Loading…

FinCEN’s Marijuana-Related SAR Data: By Not Including MSBs, Are We Under-Reporting Marijuana Businesses’ Access to Financial Services?

Marijuana-Related Businesses may have greater access to financial services than is being reported, even if those services aren’t being provided by banks and credit unions

The only real guidance that financial institutions can turn to when deciding whether to provide financial services to marijuana-related businesses, or MRBs, is FinCEN’s February 14, 2014 guidance, FIN-2014-G001. The actual Guidance document – FIN-2014-G001 PDF – begins with: “The Financial Crimes Enforcement Network (“FinCEN”) is issuing guidance to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses.”

The section “Providing Financial Services to Marijuana-Related Businesses” begins with “This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations. In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution.” Following that is a section on seven marijuana-related business-specific customer due diligence steps a financial institution should consider in assessing the risk of providing services to a marijuana-related business. Then there is guidance on the three types of marijuana-related Suspicious Activity Reports: Marijuana Limited, Marijuana Priority, and Marijuana Termination. Finally, there are two pages of “Red Flags to Distinguish Priority SARs”.

Throughout the Guidance, the term “financial institution” is used forty-four times in seven pages. The term “money services business” or “MSB” appears once (in the PDF version of the Guidance). In the “Currency Transaction Reports and Form 8300’s” section on the last page is: “Financial institutions and other persons subject to FinCEN’s regulations must report currency transactions in connection with marijuana-related businesses the same as they would in any other context, consistent with existing regulations and with the same thresholds that apply. For example, banks and money services businesses would need to file CTRs on the receipt or withdrawal by any person of more than $10,000 in cash per day.”

So, are MSBs covered by the 2014 Guidance or not? Are MSBs “financial institutions” and subject to the Guidance?

For BSA purposes, the term “financial institution” is defined in the regulations at 31 CFR s. 1010.100 as including banks, credit unions, broker dealers, casinos, mutual funds, and money services businesses, among other entities. So one could assume that the use of that term in the Guidance indicated that all entity types would be subject to the guidance – including money services businesses, broker dealers, casinos, card clubs, etc.

Although the PDF version of the FinCEN Guidance doesn’t define “financial institution”, both the news release and the non-PDF version had a reference to the term “Financial Institution” at the end (of both) that appears to mean that for the purposes of the “Guidance to Financial Institutions on Marijuana Businesses”, “financial institutions” meant money services businesses and depository institutions.

The term “depository institution” is defined in multiple banking regulations in Title 12 of the Code of Federal Regulations. To keep it simple, and in keeping with FinCEN’s reporting practices, it means banks and credit unions. So, according to FinCEN, it has issued guidance to clarify Bank Secrecy Act (“BSA”) expectations for banks, credit unions, and money services businesses seeking to provide services to marijuana-related businesses.

Since the publication of the that guidance, FinCEN has published a quarterly “Marijuana Banking” report that provides some high level data on the number of these marijuana-related SARs that it instructed depository institutions (banks and credit unions) and money services businesses to file. As can be seen from the chart, this reporting is limited to depository institutions – banks and credit unions. FinCEN hasn’t reported any marijuana-related SARs filed by any of the other “financial institution” types – money services businesses.

If FinCEN has provided guidance that banks, credit unions, and money services businesses are required to file marijuana-related SARs, why is it only reporting on the marijuana-related SARs filed by banks and credit unions?

Without knowing for sure whether any of the 227,745 MSBs (according to a GAO report released September 26, 2019 that looked at how BSA-related information was being shared between the public sector agencies and by FinCEN: see GAO-19-582 at page 9) have identified and reported any marijuana-related suspicious activity, one can assume that some of the millions of SARs filed by those MSBs since 2nd quarter 2014 must have included marijuana-related activity. Indeed, given the complaints by the cannabis/marijuana industries about the lack of access to traditional banking services, one can assume that marijuana-related businesses are turning to money services businesses and alternative financial services providers to conduct otherwise basic financial services such as paying suppliers, paying utility providers, paying taxes and license fees, even cashing checks for employees. And, if those marijuana-related businesses were doing those transactions at money services businesses, ALL of those transactions are supposed to be reported in a marijuana SAR. According to FinCEN.

