ARTICLE

A Growing Industry Navigates Conflicting State and Federal Cannabis Laws

June 6, 2022

Cannabis cultivation

Recent years have seen major shifts in the legal landscape governing cannabis. Nearly all states have passed varying levels of legalization, spanning from medical and/or recreational use to permitting the use of low-THC products. This has resulted in a patchwork of state laws and regulations for the growing field of cannabis products, which is only made more complex by contrasting federal law.

Despite legal challenges, the market continues to grow. Taxes on the sale of recreational cannabis in legal states raised $3.7 billion in 2021, according to the Marijuana Policy Project – a 34% increase over 2020. A more consistent regulatory and legal landscape, however, is essential to maintaining momentum in the industry.

How do state and federal laws on cannabis differ?

Federal law has classified hemp, a subtype of cannabis, as a legal agricultural commodity since the passage of the Agricultural Improvement Act of 2018 (the 2018 Farm Bill). According to the 2018 Farm Bill, the federal definition of industrial hemp stipulates that it must not contain more than 0.3% concentration of delta-9 tetrahydrocannabinol (delta-9 THC) on a dry weight basis.

If this classification is met, hemp-related entities are no longer subject to Section 280E of the U.S. Internal Revenue Code, which forbids businesses that traffic in illegal substances from claiming normal business operating deductions other than for the cost of goods sold. In addition, funding sources such as federally chartered banks no longer need worry about hypothetical money laundering charges.

Though these relaxed restrictions significantly impact hemp production, federal law continues to classify marijuana, typically used as a psychotropic drug, as a Schedule I drug – the same category as LSD and heroin. As a result, cannabis-related businesses face potential legal complications related to financing, production, transport, and sale of cannabis products, even in states with legal recreational marijuana use.

In contrast with federal marijuana laws, state-level regulation has grown increasingly permissive. In many states, possession and use of marijuana in certain amounts no longer constitutes a criminal offense. These states include Alaska, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, Mississippi, Michigan, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia, and Washington.

[Subscribers only: For more on state laws and regulations related to cannabis, consult our detailed chart of medical and recreational cannabis laws by state.]

Hear from Bloomberg Law analysts Grace Maral Burnett and Dori Goldstein on how to answer client questions about cannabis laws.

How does federal law affect financial operations for cannabis-related businesses?

Federal illegality has not deterred many banking institutions from serving marijuana-related businesses (MRBs).

In fact, according to the March 2022 Marijuana Banking Update released by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the number of depository institutions providing banking services to MRBs has increased in recent years, reaching a total of 755 institutions in September 2021.

Financial institutions that assist marijuana companies, however, run the risk of violating the Controlled Substances Act as well as being deemed money launderers under the Bank Secrecy Act (BSA) of 1970. Given this risk, some banks, credit card companies, and M&A brokers remain hesitant to provide accounts and services to marijuana companies.

FinCEN also issued guidance on how financial services firms can provide services to the marijuana industry without violating money laundering laws. Known as “BSA Expectations Regarding Marijuana-Related Businesses,” the guidance requires financial institutions to file special-purpose Suspicious Activity Reports (SARs).

To further minimize exposure risk, institutions should verify with state authorities whether a business is licensed and registered, review the business state license application, ask state licensing and enforcement authorities for additional business-related information, and perform ongoing monitoring of publicly available sources for compromising information about the business and associates.


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How might the SAFE Banking Act impact the cannabis industry?

Legislation first introduced in March 2019 has the potential to significantly impact the relationship between financial institutions and MRBs – if it can pass in both chambers. In February 2022, the Secure and Fair Enforcement Banking Act (SAFE Banking Act) was passed by the United States House of Representatives for a sixth time.

The SAFE Banking Act seeks to:

  • Prevent federal banking regulators from discouraging, prohibiting, or penalizing depository institutions that serve the cannabis industry
  • No longer consider the proceeds of transactions conducted by cannabis-related businesses that operate in accordance with state laws to be proceeds from unlawful activity
  • Protect financial institution employees from being held liable under federal law
  • Amend requirements for institutions to provide SARs
  • Add protections for ancillary businesses providing products or services to legitimate cannabis-related businesses

The proposed legislation has thus far failed to be taken up by the Senate, but key players in the cannabis industry appear to be guardedly optimistic about its prospects in the near term.

What is the Marijuana Opportunity Reinvestment and Expungement Act of 2022?

In addition to the SAFE Banking Act, the House also passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act on April 1, 2022.

The MORE Act would apply retroactively to previous marijuana convictions, as well as pending cases, and seeks to:

  • Expunge federal marijuana convictions
  • Condition states’ eligibility for new grants on their making similar changes to state laws
  • Impose taxes on cannabis producers and importers and use the revenue to support people arrested for drug offenses, including those with previous convictions who want to participate in the cannabis industry

The measure still faces significant hurdles in the Senate, where many Republicans and some Democrats have spoken in opposition of such legislation.

An evolving legal and regulatory landscape brings new risks and responsibilities. You can count on Bloomberg Law’s essential news, expert analysis, and practice tools to help you stay ahead of developments in the cannabis industry and other emerging practice areas.

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