The House of Representatives passed H.R. 1595 – Secure And Fair Enforcement Banking Act of 2019 (“SAFE Act”) on September 25, 2019, in a historic step toward federal marijuana legalization.  (Jeff Smith, Marijuana Business Daily).  Introduced by Representative Ed Perlmutter (D-Co.), the SAFE Act, which required a two-thirds majority in the House, passed with a vote of 321-103 in a rare showing of bipartisan support.  Id.  Under current federal money laundering statutes, any financial firm that provides services to a cannabis company, regardless of its operation in a legal state, faces heavy financial penalties.  (Lane and Gangitano, The Hill).  However, under the SAFE Act, financial institutions and insurance companies could provide commercial banking services to state-legal cannabis companies without fear of federal penalty.  (Staff, Marijuana Business Daily).  The SAFE Act “clarifies that . . . [marijuana] proceeds do not constitute . . . unlawful activity solely because of the business’s involvement in the cannabis industry.”  (Kini et al., Mondaq).  The Act also provides protections for industrial hemp and hemp-derived cannabidiol (“CBD”) businesses, who face similar problems procuring financial services despite hemp’s federal decriminalization under the Agriculture Improvement Act of 2018 (“Farm Bill”).  (Thomas Mitchell, Westword).

The initial passage of the SAFE Act is a crucial victory for the marijuana industry.  FinCEN, a Treasury department bureau that monitors illegal financial activity, reported that “438 depository institutions were providing [financial] services to cannabis companies” in 2018.  (Eversheds Sutherland (US) LLP, JDSupra).  However, those institutions that do service such businesses currently run the risk of federal penalties, which is why most institutions are generally unwilling to provide financial services.  Id.  As a result of a lack of access to financial services, cannabis companies have almost exclusively operated on a cash-only basis.  Id.  Not only does operating on a cash-only basis complicate cannabis businesses’ financial positions, but Section 280E of the Federal Income Tax Code prohibits cannabis companies from deducting their business expenses as a result of marijuana’s Schedule I designation by the DEA. (Anne van Leynseele, Cannabis Law Journal).

This financial dilemma creates an interesting catch-22 for the marijuana industry: marijuana needs to show profitability and sustainability to be treated as a serious and legitimate industry, yet it is difficult to do so because of businesses inability to deduct business expenses or access banking services.  However, should the SAFE Act become law, it will provide liability protection to financial institutions for providing services to state-legal cannabis businesses, which are currently classified as unlawful drug operations under the Money Laundering Control Act.  (Eversheds Sutherland (US) LLP, JDSupra).  In another sense, passing the SAFE Act would prohibit federal regulators from imposing punishments on cannabis-related legitimate business practices in legalized states and could incentivize financial institutions to service cannabis companies without fear of retribution.  Id.

So, what’s next?  In 2018, the state-legal marijuana industry pulled in over $10 billion in investments, with that number expected to surpass $16 billion by the end of 2019. (Associated Press, NBC News).  As the industry continues to grow, the call for industry access to financial institutions is growing louder.  Despite passing the House, however, some fear that President Trump’s impeachment and the upcoming Congressional recess could present short-term barriers to the SAFE Act’s progress.  (Thomas Mitchell, Westword).  Nonetheless, cannabis lobbyists and insiders, like Rep. Perlmutter, point to the bill’s passage in the House “amidst all the impeachment [talk],” and Senator Michael Crapo’s (R-Id.) commitment to taking up “cannabis banking legislation in the fall,” as reasons to remain optimistic about the SAFE Act’s future.  Id. As the bill moves into the Senate, Senate Majority Leader Mitch McConnell will be a key figure for whether the Act passes, as his voice carries significant weight in determining a bill’s future.  (Lane and Gangitano, The Hill).

One way in particular that could have Senator McConnell favor the Act’s passage stems from the booming hemp industry in McConnell’s home state of Kentucky.  Hemp production is quickly becoming a major part of Kentucky’s agricultural economy as hemp has seen a spike in gross product sales from $16.7 million in 2017 to $57.75 million in 2018.  (Phillip M. Bailey, Louisville Courier Journal).  McConnell was a major player in hemp’s decriminalization under the Farm Bill of 2018 and has seen his State invest roughly $18 million for hemp grow operations in 101 of Kentucky’s 120 counties.  Id.  McConnell noted that although hemp production is legal, “hemp businesses are finding [it] hard to gain access to financial services like bank accounts and lines of credit.”  Id.  Although McConnell has long been an opponent to marijuana legalization, hemp’s sustainability in Kentucky could provide the necessary persuasive force on McConnell for him to take up the SAFE Act in the Senate.  The Senate will likely not pass the House’s version of the SAFE Act as it currently is written, but instead opt to pass a similar version and move it on to the President by the year’s end or in early 2020.