Banking News

Update: DOJ and SAFE Banking Act

As we blogged about last week, the SAFE Banking Act is trying to claw its way back from the dead during this lame duck session of Congress. Interestingly, on December 2, Punchbowl News reported that the Department of Justice (DOJ) issued a memo outlining its “issues” with the SAFE Banking Act. Here’s the memo (“Memo”).

Whenever we get a cannabis-related memo from DOJ, I get pretty excited. Mainly because we get a tiny peak into the minds of enforcement and what their priorities are at the time. This five-page memo is of particular import because it deals with cannabis financial crimes and enforcement. Unless you’ve been living under a rock, you know that two of the biggest problems for the cannabis industry overall are access to financial institutions and I.R.C. Section 280E.

DOJ “issues”

The SAFE Banking Act neither legalizes cannabis nor reschedules it on the Controlled Substances Act. Given that fact, the memo starts out by saying that

Because marijuana would remain illegal under federal law, Congress should ensure efforts to provide access to financial services for state-legal businesses does [sic] not unintentionally erect obstacles to prosecution of other illicit activity or activities involving money laundering of proceeds of other illegal drugs or sales of marijuana that do not comply with state requirements

The DOJ’s first beef then is that the bill would technically immunize from prosecution cannabis businesses or providers that fall into certain legal classifications under the Act, rather than examining the types of legal or illegal activities in which those entities are engaged. The example provided in the Memo is that the DOJ could not go after a “cannabis-related legitimate business” that’s engaged in state licensed commercial cannabis activities but also fraud. Luckily, the DOJ instructs Congress in the Memo on how to fix the offending language by suggesting that immunity be limited to:

“the state-legal activities in which entities engage (again, ensuring those activities are in conformity with state law), rather than basing it on their classification as a particular business type, i.e., a ‘cannabis-related legitimate business’ or a marijuana-related ‘service provider.’”

The DOJ also thinks that the SAFE Banking Act is too broadly drafted to immunize cannabis companies from existing money laundering statutes, basically for the same reasons above. The DOJ also bemoans the fact that such a broad protection would put an additional burden on prosecutors to show the difference between legal and illegal activities in the cannabis trade. The DOJ provides the example that “a marijuana-related business could be laundering proceeds from fentanyl sales on the side, or from marijuana sales conducted outside of the state regulatory framework”, and that the SAFE Banking Act, as written, wouldn’t allow law enforcement or prosecutors to do their jobs effectively.

The DOJ also takes issue with the fact that the SAFE Banking Act doesn’t do much to solve the issue of total compliance for financial institutions with the Bank Secrecy Act, existing anti-money laundering laws, and countering-the-financing regulations to collect—or verify—information demonstrating that a particular business is operating in accordance with applicable state law. This is definitely an issue with these piecemeal cannabis bills: there will always be collateral effects regarding compliance with other, existing federal laws. The DOJ also opined that there will be forfeiture issues related to depository institutions’ interests in collateral, because the SAFE Banking Act doesn’t also amend current forfeiture laws.

Technical comments

Helpfully, the DOJ then trots out a list of technical assistance comments, pointing out to lawmakers where legal and interpretive inconsistencies will exist if the SAFE Banking Act is passed “as-is”. These mainly touch on things like definitions in the bill, the use of the term “cannabis” versus “marijuana” as compared to existing federal laws, and enforcement ambiguities.

Notable concern

Towards the end of the Memo, the DOJ states that

Section 3 and 14 (“Definitions”) read together result in interpretive uncertainties. The definition of “cannabis-related legitimate business” is ambiguous. For example, this Section says nothing about how states will determine compliance with state law or what happens when state laws conflict – e.g., some states have different restrictions on movement of marijuana within or out of the state, or different registration and compliance regimes. Nor does it explain how to deal with fraudulent declarations of alleged compliance with state laws (many states do not have the bureaucratic capability to ensure full compliance yet, and DEA has law enforcement intelligence demonstrating that criminal organizations are exploiting the marijuana industry in states where the industry is legalized).

This is a somewhat troubling observation by the DOJ, but probably an accurate one.

What happens now?

Without a doubt, Congress will listen to the DOJ on technical changes to the bill. The fact that the DOJ isn’t entirely fighting the legislation is a good development. On the whole, the suggested changes are mostly helpful (from a legal/technical standpoint to avoid conflict) and they strike a compromise in that the DOJ still needs to be able to do its job if the SAFE Banking Act passes. To date, politics have played a big role in the SAFE Banking Act going nowhere, but now that we have DOJ weigh-in on the bill, we may actually be crossing into a phase of serious consideration. So, stay tuned.

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