Yesterday, the House of Representatives passed H.R. 1595, the Secure and Fair Enforcement Banking Act (SAFE Act), by a vote of 321-103, with 90 Republicans voting in favor of the bill. Some have hailed the bill as a panacea for banking cannabis related businesses (CRBs). While this post is not intended to be a comprehensive analysis of the SAFE
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Cannabis Industry: The Latest Takeaways
Last week, several members of Seyfarth’s cannabis practice attended CannaVest West and the Cannabis Business Summit & Expo. Industry expert panels discussed market trends, private equity, venture capital, family offices, and banking, as well as commercial real estate, which I had the opportunity to moderate.
Of interest to TBT readers, a few key takeaways from the event include:
Investment Opportunities
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DC Mayor Begins Effort to Legalize Recreational MJ Sales
The District of Columbia is one of only two jurisdictions (the other is Vermont) which have legalized possession of recreational marijuana but where sales remain illegal. Wait, what? That’s correct; in your nation’s capital, you can use recreational MJ, but you can’t buy or sell it.
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Will Banks be Able to Play it SAFE with Marijuana Related Businesses?
Marijuana is estimated to be a $10 billion industry and rapidly growing. Almost all of it is conducted in cash. Although legal in thirty three states plus Washington, D.C., Puerto Rico and Guam, marijuana remains illegal at the federal level. Accordingly, financial institutions that handle proceeds from a transaction involving the distribution, manufacture or sale of marijuana would be handling illegal proceeds in violation of both federal money laundering statutes and banking regulations that prohibit such institutions from participating in any transaction or engaging in any relationship involving illegal proceeds.
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Judgment Rendered in Favor of Grower in First Civil RICO Trial for Cannabis Industry
A Colorado federal jury sided with the owner of a state-licensed cannabis cultivation business last Wednesday in a federal Racketeer Influenced and Corrupt Organizations Act (RICO) suit brought against him by his neighbors.
In 2015, Michael and Hope Reilly brought a federal RICO lawsuit in Colorado against Parker Walton and his cannabis cultivation operation that neighbored their property. The Reillys
FDA: .1% CBD OK
This is Washington, and we do like to speak in initials. A plain English translation of the title of this piece would read “FDA ‘places FDA-approved drugs that contain CBD derived from cannabis and no more than 0.1 percent tetrahydrocannabinols in Schedule V.’” DEA Final Order, Docket No. DEA-486 Schedule V drugs include cough medicine with codeine and many pain relievers that still require a prescription. So, really what this order does is allow doctors in the US legally to prescribe the recently approved epilepsy drug, Epidiolex, and allows pharmacies, rather than marijuana dispensaries, legally to sell the drug.
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Appropriations Rider Gives Sliver of Hope For California Dispensary Owner Caught Between Conflicting State and Federal Laws
In a split decision last Thursday, the U.S. 9th Circuit Court of Appeals affirmed the conviction of Morro Bay marijuana dispensary owner Charles Lynch and remanded the case to the district court for a factual determination as to whether Lynch’s activities were in strict compliance with California law. [Link to case here.]
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Budding Developments: North Dakota to Legalize Recreational Marijuana?
Just two years ago, North Dakota voters passed medical marijuana legalization with 64 percent support. Now, North Dakota could join a number of sanctuary states legalizing recreational marijuana.
Through an effort called Legalize ND, proponents of recreational marijuana submitted more than the required 13,452 valid petition signatures to get a measure on the November 2018 general election ballot.
If
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FDA Approves First Marijuana-Based Drug to Treat Epilepsy
On June 25, 2018, the Food and Drug Administration (“FDA”) approved Epidiolex (cannabidiol), the first marijuana derived drug for use in the United States, to treat two rare forms of epilepsy. This decision for the FDA could have sweeping effects for the marijuana industry. While the FDA has previously approved drugs comprising synthetic (manufactured) cannabinoids, this is the first FDA approved drug comprised of an active ingredient derived from marijuana. Even with FDA approval, further action is required before Epidiolex can enter the market in the United States.
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Banking Marijuana Related Business: Are We There Yet?
No. We are not there yet. Are we making progress? Maybe.
The biggest impediment to explosive growth in the marijuana industry is lack of access to banking and robust financial services. Because banks face the risk of prosecution for money laundering and aiding and abetting in drug trafficking, most banks will not bank marijuana-related businesses (MRBs).
Why would any bank risk prosecution by banking MRBs? In 2014, following the issuance of the Cole Memorandum, the Justice Department and the Department of the Treasury Financial Crimes Enforcement Network (FinCEN) issued non-binding guidance on how financial institutions could serve MRBs. (For a more complete analysis of the laws related to banking MRBs see our blog post here.) The FinCEN guidelines called for fairly intensive, ongoing and expensive due diligence of any MRB customers, to the point where the risk/reward ratio for banks became inverted—high risk (jail, loss of banking license), low reward (low profit margins).
While most banks thought the risks far outweighed the benefits of having MRB customers, some financial institutions, mostly local banks and credit unions, saw in the FinCEN guidelines an opportunity and quietly began offering depositary services to MRBs. According to FinCEN, in 2017 there were over 300 financial institutions providing some form of banking services to MRBs. However, the vast majority of business in the industry is conducted in cash. For many businesses that touch the plant, this makes profit and loss statements questionable, taxing authorities nervous, and potential investors dubious about valuations.
Since the publication of the FinCEN statistics, much has happened to banking related to the marijuana industry—some of it good, some bad, and some ugly. Let’s take them in reverse order.
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