On May 30th, 2023, Governor Tim Walz signed into law a bill legalizing the recreational use of marijuana in the State of Minnesota. The bill is likely to create a new sector in Minnesota’s retail business landscape; however, financial institutions’ opportunities to work with those new businesses may not be as open and carefree as using the drug. Financial institutions should keep both feet on the ground and understand the rules and requirements before financing or otherwise providing banking services to any cannabis-related business.
Under the new Minnesota law, as of August 1, 2023, adults 21 and older will be able to possess up to two ounces of cannabis and may cultivate up to eight plants at home. However, state officials expect it to take 12-18 months before the Office of Cannabis Management is able to begin issuing licenses.1
Industry analysts forecast that total sales in the US legal cannabis industry will reach $29.6 billion by the end of 2023, further predicting that this figure could be as high as $45 billion by the end of 2027.2 Despite these projected sales numbers, as of December 2022 there were only 773 depository institutions that provided banking services to cannabis-related businesses (“CRBs”).3 This discrepancy has been attributed to the legal risks and high compliance costs associated with providing financial and banking services to CRBs.4 Since cannabis is still illegal at the federal level, financial regulators impose stringent reporting and monitoring requirements for financial institutions that serve CRBs.5
Current Federal Requirements
Under the current regulatory regime, in addition to other federal laws and regulations, financial institutions seeking to provide services to CRBs are subject to FinCEN’s guidance regarding the Bank Secrecy Act.6 Under FinCEN’s current regulatory structure, a financial institution is required to file a suspicious activity report (“SAR”) on any activity involving an CRB, regardless of state legalization.7 In doing so, the financial institution must undertake significant investigation and analysis to properly categorize and draft an SAR.8 These reporting obligations can create an extensive burden, potentially requiring a SAR covering every transaction taken by an CRB.9 For example, a small credit union in Oregon filed around 13,500 SARs over a two year span for approximately 500 CRB clients.10 The basis of the FinCEN reporting requirements is that under federal law, all transactions involving marijuana involve illegal activity and therefore require stricter reporting under the Bank Secrecy Act.11 The effect of the reporting requirements is that the cost of providing financial or banking services to CRBs is higher than federally legal businesses and the financial institution providing those services faces more significant legal ramifications for the failure to comply with applicable regulations.12 The American Bankers Association has stated that “any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational, and regulatory risk.”13
Potential Future Legislation
Recognizing the incongruity between federal banking regulations and the growing number of states that have legalized marijuana, on April 27, 2023, a bipartisan group of congresspeople reintroduced the Secure and Fair Enforcement (SAFE) Banking Act in the House and Senate. As currently drafted, the SAFE Banking Act would provide a safe-harbor to depository institutions, federal credit unions, and state credit unions who provide financial services to a state-sanctioned CRB.14 Under the Act, federal regulators would be prohibited from: penalizing, prohibiting, or discouraging a bank from providing financial services to state legal cannabis businesses; ending or limiting a bank’s federal deposit insurance if the bank provides those services; or recommending or incentivizing a bank to halt or limit the services provided to CRBs.15 The SAFE Banking Act would also require that the SAR reporting requirements be amended such that the requirements are consistent with the purpose and intent of the SAFE Banking Act, likely meaning that SARs will no longer be required for transactions involving marijuana or marijuana products in states that have passed legalization legislation.16 Those in the cannabis industry see the SAFE Banking Act as a springboard for financial institutions to meaningfully participate in the growing industry on a large scale for the first time.17
The SAFE Banking Act has enjoyed strong bipartisan support and has passed in the House seven times previously.18 The SAFE Banking Act has not made it out of the Senate Banking Committee before, but Sherrod Brown, chairman of the committee, stated that he hopes that the Act will get a markup “sometime in the near future” but he could not give a specific timeline for markup and submission to the Senate floor.19 Should the SAFE Banking Act pass, financial institutions will have an unprecedented opportunity to provide services to CRBs in states that have legalized marijuana.
What This Means for Financial Institutions in Minnesota
The confluence of Minnesota’s legalization of cannabis and potential reform to federal banking regulations represents a unique opportunity for financial institutions in Minnesota to meaningfully participate in the growth and development of a new industry in Minnesota. Financial institutions should stay informed regarding the development of federal financial regulations as they apply to cannabis to fully take advantage of Minnesota’s legalization as more customers and potential customers seek financial services for their upcoming CRBs.
1 Kyle Jaeger, Minnesota Governor Signs Marijuana Legalization Bill Into Law, MARIJUANA MOMENT (May 30, 2023), https://www.marijuanamoment.net/minnesota-governor-signs-marijuana-legalization-bill-into-law/; Shawna Mizelle and Sydney Kashiwagi, Minnesota Becomes 23rd State to Legalize Recreational Marijuana, CNN (May 30, 2023); https://www.cnn.com/2023/05/30/politics/minnesota-cannabis-legalization-recreational-marijuana/index.html.
2 Press Release, BDS, BDSA Forecasts Legal U.S. Cannabis Market to Reach $45 Billion in 2027 (June 7, 2023), https://bdsa.com/press-release/bdsa-forecasts-legal-u-s-cannabis-market-to-reach-45-billion-in-2027/; Bryan McGovern, Cannabis Weekly Round-Up: TerrAscend Closer to TSX Listing, INVESTING NEWS NETWORK (June 23, 2023); https://investingnews.com/top-cannabis-news/.
3 FinCEN, Frequently Requested FOIA-Processed Records: Marijuana Banking Updates, https://www.fincen.gov/frequently-requested-foia-processed-records
4 Jeffery Miron and Nicholas Anthony, Cannabis Banking: A Clash Between Federal and State Laws, CATO INSTITUTE (May 27, 2022), https://www.cato.org/blog/cannabis-banking-clash-between-federal-state-laws
5 FinCEN, BSA Expectations Regarding Marijuana-Related Businesses, FIN-2014-G001 (Feb. 14, 2014), https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses
9 John Hudak and Aaron Klein, Banks Don’t Want to Work with Marijuana Companies. It’s Time for that to Change, BROOKINGS INSTITUTE (Mar. 28, 2019), https://www.brookings.edu/opinions/banks-dont-want-to-work-with-marijuana-companies-its-time-for-that-to-change/
11 FinCEN, supra note 5.
12 Miron and Anthony, supra note 4.
13 American Bankers Association, Cannabis Banking: Bridging the Gap Between State and Federal Law, https://www.aba.com/advocacy/our-issues/cannabis
14 SAFE Banking Act of 2023, H.R. 2891, 118th Cong. (2023).
15 Stefan Sykes, Lawmakers Reintroduce SAFE Banking Act, A Bill the Cannabis Industry Hails as a Lifeline, CNBC (April 27, 2023); https://www.cnbc.com/2023/04/27/safe-banking-act-reintroduced-cannabis-industry-hails-bill.html.
16 SAFE Banking Act of 2023, H.R. 2891, 118th Cong. (2023).
17 Sykes, supra note 15.
19 Kyle Jaeger, Key Senate Committee Chair Hopes to Hold Marijuana Banking Vote in “Next Two or Three Weeks’ Following Negotiation with GOP, MARIJUANA MOMENT (June 7, 2023); https://www.marijuanamoment.net/key-senate-committee-will-vote-on-marijuana-banking-bill-in-next-two-or-three-weeks-chairman-says/