Banking and Finance Law Daily Wrap Up, BANKING OPERATIONS—Rescheduling won't resolve marijuana banking issues, reports Congressional Research Service, (Aug 27, 2024)

By Steven Melendez

Simply moving the drug to a less restrictive category likely won't be enough to resolve the financial industry’s legal concerns.

Even though the majority of states and territories now allow some marijuana use for either medical or recreational purposes, the drug is still strictly illegal under federal law, effectively limiting state-legal marijuana businesses' access to the banking system and forcing them to deal heavily in cash.

The Department of Justice has begun a rulemaking process to reclassify marijuana from the Controlled Substance Act's Schedule I to a less-restrictive Schedule III but, according to a report from the Congressional Research Service, that won't be enough to resolve the industry's legal banking woes.

Right now, according to the report, banks run the risk of having proceeds from working with marijuana businesses seized through asset forfeiture laws and may violate federal anti-money-laundering (AML) laws by knowingly handling funds related to marijuana transactions. That could include bank workers knowingly taking cash deposits from marijuana sales or even knowingly using the revenue from such sales to fund a business's employee paychecks, according to the report. And banks may run afoul of regulators for allowing illegal activity, including related to marijuana sales, according to the report.

The Bank Secrecy Act (BSA) also requires financial institutions to have policies in place to avoid dealing with organizations violating the law, including by selling marijuana, and to file suspicious activity reports (SARs) to the Financial Crimes Enforcement Network (FinCEN) when they suspect illegal activity is taking place. FinCEN has received more than 410,000 marijuana-linked SARs from about 680 financial institutions as of March 31, 2024, according to the report.

Rescheduling. Schedule III drugs can be sold with a prescription if they are approved by the Food and Drug Administration (FDA). But marijuana is not approved by the FDA, and even state medical use programs do not comply with federal controlled substances rules. This means that simply rescheduling marijuana to Schedule III wouldn't address bank industry concerns about working with cannabis businesses.

"Additionally, bank responsibilities under the BSA and AML laws and banking regulator enforcement authorities would likely remain largely the same if marijuana became a Schedule III drug," according to the report. "Consequently, financial institutions would likely continue to face significant legal risks under federal law for serving marijuana-related businesses even if marijuana were moved to Schedule III."

The report suggests that state and federal regulators could potentially take action to reduce financial industry risk around marijuana. And Congress has considered, but not yet passed, bills that would effectively exempt marijuana transactions from AML laws, including bills that would be known as the SAFE Banking Act or SAFER Banking Act.

"The bills would provide that the proceeds from state-authorized marijuana activities shall not be treated as proceeds from an unlawful source for purposes of federal AML laws," according to the report.

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