The data may bear that out. FinCEN’s SAR Statistics allow you to drill down to SARs filed by depository institutions, by MSBs, by month and year, and by location of the reported suspicious activity (state, county, even metropolitan areas). See https://www.fincen.gov/reports/sar-stats

Let’s take a look at a marijuana hot spot – the Emerald Triangle of California: Humboldt, Trinity, and Mendocino counties that (reportedly) grow much of the illegal cannabis in California and about 35% of the legal cannabis.

In calendar year 2018, across all of the United States, MSBs filed about 90 SARs for every 100 SARs filed by Depository Institutions, or DIs. But for activity that occurred in California, MSBs filed 122 SARs for every 100 SARs filed by DIs. To put it another way, for suspicious activity across the United States, MSBs filed about 90% the number of SARs as banks and credit unions, but in California MSBs filed 122% the number of SARs as did DIs.  But according to FinCEN’s “heatmap” of SARs filed by MSBs by California county, there was a hotspot up in the three “Emerald Triangle” counties. Drilling down into the actual FinCEN data, in 2018 MSBs filed 327 SARs (10,076) for every 100 SARs (3,081) filed by DIs in the three Emerald Triangle counties. There are only 235,000 people in those three counties, which is 0.6% of California’s population, yet 4.6% of MSBs’ SARs were filed on activity that occurred in those three counties.

It could be that none of those 10,076 MSB SARs filed in 2018 on activity that occurred in the Emerald Triangle counties was flagged as a marijuana-related SAR for FinCEN to identify, track, and report. But the ratio of MSB-related SARs relative to the number of bank and credit union related SARs filed on activity in the Emerald Triangle – a ratio that has held steady for the last five years at 3.5 to 1 – suggests that FinCEN’s quarterly “Marijuana Banking” report of marijuana-related SARs filed by banks and credit unions may be under-reporting marijuana-related financial activity overall.

It’s logical – and likely – that this high MSB SAR count, both relative to depository institutions and to the population of the area, indicates that MSBs are filing “Marijuana Limited” SARs on all of the activity that marijuana-related businesses are doing with them, not just the traditional suspicious activity. In other words, MSBs are complying with the FinCEN guidance, and we don’t know it. The conclusion may be that marijuana related businesses have access to more financial services than is being reported, even if those financial services aren’t being provided by banks and credit unions.

Perhaps FinCEN can tell us in the next quarterly Marijuana Banking and Money Services Business Report …

Marijuana $475,000,000 in Tax Revenue? IRS Says “No Thanks, We Have Other Priorities”

On March 30, 2020 the Treasury Inspector General released a OIG Report titled  “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance”. It is, in large part, a stinging rebuke of the way the IRS has handled – or has avoided handling – federal income tax payments made, and tax returns filed, by marijuana related businesses, or MRBs.

To the extent that Government laws and regulations discourage banking for marijuana businesses (and to the extent they encourage cash only transactions), they also may be indirectly and unintentionally encouraging tax noncompliance. – Report, page 5

From a federal tax perspective, MRBs face a number of hurdles.

Limited Access to Banking and the Impact on Paying Taxes

“Marijuana businesses have limited access to banking because marijuana is classified as a Schedule I controlled substance, and banks and credit unions who service marijuana businesses can potentially be charged with money laundering. Many financial institutions are not willing to risk potential civil or criminal liability associated with their obligations under the Bank Secrecy Act (BSA).” – Report, page 4.

And the entirety of page 5 of the Report is important:

“One of the main barriers for banks and credit unions is the information reporting requirements when providing banking services to marijuana businesses. For example, BSA regulations require the filing of a Suspicious Activity Report (SAR) when a financial institution knows, suspects, or has reason to suspect that a transaction of $5,000 or more involves funds derived from an illegal activity or is an attempt to disguise funds derived from an illegal activity.

The SAR filing requirement is both costly and risky as the reporting of all transactions the financial institution has with the respective marijuana business can be extensive, and if the activity is incorrectly reported, fines to the financial institution could result. Banks and credit unions that service marijuana businesses may charge large fees to compensate for the extensive reporting requirements and risk for providing services to these businesses. One credit union in California stated it was charging banking fees to marijuana businesses of up to $10,000 as an upfront fee and $5,000 a month for producers and $7,500 a month for dispensaries. Another small credit union in Oregon that serves marijuana businesses stated the credit union filed more than 13,500 individual reports over the past two years (2017 and 2018) for approximately 500 cannabis clients.

