The cannabis industry is growing at a rapid pace in the United States. In 2021, marijuana sales reached $25 billion. In addition, over 44% of Americans now have access to legal recreational cannabis since various states have opened the doors to legalize and support the cannabis industry. Though the federal government still considers marijuana possession, sale, and manufacturing illegal and a criminal offense, 91% of Americans favor legalizing it. 

The legislative process supporting the cannabis industry continues to gain traction in states and at the federal level with the introduction of the SAFE Banking Act. Passage of the SAFE Banking ACT would facilitate responsible banking of Marijuana Related Businesses (MRBs). The proposed legislation would clarify,  ease, and reconcile certain federal verse state banking restrictions in the cannabis industry. In addition, it would resolve major business operational problems like managing excessive cash balances for the cannabis businesses. 

The SAFE Banking Act has passed the House on eight occasions and continues to fail passage in the Senate. As a result, experts predict that the cannabis industry will likely have to wait until 2025 for the bill to become law by passing both the House and Senate chambers.

The Federal vs. State Cannabis Laws

The Federal government considers the manufacturing, possession, sale, and distribution of marijuana illegal. All actions involving marijuana are generally criminal offenses under federal law. Therefore, from the national perspective, you cannot grow marijuana on your property,  sell, or distribute it. Even monetary transactions related to marijuana are criminal under federal money laundering laws. 

In summary, under federal law, you are generally prohibited from using cannabis for any purpose, including medical and recreational. 

Strict federal laws related to cannabis generally inhibit banks from providing direct and indirect financial services to the cannabis industry. However, FinCEN 2014 guidelines provided limited relief but burdened financial institutions with various investigative processes and compliance obligations.   

There are several prominent laws related to cannabis imposed by the federal government.

Section 280E of the Internal Revenue Code

The federal government considers marijuana illegal under the Controlled Substances Act (CSA). Cannabis is a  Schedule 1 controlled substance under the Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 USC §801–971 (1970).

Section 280E of the Internal Revenue Code states that taxpayers involved in the business of illegal substances such as marijuana cannot deduct business expenses. 

Section 280E states:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

The Senate report on the enactment of Section 280E outlines the intention behind the law:

“All deductions and credits for amounts paid or incurred in the illegal trafficking of drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.”

By associating the word “trafficking” the Tax Court has clearly stated that any commercial activity such as buying or selling marijuana will be considered “trafficking” which is illegal even when the states permit it.

Moreover, even if the income derived from the cannabis business is illegal, Section (61) requires you to pay federal income tax as the law does not differentiate between the income coming from legal and illegal sources.

Cannabis business owners,  due in part to conflicting federal verse state laws, cannot enjoy any tax breaks enjoyed by most other business concerns.   It punishes the business owners by preventing the companies from deducting expenses like rent, transport bills, telephone, and additional costs while calculating gross income. Cannabis business owners must pay outsized taxes to the federal government based on gross income rather than net income.

The Bank Secrecy Act

BSA, or the Bank Secrecy Act, requires banking institutions to report suspicious activities like potential money laundering, tax evasion, and transactions related to other possible criminal activities. By reporting such cases to the federal government, banks help identify and prohibit illegal monetary activities. Banks must compile all the suspicious activities in Suspicious Activity Reports (SARs) and transmit the reports to the Financial Crimes Enforcement Network (FinCEN).  

Federal anti-money laundering law considers monetary transactions related to unlawful activities a crime. One such illegal activity is the buying and sale of marijuana, which is a Schedule 1 controlled substance under federal law. Thus, all transactions like deposits, loans, transfers, and other banking services related to cannabis are unlawful under federal law and considered money laundering.

Hence,  if the banks accept cannabis-related businesses as clients, they must report their transactions via SARs per BSA requirements. Moreover, cannabis businesses come under direct scrutiny by other potential government agencies if their transactions are reported in SARs.

FinCEN 2014 Guidelines

The FinCEN 2014 guideline provides some relief for the cannabis industry but not for banks doing business with the industry. The FinCEN guidance puts investigative requirements on banks to monitor cannabis business clientele and financial activities. The mandated monitoring burdens banks as they must continuously report marijuana-related transactions via  SARs. The reporting requirement leads to large amounts of paperwork, which must be done cautiously and accurately to avoid potential fines and penalties related to technical reporting duties.

