Colorado and Washington were among the first states to legalize adult-use cannabis in 2012. In the nearly 11 years since then, numerous other states have jumped on the recreational cannabis bandwagon. However, there is one thing that has remained virtually unchanged nearly 11 years after the first U.S. states moved to legalize recreational marijuana possession and consumption. What’s unchanged? The way the cannabis industry conducts business.
The cannabis industry primarily operates under a “cash-only” business model. Since marijuana is an illegal Schedule I substance at the federal level, retailers and cultivators do not have access to the vital services provided by banks and financial institutions. With federal legislation stalling again, New York is attempting to take matters into its own hands.
New York Looking for a Financially Workaround
The governor of New York is attempting to make it easier for cannabis retailers, cultivators, and producers in the state to access essential services provided by banks and other financial institutions. Senate Bill S1047 seeks to work around federal banking laws by allowing financial institutions to access and verify personal and financial information for prospective cannabis clients. It improves upon the “Know Your Customer” compliance law. It makes it simpler and less expensive for financial institutions to comply with federal reporting when working with legitimate cannabis businesses in New York.
The original “Know Your Customer” regulation ensures that when a financial institution opens or maintains a client’s account, it must exercise all reasonable due diligence when determining and storing vital identifying information about the client. It is essentially a legal and ethical tool to ensure that clients truthfully represent themselves to financial institutions and banks and to ascertain that they are not involved in illegal or illicit activities. It works hand in hand with the Know Your Business rule that helps reduce money laundering by setting practices to verify business credentials.
Banks and financial institutions must comply with all federal banking laws, which gets complicated when marijuana is considered an illegal substance by the federal government. Adhering to strict compliance and reporting measures, paired with the threat of facing federal penalties, means most banks and financial institutions will not risk working with legitimate cannabis businesses.
Without the help of vital financial services provided by banks, many cannabis companies continue to operate within the confines of a dangerous “cash-only” system. The cash-only system offers few protections for employees and employers and makes cannabis businesses and their employees a target for theft, robbery, and violence.
The new measure does not impact banking regulations at the federal level. However, state lawmakers hope it helps encourage New York banks to engage with cannabis businesses and smooth out the process of offering financial services to the cannabis industry. Officials hope the law will also further its goal of social equity by removing some of the financial barriers that prevent many individuals from participating in the market.
Separate legislation signed by the governor of New York also seeks to provide some financial relief to the cannabis industry through tax breaks. Internal Revenue Service’s code 280E prohibits cannabis businesses from making federal business deductions aside from the cost of the goods they sell. Last year, the governor signed legislation allowing state-level cannabis business tax deductions as a partial solution to the ban on deductions at the federal level. This year, lawmakers introduced a new tax measure that helps fill the policy gap created by last year’s legislation and New York City’s tax laws, which had not been affected by the previous legislative change.
Why the Workaround in New York?
Why does New York need to take matters into its own hands? Because legislation at the federal level that is designed to ease restrictions on banks and financial institutions continues to stall. For years, liberal lawmakers have been pushing the SAFE Banking Act, a measure meant to ease federal restrictions and penalties on banks and financial institutions that conduct business with legitimate, state-sanctioned cannabis businesses. The measure would open a wealth of financial services to cannabis retailers and cultivators, giving them access to services most companies take for granted. It would also create common-sense standards for banks and credit unions to help them maintain client relationships and expand access to services for underrepresented communities.
The first iteration of the SAFE Banking Act was introduced to Congress by Sen. Jeff Merkley (D-OR) in 2017. For years, Congress has considered some form of the measure, but it always failed to generate enough bipartisan support to pass both chambers of Congress. Often, the legislation would score a victory in the House only to be killed in the Senate.
A new version of the measure, dubbed the SAFER Banking Act, is currently making steady progress in the Senate, clearing some significant procedural hurdles. Unfortunately, the Senate may not be the measure’s problem this time. While there may be enough bipartisan support in the Democratic-held Senate to move the measure forward, the bill’s fate is less certain in the Republican-controlled and chaotic House. Some lawmakers noted that Republicans in the House, once committed to passing the bipartisan measure, are starting to sour on supporting the SAFER Banking Act.
Rep. Mike Johnson (R-LA), recently promoted Speaker of the House, is a hard-right religious conservative who consistently opposes cannabis reform policies and has already voted against previous versions of the SAFE Banking Act in 2019 and 2021. Although the SAFER Banking Act may pass the Senate, it has little chance of gaining the support it needs to pass a GOP-controlled House.
New York lawmakers may have seen the writing on the walls, spurring them to take action and lay the groundwork for their state banking compliance laws that support financial institutions and the cannabis industry. While not an ideal solution, it does help ease some of the burdens financial institutions may face when assessing the risk of engaging with clients in the legal cannabis marketplace.