We have also identified recent trends with banks and credit unions providing banking services to marijuana businesses. According to the U.S. Treasury Financial Crimes Enforcement Network, the number of financial institutions actively banking marijuana-related businesses increased from 401 in October 2017 to 715 in June 2019. However, the lack of banking access continues to be an issue in the marijuana industry with most banks or credit unions across the United States not willing to accept marijuana business customers. Marijuana businesses without bank account access are also unable to set up merchant accounts for accepting credit or debit cards. This results in most marijuana businesses conducting business transactions in cash only. Marijuana businesses may have automated teller machines on the premises for customers to facilitate cash only transactions.

The main tax-related concern about cash intensive businesses is that cash transactions are more difficult to track and are therefore more likely to go unreported to the IRS. Unlike checks and credit card receipts, cash transactions do not generally result in third-party information capable of being reported to the IRS. To the extent that Government laws and regulations discourage banking for marijuana businesses (and to the extent they encourage cash only transactions), they also may be indirectly and unintentionally encouraging tax noncompliance.”

(citations omitted)

There are at least three issues stemming from the difficulties that cash intensive businesses, such as MRBs, have in obtaining and keeping banking relationships. First is that they may not file tax returns at all: the OIG observed a filing rate of active MRBs to be between 60% to 70%. Second, they may under report income that is not flowing through a bank relationship or is not otherwise being tracked and monitored: the OIG observed an under-reporting rate of about 25%. And third is the penalty that filers must pay for not paying federal taxes electronically. Known as the Failure To Deposit, or FTD penalties for not making tax payments by ACH, the OIG found that almost half the MRBs that were potentially unbanked, based on FTD data, paid penalties. The OIG recommended, at page 22 of the Report:

“Taxpayers including marijuana businesses should not be penalized because they cannot satisfy their respective employment tax obligations via the required electronic transmission process. The current conflict between Federal and State law regarding marijuana business activity is well established regarding banking access. The IRS needs to increase awareness of the current FTD penalty relief policies for unbanked taxpayers such as marijuana businesses.”

This was one of the few (of six) recommendations that the IRS agreed to.

I.R.C. §280E from 1982

In 1982, section 280E was added to the Internal Revenue Code to prohibit businesses engaged in illegal activity from deducting business expenses such as payroll, employee benefits, and rent from gross income for purposes of determining federal income tax. Section 280E was the legislative response to a number of court decisions that allowed illegal businesses to deduct certain expenses incurred in operating those illegal businesses. Since the Controlled Substances Act makes it federally illegal to manufacture or distribute marijuana, §280E then prohibits the deduction of expenses incurred in trafficking controlled substances. The only expenses allowed by §280E  is cost of goods sold, so businesses that sell marijuana can reduce gross receipts by the cost of goods sold but cannot deduct other business expenses.

 

The Report included a hypothetical example of the impact of §280E to a marijuana related business. As seen from Figure 2, the effective tax rate is about 80% – $80,750 on net income of $100,000.

The OIG found that about 60% of the MRBs in their sample that filed federal tax returns improperly applied §280E adjustments, yet “the IRS lacks guidance to taxpayers and tax professional in the marijuana industry” and that “no references to marijuana businesses can be found in IRS publications.” The OIG estimated the 5-year impact on federal tax collected in the three states (California, Oregon, and Washington) was almost $250 million.

 

I.R.C. §471(c) from 2017

The Tax Cuts and Jobs Act of 2017 added section 471(c) to the Internal Revenue Code to provide some relief to small businesses in whether and how they could track and account for their cost of goods sold. The OIG noted:

“Under this new provision, marijuana businesses could argue they are entitled to use a method of accounting that includes all expenses in cost of goods sold to potentially avoid the impact of I.R.C. § 280E. According to IRS Chief Counsel, at least two practitioners have identified this issue and have questioned IRS personnel on how the IRS plans to handle I.R.C. § 471(c) as applied to marijuana industry taxpayers. These practitioners have identified the potential unintended consequence of I.R.C. § 471(c) that appears to allow small marijuana businesses to include non-cost of goods sold expenses in their cost of goods sold and potentially avoid the application of I.R.C. § 280E. IRS Chief Counsel noted that practitioners assert that the new law may provide small business taxpayers wide latitude to characterize all expenditures as cost of goods sold. The effect of the law is still uncertain.” – Report, page 15.