FinCEN guidance instructs banks to:

• Confirm with the relevant state authorities that the company has the necessary licenses and registrations.
• Examine the company’s license application (and accompanying materials) for state license approval to run its marijuana-related business.
• Request information about the company and related parties from the state licensing and enforcement authorities.
• Understand the business’s typical and anticipated activity, including the goods sold and the types of clients to be served (e.g., medical versus recreational customers).
• Conduct ongoing continuous searches for negative material about the company and linked parties via publicly accessible sources.
• Monitor ongoing activities for suspicious activity, including any warning signs outlined in the guidelines. 
• Update data from customer due diligence periodically and proportionately to risk. For example, a financial institution may reasonably rely on the veracity of the information provided by state licensing authorities if states make such information public about the information on state licensure collected in connection with such client due diligence.

As a result, the FinCEN guidance that was issued to resolve the banking restrictions of the cannabis industry to some extent, has discouraged banks from offering any services to cannabis businesses.

State Marijuana Laws

Cannabis is now legal for medical use in 37 US states, including Washington, DC. These states include New York, Ohio, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, Washington, and West Virginia.

As of now, 21 states, including the District of Columbia and the Northern Mariana Islands, have legalized marijuana for both medical and recreational use. On the other hand. Fourteen states have legalized only the recreational use of marijuana with limited THC content. At the same time, 15 other states, like US Virgin Islands, have decriminalized the use of marijuana.

Commercial manufacturing and distribution of marijuana are allowed in all the states that have legalized cannabis except the District of Columbia and Vermont. 

The Supremacy Clause in case of Federal & State conflict

The Supremacy Clause of the United States Constitution (Article VI, Clause 2) states that federal law will be upheld in cases of a clash between federal and state law.

If federal law trumps state law, the federal government can prosecute citizens and businesses involved in marijuana-related activities. However, in states where marijuana-related activities are considered legal, it essentially means that citizens and companies will generally not be prosecuted under state laws.

The SAFE Banking Act

SAFE Banking Act is one of the most prominent efforts to legalize cannabis at the federal level.  The Secure and Fair Enforcement Banking Act of 2019, aka the SAFE Act, was first passed in the House of Representatives in September 2019. 

The bill underwent several revisions and was reintroduced by the House and Senate in 2021 and on several occasions. The SAFE Act has now passed in the House eight times, but it is unlikely that the SAFE Banking Act will become law in the immediate future as it has failed to pass in a divided Senate. But if implemented, it will provide some relief to the banks and take the cannabis industry out of the federal and state law complications.

The SAFE Banking Act prohibits federal government agencies from acting against banks and financial institutions solely because they have offered financial services to marijuana businesses and related service providers. It will be valid in the states where marijuana is legal. 

The act includes the term “cannabis-related legitimate business,” which means any person involved in the marijuana business, including its manufacturing, cultivation, distribution, selling, buying, and displaying. 

It is vital that the act safeguards service providers who are not directly involved in the business. Such service providers include landlords, construction companies, lighting providers, hydroponic equipment providers, and others. Currently, these service providers are at risk of losing access to banking services if found they are in any way connected to providing services to cannabis businesses. 

The bill also clarifies the banking activities that financial institutions can provide to cannabis businesses. The SAFE Banking Act’s Section 3 explicitly addresses AML laws, stating that transactions with cannabis-related firms would not be regarded as proceeds from illegal activities simply because they are now connected to a legal cannabis business. 

By exempting financial institutions from civil and criminal forfeiture procedures, Section 4 of the bill safeguards financial institutions’ interest in collateral that any banking client utilizes in the cannabis business.

Lastly, Section 7 of the bill mandates that the Financial Institutions Examination Council (“FIEC”) create standards and processes that depository institutions must adhere to when working with legal cannabis operators. Following that, the FIEC’s framework-compliant recommendations and examination processes would have to be issued by federal banking regulators.

The SAFE Banking Act creates a potential milestone and framework to bank cannabis in the United States.