are sold as either medicinal products or non-medicinal. Other products that are sold both as a “medicine” and as a non-medicine include toothpaste and tooth whiteners, deodorant and antiperspirant, and suntan lotion and sunscreen. But all of those products are first approved as either foods, drugs, or cosmetics. Currently, the same or similar products (cannabis flower, tinctures, edibles, lotions) are sold as non-approved adult-use products (and are taxed accordingly) or as non-approved medicinal products (and generally not taxed at all or as much). That creates confusion and opportunities for mischief.
  3. The medicinal cannabis industry does not appear to uniformly adhere to the “under the care of a physician” or “legitimate or bona fide physician/patient relationship” standards in all states’ medical/medicinal marijuana regimes. A simple review of online applications for, and customer reviews of, medicinal cannabis cards suggests that an online form and quick video chat “in ten minutes or less!” without any true follow-up isn’t a true physician patient relationship. And it has always seemed odd to me that a physician would recommend a medicine to a patient by telling them “here’s approval to buy as much of this medicine as you want, in whatever amount and strength you want, in any form you want, for a year.”  And then that patient gets his advice from a 20-something year old budtender, not an educated and licensed pharmacist. That’s essentially what a recommendation for medicinal cannabis is. It just doesn’t seem responsible to me. Some enhancements to this process are overdue.
  4. The 6-plant personal grow is a legacy of the California cooperative environment and may not be appropriate in a go-forward regime (apparently Illinois has recognized this, and its pending bill only allows limited home grows for medicinal cannabis patients). Six plants – up to 99 for Colorado and California medicinal cannabis – can produce as many as 30 joints a day (or up to 1,800 for 99 plants). Some argue that is excessive and goes against all the other strict production, labeling, and distribution laws and regulations otherwise in place. Home grows are a major concern of the DEA.
  5. Ownership and control of marijuana-related businesses: there are too many definitions, no central database (such as the Nationwide Multistate Licensing System for money transmitters and other state-licensed businesses). Those drafting cannabis laws and regulations should look at what the federal government did with money services businesses (MSBs) in Title IV of the Riegle Community Development and Consumer Protection Act of 1994. Title IV, known as the Money Laundering Suppression Act of 1994, called for uniform state licensing and regulation of MSBs, and a national registry of MSBs, while leaving authority over MSBs to those states with effective regulation and enforcement regimes. Not a bad model for marijuana related businesses (MRBs).
  6. Has there been a balanced look at whether the license fees and taxes actually cover the direct and indirect governmental costs, let alone any societal harms, that are a result of the cannabis regime?
  7. Everyone is focused on federal criminal laws around narcotics, but there have been virtually almost no convictions for true marijuana possession in the last ten years at the federal level (90%+ of the few thousand federal marijuana possession convictions are along the southern border, and the average weight of marijuana for those possession cases is over 40 pounds). It is a state issue. Solving criminal law issues (including the expungement of past convictions) at the federal level doesn’t address the real criminal law issues.
  8. The current production FAR exceeds demand in some states. Oregon’s supply of recreational marijuana is estimated to be 6.5 years (per the OLCC’s 2019 Recreational Marijuana Supply and Demand Legislative Report), and California has reported that as much as 11 million of the 13 million pounds of cannabis produced in California is diverted and not taxed. The states’ failure to address over-production (notably California and Oregon) could result in a federal crackdown.
  9. The last four Surgeons General have all said that there needs to be more clinical trials. Clinical trials take time.
  10. Continuing noncompliance is occurring in the industry. For example, the Oregon Liquor & Cannabis Commission reported on April 18, 2019 of “significant noncompliance by marijuana licensees failing to abide by the state’s laws and rules”.
  11. The current FinCEN guidance is not sustainable. Read literally – which is how any guidance or regulation is read when it is being used to sanction a bank – the guidance is impossible to follow in a commercially reasonable manner when the risks of noncompliance are unknown. I have advocated that any Marijuana Related Business (MRB) regulations and guidance should mirror the Money Services Business (MSB) regulations and guidance.

Seven Observations on the Proposed “Quick Fix” Solutions

Some advocates for Congressional action are suggesting that rescheduling or descheduling cannabis and passing a SAFE Banking Act or STATES Act will resolve many of the issues currently facing the cannabis industry. These suggestions are probably accurate, but certainly incomplete. It will take years, and many more steps, before the major issues are known and addressed. Some observations:

  1. Rescheduling Cannabis – if cannabis is rescheduled, to which schedule? If moved to Schedule III or lower, what about the US treaty commitments enshrined in law? Do doctor “recommendations” become “prescriptions” and require specific and DEA/FDA-approved dosage, duration, means of delivery, and FAERS-like reporting? And if rescheduled, what about DEA registration, inspection, Suspicious Order Reporting, etc., for growers, manufacturers, and distributors?
  2. Descheduling Cannabis – if descheduled, FDA approval would still be required (as for hemp), whether for medicinal use or as an additive to food. Also, the same foreign treaty issues (three UN conventions or treaties) apply as for rescheduling.
  3. Other Federal Laws – in addition to changes to the Controlled Substances Act in Title 21 of the US Code, many other laws would also need to be amended or rescinded, including those in Title 8 (Aliens and Immigration), Title 12 (Banks and Banking), Title 18 (Crimes and Criminal Procedure), Title 21 (Food and Drugs), Title 26 (Income Tax), Title 31 (Money and Finance), and Title 50 (War, for sanctions-related laws).
  4. Once federal legislation is enacted, it will take months/years for federal regulations, and years for regulatory guidelines, guidance, policy manuals to be revised. Also, for medical cannabis, it will take years for clinical studies then FDA/DEA approvals of new drugs.
  5. Federal Legalization brings federal taxation – like alcohol and tobacco. Depending on tax rates, the black market will thrive and survive.
  6. Interstate distribution – another area that hasn’t had much attention, but will require thoughtful and collaborative solutions. Which leads to:
  7. Amazon, Big Pharma and Big Tobacco – or combinations of them. Is there any way to stop them from taking over the production, manufacturing, and distribution of cannabis?

Conclusion and Path Forward

First and foremost, there has to be a change in the level of discourse. Like in the political arena, there appears to be a polarization of opinion so that neither side in the cannabis debate is prepared to even listen to, let alone compromise with, the other. I’ve seen examples of advocates for expunging all marijuana possession convictions employ ad hominin attacks on anyone who suggests that not all marijuana convictions are the same, and each should be looked at carefully. I’ve seen examples of advocates for preventing any medicinal uses of marijuana until full FDA approvals are in hand employ those same ad hominin attacks on anyone who suggests that, even without FDA approval, there are situations where compassion and common sense dictate medicinal uses of marijuana.  Even my list of eighteen things to consider and observations will no doubt elicit scorn, ridicule, condemnation, and name-calling. So be it.

Those most passionate are often the most vocal, and grab the most headlines, and those most passionate are sometimes the ones that aren’t listening to anyone who doesn’t share their passion. But there are also many – probably most – of the people along the spectrum of opinion that are not only willing to listen to all sides of an issue, but recognize there are many sides to an issue, and that solutions aren’t simple, and consequences are many. There are many strong advocates on both sides of the various marijuana/cannabis debates: let’s have those debates. Let’s put all of the possible issues on the table. Let’s have the courage to listen to those that present those issues and try to understand their perspectives and concerns. And let’s have the courage to compromise to get to solutions that at least do the least harm.

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