The OIG’s fourth recommendation was that the IRS should publish guidance on the impact of § 471(c) on § 280E. The IRs response was, essentially, that it was too busy:

Recommendation: that the IRS “develop and distribute, internally and externally, specific guidance on the application of I.R.C. § 471(c) in conjunction with I.R.C. § 280E for taxpayers that report Schedule I related activities on Federal tax returns.”

IRS Response: “IRS Chief Counsel disagreed with this recommendation because the Department of the Treasury and Chief Counsel resources at present are focused on priority guidance in response to the Tax Cuts and Jobs Act and identifying and reducing regulatory burdens in response to Executive Order 13789.” – Report, page 22.

Marijuana Businesses – “High Impact” for IRS Attention

The IRS has acknowledged that the marijuana industry is a “high impact compliance area” because of its unique tax compliance risks due to I.R.C. § 280E, cash intensive sales, and potential lost tax revenue. In fact, the OIG report estimated a five-year impact of approximately $475 million. The OIG had two recommendations for the IRS: that the IRS develop a comprehensive compliance approach for the marijuana industry (recommendation 1 on page 13); and that the IRS use more state information (which it was reluctant to use) to identify non-filers (recommendation 5 at page 20). The IRS response to both recommendations was the same:

Recommendation 1 –  IRS should develop a comprehensive compliance approach for the marijuana industry and leverage state marijuana business lists to identify non-compliant taxpayers. IRS Response: “whether it pursues taxpayers in the marijuana industry depends on priorities and available resources … it will use data analytics to identify the size and scope of non-compliant taxpayers and prioritize the compliance activities based on resources available.” – Report, page 13

Recommendation 5 – IRS should leverage publicly available state tax information and expand use of Fed/State agreements to identify non-filers and unreported income in the marijuana industry. IRS Response: “whether it pursues taxpayers in the marijuana industry depends on priorities and available resources … it will review the publicly available State tax information and Fed/State agreements to determine whether and how they could be legally, systemically, effectively, and efficiently used in compliance activities.” – Report, page 20

Conclusion

It’s unfortunate that this report was published in the midst of the Great Pandemic of 2020: but for the pandemic, it would have garnered more attention from the public and Congress. Tax compliance should be encouraged and tax enforcement should be consistently and fairly applied. The Treasury Inspector General has reported that neither is happening with respect to the marijuana industry, and the IRS response to its Inspector General seems to be “we’ll think about, but we’ve got other things to worry about”.  The IRS doesn’t seem too interested in an industry made up of thousands of marijuana related businesses employing hundreds of thousands of people that is apparently under-reporting hundreds of millions of dollars – perhaps billions of dollars – of federal taxes. After the coronavirus pandemic eases, perhaps somebody in Congress can ask the Commissioner of the IRS what would get his attention.

Colorado’s Roadmap to Cannabis Banking – A Roadmap Without a Destination

Kudos to all of those involved in this effort in Colorado, but I’m not sure how this advances the effort to get more Colorado financial services providers to serve more cannabis related businesses. Most importantly, the “Wildly Important Goal” set out in the Roadmap – to increase the number of Colorado-chartered financial institutions serving cannabis related businesses by 20% – doesn’t actually address the underlying problem that the Roadmap otherwise tries to address. It’s not important how many financial institutions are providing financial services to cannabis related businesses: what is important is how many cannabis related businesses have access to financial services.

First, the Roadmap is limited to Colorado-chartered banks, trust companies, money transmitters, credit unions, and savings & loans. Federally-chartered financial institutions are not included: in fairness, Colorado has no jurisdiction over federally-chartered entities. Regardless, all of those Colorado entities have some sort of federal agency oversight (OCC, FRB, NCUA, IRS, etc.) and none of those federal agencies have been willing or able to provide any formal regulatory fixes. And it should be noted that none of those agencies have formally acknowledged the February 2014 FinCEN Guidance on providing financial services to marijuana-related businesses: they’ve had six years to do so, and haven’t. That should tell you something.

