The U.S. Drug Enforcement Agency’s proposal to reschedule cannabis from a Schedule I to a Schedule III drug under the Controlled Substances Act (CSA) has generated considerable buzz across business sectors, including for the banks and credit unions that see opportunity and challenges in transacting in the legal marijuana space. Legality varies by use and by state, while federal law limits how financial institutions can operate.

Notably, for financial institutions, this proposed legal shift may not bring about the sweeping changes some might anticipate.

[Editor’s note: As of the July 22 closing of the DEA’s public comment period on the rescheduling, the agency had received a record number of submissions topping 43,000. Comments of support came from sources citing local economic benefits. The National Transportation Safety Board, as one example, has submitted comments of concern. Most broad polls, including from Pew Research, show public approval in favor of legal medical and recreational use. A cannabis-business trade publication offers this update.]

This article delves into why rescheduling cannabis to Schedule III would not significantly alter the landscape for financial institutions, despite the regulatory adjustments. Additionally, we will touch on the history and status of the SAFER Banking Act in Congress, which remains pivotal in addressing the industry’s banking challenges.

Understanding Rescheduling

Cannabis’s status as a Schedule I drug has resulted in stringent regulatory constraints, particularly for financial institutions, which face considerable risks when dealing with cannabis-related businesses (CRBs).

Rescheduling cannabis to Schedule III will have significant implications for medical research and the pharmaceutical industry but falls short of addressing the comprehensive regulatory and operational hurdles faced by financial institutions in dealing with CRBs.

Limited Impact on Financial Institutions for Now

• Federal Legalization and Regulation: The primary obstacle for banks remains the federal illegality of cannabis. Even as a Schedule III drug, marijuana will still be federally illegal, albeit under a less stringent schedule. This status continues to expose financial institutions to federal enforcement actions and regulatory scrutiny. The risk of penalties, asset forfeiture, and reputational damage persists, deterring banks from engaging with CRBs.
• Anti-Money Laundering (AML) Compliance: Financial institutions are mandated to comply with stringent AML regulations, including the Bank Secrecy Act (BSA). If a financial institution decides to bank CRBs, the financial institution must adhere to enhanced due diligence, monitoring, and reporting standards as it relates to the CRB’s activities. Rescheduling does not mitigate the complexities and costs associated with AML compliance. Banks will still need to navigate the intricate web of state and federal regulations, rendering the operational landscape fundamentally unchanged.
• FinCEN Guidance and Reporting Requirements: The Financial Crimes Enforcement Network (FinCEN) issued guidelines in 2014 outlining how financial institutions may provide services to CRBs. Such guidelines carry significant reporting and compliance obligations but stop short of explicitly rectifying the conflicts that exist between federal and state laws. Rescheduling cannabis to Schedule III does not alleviate these concerns, which sustains the status quo for banks.
• Payments and Lending Risks: The uncertainty around the legality of cannabis also impacts payment and lending services. Financial institutions face challenges in backing assets and providing loans to CRBs due to the inherent risks and potential for asset seizure. These conflicts may be most prevalent in the payments space, leaving the cannabis industry to operate primarily in cash. Payment card networks disallow using their branded cards for cannabis purchases as “illegal transactions.” For example, Visa Core Rules prohibit the use of a Visa branded card for “the purchase of products that claim or imply a similar efficacy as prescription drugs, controlled substances, or recreational/street drugs, irrespective to claims of legality” (emphasis added). Rescheduling does not offer a definitive solution to address these risks, nor provide relief under most payment networks, leaving financial institutions in a precarious position and relying heavily on cash transactions.

The SAFER Banking Act: A Historical Perspective

The Secure and Fair Enforcement (SAFER) Banking Act, formerly known as the SAFE Banking Act, aims to provide a safe harbor for financial institutions serving CRBs. Introduced in Congress multiple times since 2013 but never successfully enacted, the act seeks to address the banking challenges posed by the federal prohibition of cannabis. Despite bipartisan support and multiple approvals by the House of Representatives, the act has faced hurdles in the Senate.

The legislation proposes to prohibit federal banking regulators from penalizing banks for providing services to state-legal cannabis businesses. It also aims to protect ancillary businesses and individuals associated with CRBs from being targeted by federal authorities.

The SAFER Banking Act was reintroduced in Congress in 2021, reflecting the ongoing struggle to reconcile federal and state cannabis laws. Its passage would be a game-changer for financial institutions, offering a clear legal framework and reducing the operational risks associated with serving CRBs. However, until such legislative measures are enacted, the rescheduling of cannabis to Schedule III remains an insufficient solution.

Looking Ahead

While rescheduling cannabis from a Schedule I to a Schedule III drug under the CSA marks a significant step forward in recognizing the substance’s medical value, it does little to alleviate the related burdens faced by financial institutions. Federal illegality, coupled with stringent AML requirements and the absence of comprehensive legislative reforms like the SAFER Banking Act, continues to pose substantial challenges.

For banks, the path to fully integrating cannabis-related businesses into their portfolios remains fraught with regulatory and operational hurdles that rescheduling alone cannot overcome. Until Congress enacts robust legislative changes, the financial sector will continue to tread cautiously in the cannabis industry.

This article was first published on BAI.org on August 15, 2024, and is reprinted with permission.