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What Will Happen Once Cannabis Becomes Legal?

“If THC cannabis becomes federally legal, will my bank be required to conduct the same level of due diligence, monitoring, and reporting that is required in today’s regulatory environment?”


This is a frequent and reasonable question that financial institutions pose, and the answer is simply…it’s complicated. It relies heavily on what historical data we have on regulatory expectations regarding “higher-risk” industry sectors and how future legislation is written and interpreted by FinCEN or other regulatory bodies.


First, the long-awaited Safe Banking Act. As of February 2022, six versions of this bill have been passed by the House but the Senate has failed to move the bill forward. As a result, the cannabis industry is still suffering from a lack of available and affordable banking as many financial institutions are waiting for formal permission in order to feel comfortable enough to begin banking the cannabis industry.


Even with Congress finally getting serious about THC cannabis legalization, the financial services industry knows that even with formal legislation it will likely be a year or more before FinCEN provides any official memo guidance on their expectations. This means it is likely that recurring SAR filing requirements on the industry will remain in effect for the foreseeable future.


The legalization of hemp through the 2018 Farm Bill can be used as an example of what to expect for any THC cannabis bill. Hemp was legalized in December 2018 and the bill left it up to each state to pass their own version of hemp legalization – so long as it adhered to the USDA’s hemp guidelines. That sounded like a half-decent approach to hemp legalization except for the caveat that the USDA hemp guidelines did not yet exist, leaving businesses in many states on the sidelines for years as they awaited the passage of individual state hemp legislation.


While the hemp industry did see tremendous progress and growth with legalization in their first year, it was stifled by the slow and clunky guidance rollout for industry participants. To further convolute things, there was minimal guidance available for bankers for almost 18 months after the bill passed, leaving financial institutions unclear on the “correct” approach to serve the industry. The reality is this: Regulatory agencies learn and implement guidance based on the innovations that financial institution’s create to serve these industries, so the slow release of guidance is unlikely to change on any legislative release. In fact, it took FinCEN until June 2020 to finally roll out hemp banking due diligence guidance. The ripple effect of slow-to-release financial services guidance leaves more risk-averse financial institutions little opportunity to provide industry participants with access to reliable and affordable banking options.


If the Safe Banking Act is passed or if full legalization of THC cannabis is passed, expect it to take at least 18 months to receive updated THC cannabis banking guidance from FinCEN. If full legalization occurs, we can expect a rollout similar to hemp, leaving it up to states to decide how they will conduct, if at all, their state THC cannabis programs. This will mean that each state will have slightly different rules including which businesses require licensing, what products will be allowed to be produced and sold, and so on. Industry experts predict requirements similar to FinCEN’s current expectations, with the exception being a pullback on limited SAR filing requirements.


The THC cannabis industry will likely remain cash intensive for several years after either bill passes as financial institutions and payment processors ease into allowing THC cannabis-related sales to occur through payment methods like credit cards. This will require institutions to continue their vigilance in understanding and verifying the source of funds for cash-related transactions.


Lastly, for decades regulatory expectations have required enhanced due diligence efforts on many legal industry types such as: Money services businesses, independently-owned ATMs, precious metal dealers and third-party payment processors. These are well-established industries but, due to increased opportunity for illicit activity, the services they provide or products they sell require institutions to conduct enhanced due diligence and monitoring as compared to traditional lower-risk businesses. Regulatory expectations have actually increased for higher-risk industries over time despite their legal operations.


As we all know, the regulatory expectation is to know our customers. With industries like THC cannabis that present an elevated level of known or perceived risk, we will always be expected to go above the traditional means of knowing our customers or members.


Check out our Cannabis Two Pager for more info.

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