Will a side effect of the COVID-19 pandemic be banking for the cannabis industry? The U.S. House of Representatives recently passed a new coronavirus relief bill, the Health and Economic Recovery Omnibus Solutions (HEROES) Act (H.R. 6800), that includes regulations that could have implications for the industry far beyond the pandemic. Currently, 33 states have legalized marijuana for medical use, with 11 also allowing adult use. At least four states have ballot initiatives scheduled for the current election cycle, although that number is fluctuating as a result of the pandemic, and almost all states that have legalized cannabis have declared these businesses to be “essential.”

Nonetheless, the cannabis industry still operates in a hazy area. Even though they pay billions of dollars in federal taxes annually, cannabis businesses are excluded from many of the provisions of the CARES Act passed by Congress in March, including the Paycheck Protection Program, because the cultivation and sale of marijuana remains illegal under federal law. But despite the cannabis industry’s exclusion from the initial legislation, the push for some sort of relief for the industry has been ongoing since the start of the pandemic. The HEROES ACT passed by the House included the Secure and Fair Enforcement (SAFE) Banking Act of 2020. The language in the 2020 SAFE Banking Act remains unchanged from last year’s bill by the same name, which the House passed in November 2019. Both outline a legislative basis to help cannabis businesses secure safe, affordable banking and merchant services.

While there had been significant lobbying to include the SAFE Act in the Heroes bill, its inclusion came after a 8 May letter sent to Congress by several cannabis groups, including the Marijuana Policy Project, Minority Cannabis Business Association, National Cannabis Industry Association, National Cannabis Roundtable, National Organization for the Reform of Marijuana Laws, and Policy Center for Public Health and Safety. The letter asked that the SAFE Banking Act “or similar language” be included “in the next pandemic relief package.” Among other things, the group cited the “risk of banknotes as a vector for the virus” as well as the reduction in the effectiveness of social distancing measures in cash transactions.

Similar to the 2019 bill, the cannabis portion of the HEROES Act begins: “The purpose of this section 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.” Among other things, the act prohibits federal regulators from taking adverse action against financial institutions that provide financial services to cannabis-related businesses lawfully operating under state, local, or tribal laws. Because cannabis remains a Schedule 1 drug and thus is falls under the umbrella of anti-money laundering laws, banks have been reluctant to provide services to this industry. The bill will also “allow cannabis-related legitimate businesses, that in many states have remained open during the COVID-19 pandemic as essential services, along with their service providers, to access banking services and products, as well as insurance.”

Cannabis groups have generally praised the inclusion of the 2020 SAFE Banking Act in the relief bill. However, the HEROES Act seems unlikely to proceed in the Republican-controlled Senate. Senate Majority Leader Mitch McConnell (R-KY) has labeled the bill as “totally unserious” and called for a “pause” in relief funding. In the absence of federal laws, some states, including New York and California, have offered some guidance on providing banking services to cannabis-related industries, with the guidance focusing on how to serve such businesses.

Even if the HEROES Act does pass, financial institutions will need to develop strong internal programs to satisfy regulators, including a sound compliance program that includes the following elements:

1. A thoughtful risk appetite statement indicating what the institution will and will not accept from clients from a risk perspective. Overly conservative statements exclude all cannabis-related business, while a carefully tailored statement will allow the institution some flexibility in onboarding lower risk cannabis business clients that are well organized and meticulous in their licensing and recordkeeping.
2. Enhanced compliance protocols with four distinct features including:
   1. Creating Enhanced Due Diligence (EDD) processes to be used prior to accepting cannabis clients. These protocols should be designed to ensure the monetary flows from a cannabis client do not include illicit project cashflows. These reviews should allow financial institutions to better understand the degree to which a potential client is involved in the cannabis industry as well as the control structures it has established.
   2. Implementing tailored transaction monitoring, including updated monitoring rules and parameters to detect and investigate transactional activity that may be outside the normal activity for a licensed cannabis-related business. Developing reasonable and dynamic rule sets will require historical data that will need to be continuously curated to achieve a good monitoring environment.
   3. Developing additional training for compliance staff regarding different red flags and potential suspicious indicia related to the cannabis industry.
   4. Engaging with a trusted third-party compliance advisor to aid in the transition to a cannabis-ready compliance program.
3. Proactive regulatory communication before launching products and services for the cannabis market. In advance of entering into this sector, a financial institution should speak with its regulatory supervisors and explain its market expansion and the enhanced compliance program that will be used to mitigate any additional risks.

Despite the financial uncertainty roiling the industry, cannabis remains in high demand, with pot sales spiking in mid-March. Additionally, CNN recently reported that job losses across the country have led dispensaries to offer discounts and launch new sizes of products as they adjust to cutbacks in discretionary spending and social distancing requirements. Amidst the current uncertainty, the budding industry is hoping that people will take comfort in the familiar act of lighting up.