In Brief

Making Sense of State and Federal Cannabis Laws

April 23, 2020
Making Sense of State and Federal Cannabis Laws

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Recent years have seen major shifts in the legal landscape governing cannabis use. Nearly all states have passed varying levels of legalization, spanning medical and/or recreational use, resulting in a fast-changing patchwork of state laws and regulations for the growing field of cannabis products. Meanwhile, federal law now classifies hemp, a subtype of cannabis, as a legal agricultural commodity.

Despite these developments, federal law continues to deem hemp’s psychoactive cousin, marijuana, a Schedule I drug, in the same category as LSD and heroin. In addition, some states do not distinguish between hemp and marijuana at all and instead continue to take a hard line on the production and transport of both substances. As a result, cannabis-related businesses still face significant legal exposure related to the financing, production, transport, and sale of all cannabis products.

Learn how businesses, industry associates, and lawyers can better navigate the patchwork of state and federal laws related to cannabis activities.

How does the 2018 farm bill impact legalization of cannabis on the federal level?

Also known as the Agricultural Improvement Act of 2018, the 2018 farm bill removed hemp from the list of drugs under the Controlled Substances Act’s Schedule 1.

This reclassification means that hemp is now legal to grow, cultivate, process, and sell on the federal level. But strict criteria must be met. Under the legislation, a cannabis sativa plant must have less than 0.3% of the psychoactive compound tetrahydrocannabinol (THC) to be classified as hemp.

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 parallel, funding sources, such as federally chartered banks, no longer need worry about hypothetical money-laundering charges. In a more favorable lending and tax-advantaged environment, freed from federal prosecution risk, the industry is expected to see new public and private investment vehicles, as well as insurance options.

With hemp deemed a legal agricultural commodity, the farm bill moved hemp regulation to the U.S. Department of Agriculture, which is tasked with cementing standards “as expeditiously as possible.” Furthermore, the legislation establishes shared state and federal regulatory authority over hemp production and delineates steps that states must take to develop a plan to regulate hemp production, with final approval granted by the Secretary of Agriculture.

However, conflicting federal and state laws persist related to production and transport, as with Idaho’s Controlled Substances Act, which does not distinguish between hemp and marijuana. As a result, industry participants should closely review state laws in advance of any transport, and where possible, avoid jurisdictions that hold a firm stance on even hemp-related activities.

In Focus: Cannabis

Bloomberg Law identifies, analyzes, and explains key drivers of change via an interactive U.S. map of cannabis laws by state; Practical Guidance on workplace drug testing, business financing, and industry developments; expert insight into developing state tax issues; the latest news; and coverage of developing topics that will drive change in the months ahead.

Lending to cannabis companies? What due diligence is required of financial institutions to ensure compliance with federal and state laws?

Even as most states have legalized marijuana for recreational or medical purposes, the substance remains illegal under the CSA, as well as counter-money laundering laws such as the Bank Secrecy Act of 1970 (BSA), which is enforced by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Further amendments to the BSA, such as the 1992 Annunzio-Wylie Anti-Money Laundering Act, require lenders to file Suspicious Activity Reports (SAR) within 30 days of a questionable transaction.

In sum, financial institutions that assist marijuana companies run the risk of violating the CSA as well as being deemed money launderers under the BSA. Given this risk, many banks, credit card companies, and M&A brokers remain hesitant to provide accounts and services to marijuana companies.

From August 2013 to January 2018, many lending institutions and stakeholders that provided accounts and services to marijuana companies relied on a safe harbor, known as the Cole Memorandum, which was rescinded by former Attorney General Jeff Sessions, thereby increasing the legal risks to financial institutions that work with marijuana-related businesses.

FinCEN has since 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 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.

How might the SAFE Banking Act impact financial institutions lending to the cannabis industry?

In March 2019, the Secure and Fair Enforcement Banking Act was introduced in the U.S. House of Representatives to provide guidelines for financial institutions that lend to cannabis-related businesses. The SAFE Banking Act seeks to prevent federal banking regulators from discouraging, prohibiting, or penalizing depository institutions that serve this industry.

