By Virginia Thomas / Spokane Journal of Business

Washington financial institutions and regulators say they’re closely watching several pieces of federal legislation regarding cannabis that could impact how banks and credit unions handle banking for the cannabis industry.

Some, however, aren’t optimistic that such legislation will

make it through the legislative process.

Washington state legalized cannabis for medical use in 1998

and for recreational use in 2012, but the substance remains illegal at the

federal level. As a result, businesses and individuals associated with the

cannabis industry – including growers, processors, retail stores, employees and

investors — often struggle to find financial institutions willing to serve

them.

Spokane Valley-based Numerica Credit Union is one of a handful

of Washington state-chartered financial institutions that have chosen to serve

the cannabis industry.

Lynn Ciani, chief risk officer at Numerica, said that by

serving cannabis businesses and individuals associated with the cannabis

industry, Numerica is committing a federal crime even as it remains compliant

with state laws and industry regulatory guidance.

“By taking in these funds, we’re technically money

laundering under the federal law,” Ciani said.

However, she said, it’s worth any risk that might be

associated with it.

“When I-502 passed, it was estimated to be a billion-dollar,

cash-only business within a few years,” Ciani said. “When you look at crime in

other states where cannabis was legalized without the ability to use

traditional banking, you would see a lot of home invasions and violent crimes.

We didn’t want that crime in our community. Our board of directors felt part of

fulfilling our mission to build communities is protecting our communities to

the extent we can by taking the cash off the street.”

Overall, Ciani said cannabis business

accounts make up a small proportion of Numerica’s customers. Just 300 of its

145,000 members are cannabis businesses or employees, she said. Six full-time

employees are dedicated to serving these accounts, ensuring Numerica complies

with state and industry regulatory agencies, and keeping an eye on legislative

and judicial actions that could affect financial institutions serving cannabis

businesses.

That includes watching proposed cannabis legislation introduced

in Congress this year.

At least three bills and a budget

addendum that have been proposed in the House and Senate would either protect

financial institutions that serve the cannabis industry or decriminalize

cannabis-related business activities, including banking.

The Secure and Fair Enforcement

Banking Act would protect banks and credit unions that serve legal cannabis

businesses by barring federal banking regulators from limiting or terminating

deposit insurance for financial institutions serving the marijuana industry

where it’s allowed under state laws. The so-called SAFE banking act also would

prohibit regulators from discouraging banks or credit unions to allow such

services.

The SAFE act passed the House Financial Services Committee

in late March; a Senate version was announced April 11. Neither full chamber of

Congress has addressed the bill.

In April, the director of the Washington Department of

Financial Institutions joined a coalition of financial regulators from 24

states and Puerto Rico to ask Congress to consider legislation that would

create a safe harbor for financial institutions to serve businesses operating

legally under state law, or that would entrust states with the full oversight

and jurisdiction of marijuana-related activity.

Roberta Hollinshead, director of banks for the Washington

State Department of Financial Institutions, said the SAFE act would provide the

kind of safe harbor the coalition requested, but the department isn’t

optimistic about the fate of the bill.

“We’re expecting that the House will support that

legislation, but it has a pretty uphill battle on the Senate side,” Hollinshead

said.

The proposed Strengthening the Tenth Amendment Through

Entrusting States Act seeks to amend the Controlled Substances Act, which lists

cannabis as a Schedule 1 substance. Under the STATES act, states, territories

and tribes would be allowed to govern themselves regarding cannabis.

“What the STATES act would do is

basically decriminalize everything,” Ciani said. “Not just the banking of

marijuana, but also the use, production and sale of marijuana in the states

where it is legal.”

The bill originally was introduced about a year ago in both

the House and the Senate, and later died in committee. In early April, the

STATES act was reintroduced in both chambers of Congress.

House Bill 420, the Regulate Marijuana Like Alcohol Act, would

federally decriminalize cannabis and allow the U.S. Secretary of the Treasury

to issue cannabis business permits. The bill was introduced in the House in

early January; it has been in the Committee on Conservation and Forestry since

February.