Second, if you read the seven goals and the “key strategies” accompanying each of the goals, there doesn’t appear to be much that is new or ground-breaking:

Goal 1 – Establish a working group – the Roadmap shows this goal as “complete and ongoing since January 2019”

Goal 2 – Increase transparency – “On track” with references to cannabis industry meetings in July 2019 and hemp industry meetings in September 2019

Goal 3 – Engage trade associations – “on track” and “complete”

Goal 4 – Encourage new and emerging technologies – The Division of Banking has issued its Interim Regulatory Guidance for Virtual Currencies and the
Colorado Money Transmitter Act, and (here’s something that isn’t new but almost complete) “obtaining legal guidance from the Attorney General regarding providing services under the Money Transmission Action and the Trust Companies Act to issue public guidance for consumers and the industry” is targeted for “spring 2020”

Goal 5 – Provide regulatory guidance – “Ongoing”

Goal 6 – Reduce barriers to entry (to new financial institutions) – “In progress” and “ongoing”

Goal 7 – Demonstrate support – “Ongoing”

So it looks like two of the seven goals are complete, four are on track/in progress,ongoing, and one goal is targeted for completion this spring. The seven goals are laudable, but not particularly bold or ambitious.

Third, although the Roadmap includes a “Wildly Important Goal” of implementing a plan to increase the number of (Colorado) financial service providers who serve CRBs by 20% by June 30 of this year, there is nothing about how many such financial service providers there are or how many of those are currently serving CRBs. According to the Colorado Division of Banking website, it regulates 799 Colorado-chartered commercial banks, trust companies, and money transmitters. According to the Colorado Division of Financial Services, it regulates 46 credit unions and savings & loans. So that’s 845 Colorado-chartered financial institutions: how many of those are currently knowingly providing financial services to Colorado CRBs? And what types of financial services are those financial institutions providing? Also, how many non-regulated businesses are providing financial services to CRBs and indirectly using Colorado-chartered financial institutions (in the same manner as Chime and Varo Money use The Bancorp Bank, or SoFi uses Cross River Bank)? We don’t know, because the Roadmap doesn’t provide any information.

Nor is there anything about how many CRBs there are in Colorado or how many currently have access to Colorado financial services providers. The Colorado Marijuana Enforcement Division website shows 2,707 licensed marijuana businesses – Colorado Marijuana Enforcement Division – and 1,712 licensed owners. How many of those businesses and owners don’t have any access to financial services? How many of them are currently obtaining services from Colorado-chartered financial institutions? The Roadmap is silent.

It’s tough to increase something by 20% if you don’t know what that something is.

Fourth, the wildly important goal of increasing the number of Colorado financial institutions serving cannabis related businesses doesn’t necessarily address the underlying problem to be solved, which is the lack of financial services available to cannabis related businesses. There are 845 Colorado-chartered financial institutions available to serve 2,707 Colorado cannabis related businesses. Assuming, for argument’s sake, that there are currently 100 financial institutions serving 500 cannabis related businesses in Colorado. Increasing the number of financial institutions by 20% to 120 doesn’t mean that the number of cannabis related businesses with access to financial services goes up at all, let alone by 20% to 600. Rather, the Wildly Important Goal should be to increase the number of Colorado cannabis related businesses with full and complete access to Colorado-chartered financial institution services by 20%.

Conclusion

Like the ABA’s response to Senator Crapo’s December 18, 2019 opposition to the SAFE Banking Act (see ABA Response), the Colorado Roadmap would have been more effective if it had provided data on the size and scope of the actual problem of the cannabis industry’s lack of access to financial services. The best the Roadmap does is: “Colorado state-chartered banks and credit unions have generally not provided services to the marijuana industry … as a result, there are a substantial number of cannabis and cannabis-related businesses that do not have access to banking services.” Given the public and private sector efforts in Colorado since full legalization in 2014, they authors and contributors to the Roadmap should have had the data to be able to write something like this (using numbers that may be wildly off): “only 20 of the 564 Colorado state-chartered banks, and 6 of the 41 credit unions are actively, knowingly provide full financial services to only 200 of the 2,707 licensed Colorado marijuana businesses. Our Wildly Important Goal is to increase the number of banks and credits unions serving those businesses by 20%, and to increase the number of Colorado marijuana businesses with access to those banks and credit unions by 50% …”.

That would be a goal worth shooting for, or in the case of this roadmap, driving towards.

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.