Most significantly, the legislation would provide uniform standards for the financial industry about cannabis-related funding activities. In seeking to align federal and state law, the SAFE Banking Act would no longer regard the proceeds of transactions conducted by cannabis-related businesses, which operate in accordance with state laws, as proceeds from unlawful activity.

Furthermore, the proposed legislation would protect financial institution employees from being held liable under federal law. The measure would also amend requirements for institutions to provide suspicious activity reports and would add protections for ancillary businesses providing products or services to cannabis-related legitimate businesses.

The bill was passed in the House in September 2019. If passed in the Senate, the SAFE Banking Act would be a significant win for the cannabis industry, much the same way the 2018 farm bill was for the hemp industry.

For the time being, however, financial institutions assessing cannabis-related businesses must still vigilantly guard against any potential charge of money laundering or aiding and abetting activities that may still fall under the rubric of federally illegal operations.

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

How does the American Bar Association’s cannabis resolution impact lawyers who represent clients across this industry?

As most states have now legalized marijuana for medical or recreational purposes, the ABA recently passed a resolution asking Congress to enact federal legislation that would protect lawyers from federal prosecution when giving advice about marijuana-related activities permitted under state law.

In parallel, ethics committees in several states have opined that lawyers may advise clients about state law permitting marijuana use, but must also advise about potential liability under federal law. And lawyers cannot assist clients in evading or violating federal laws.

Nonetheless, the continued federal classification of marijuana as an illegal controlled substance poses ongoing risks to lawyers. These dangers include exposure to federal charges of conspiracy and aiding and abetting, as well as the potential that payment received from a cannabis-related entity is viewed as proceeds from a crime.

Lawyers also run the risk that their obligation to not disclose clients’ confidential information under ethics Rule 1.6 may be challenged based on the crime/fraud exception.

Faced with these risks, lawyers should proceed with great caution and review all relevant laws, ethics opinions, and rules of professional conduct.

What impact does state legalization of marijuana have on workplace drug testing policies?

State legalization of marijuana for medical or recreational purposes presents challenges to workplace drug testing policies and their enforcement. The issue is further compounded by varying state law.

As an example, Georgia state law deems marijuana an illegal drug, and upholds a zero-tolerance drug policy with marijuana testing. By contrast, New York deems medical marijuana legal, and it will soon be illegal for employers to conduct pre-employment marijuana testing of job applicants in New York City. Similarly, as of January, Nevada now prohibits job denial based on a positive cannabis test result.

Employers must also consider varying state privacy laws. As an example, Illinois’ reclassification of marijuana as a “lawful product” holds implications for the state’s Right to Privacy in the Workplace Act, which prohibits employers from discriminating against employees for off-duty “use of lawful products.”

Employers may seek instead to establish a monitoring system to detect impairment in the workplace. Yet this approach also presents challenges, given that drug testing is not a reliable indicator of impairment from marijuana, which can linger in the system even after 30 days of non-use.

Faced with these variables, employers may wish to establish new cannabis screening practices and train workers to identify signs of impairment. In this regard, workplace policies that govern testing for alcohol impairment in the workplace could offer guidance, notes Bloomberg Law’s Dori Goldstein.

What’s next in cannabis? Bloomberg Law analysts share legal developments to watch.

Labor & Employment Practice Center

Rapidly evolving state marijuana laws are affecting drug testing in the workplace and other essential components of the employer-employee relationship. Stay up to date on the latest developments with best-in-market labor and employment resources from Bloomberg Law.

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Reference Shelf

  • Learn how two pending bills – the SAFE Banking Act and the Claim Act – could expand insurance stakeholder participation in the cannabis industry.
  • In this podcast, get insights from cannabis law attorney Joanne Caceres on how industry participants and lawyers can navigate the current patchwork of state and federal rules.
  • See how the Department of Agriculture’s interim final rule establishing the U.S. Domestic Hemp Production Program would impact the industry.
  • Get up to speed on how marijuana legalization may impact the structure and enforcement of workplace drug policies. Plus, see why cannabis laws have employers rethinking drug testing.