A draft congressional spending bill under consideration in

the House would prohibit financial regulators from spending money to pursue

banks and credit unions that serve legal cannabis businesses. It would offer

narrower protections than the SAFE act and would be in effect only for the next

fiscal year.

The spending provision also leaves banks and credit unions

open to possible enforcement by the U.S. Department of Justice, which has a

separate spending bill.

While Congress considers these options, Ciani said Numerica continues to follow guidance of the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury, released in 2013. Hollinshead said the FinCEN guidance was based on a document referred to as the Cole memo, issued by then-Attorney General James Cole.

The memo indicated that prosecutors and law enforcement

should focus on eight priorities as they relate to state-authorized cannabis

industries. Those priorities include preventing the distribution of cannabis to

minors, preventing revenue from cannabis sales from going to criminal

enterprises, gangs or cartels, and preventing cannabis from being diverted to

states that haven’t legalized it from states that have.

The memo was rescinded by former U.S. Attorney General Jeff

Sessions in January 2018, but Ciani said financial institutions serving the

cannabis industry continue to follow FinCEN guidance. For example, she said,

banks and credit unions are required by FinCEN to file a suspicious activity

report when a cannabis customer opens an account and every 90 days thereafter.

“We go through and look at each one of the criteria that

(FinCEN is) concerned about, and we figure out how to mitigate it with our own

processes and procedures,” Ciani said. “We also rely on the processes and

procedures of the Liquor and Cannabis Board. We are able to look at the

violations reports that come out, and we can see if our members are complying

or not.”

Stephanie Davidsmeyer, communications consultant with the

Washington State Liquor and Cannabis Board, said the state agency has a

thorough vetting process for each person and business entity associated with

the cannabis industry.

“One of the things that has gotten us a lot of praise has

been how strict our criminal background check process is, how we take into

account financial history for these businesses. We vet every investor,”

Davidsmeyer said. “In a landscape where it’s federally illegal to have this

kind of business, banks appreciate that.”

However, even with FinCEN guidance and help from the state

Liquor and Cannabis Board, many banks are wary of serving customers in the

cannabis industry.

“Even though the FinCEN guidance has established a framework

by which the banks can monitor and report on this activity, most of our banks

and credit unions have chosen not to go into this business because there is

still ambiguity,” Hollinshead said.

Even banks and credit unions that do choose to serve the

cannabis industry could refuse to offer certain services to those customers.

“Because of the federal illegality, cannabis businesses and their employees are at risk of seizure,” Ciani said. “That’s what makes lending so difficult to both ‘cannabusinesses’ and their employees. In conversations with the DFI and the concern of the risk of seizure, we’ve made the determination not to make any loans directly to ‘cannabusinesses.’ ”

Ciani said that if something like the SAFE act were to be

enacted into law, providing loans to cannabis businesses and their employees

would be far easier and less risky.

Legislation to protect financial institutions serving the

cannabis industry also would reduce risks for cannabis businesses, Hollinshead

said. She said that even if a cannabis business succeeds in establishing an

account with a financial institution, financial service companies such as Visa

and Mastercard do not allow cannabis transactions over their wires.

“That’s why it’s a largely cash-intensive business,”

Hollinshead said. “From a regulatory perspective, if Visa and Mastercard and

other financial institutions that provide electronic payments and services have

some sort of safe harbor, and they’re able to move forward into this line of

business, then it will increase the accountability and the traceability of

transactions.”

Protective legislation also would be a boon to smaller

cannabis businesses, Davidsmeyer said.

“A lot of these businesses are smaller. They are in desperate need

of capital, and with the limited banking that we have currently, they just

can’t get it very easily,” Davidsmeyer said. “If banks weren’t being punished

federally for this, I imagine getting capital would be a whole lot easier for

cannabis businesses.”