Coauthored by Dykema Summer Associate Shaun Sullivan-Towler.

For financial institutions interested in banking state-legal marijuana businesses, 2018 has been a rollercoaster. In January, Attorney General Jeff Sessions rescinded the Obama-era policy of lenient federal enforcement, creating new confusion for banks and credit unions about the future of marijuana-related banking. Many feared that the Financial Crimes Enforcement Network (FinCEN) would withdraw or amend its guidance as well, thereby eliminating the only federal guidance directed to financial institutions on banking marijuana businesses. But FinCEN has since been clear that its guidance remains in place and announced that, as of March 31, 2018, a total of 411 banks and credit unions now provide services to marijuana-related businesses, up from 365 a year ago.

There is additional good news for the marijuana banking sector. On June 7, 2018, Senators Elizabeth Warren (D-Mass.) and Cory Gardner (R-Colo.) introduced the “Strengthening the Tenth Amendment Through Entrusting States Act” (STATES Act). This bipartisan legislation—which was also introduced in the House by Representatives David Joyce (R-Ohio) and Earl Blumenauer (D-Ore.)—comes after President Trump made a promise to Senator Gardner that he would support legislation protecting the marijuana industry in states that have legalized the drug. And President Trump appears to have stayed true to his word: “I support Senator Gardner,” the President told reporters when asked about the STATES Act. “I know exactly what he’s doing. We’re looking at it. But I probably will end up supporting that, yes.”

Other congressional members, including Carlos Curbelo (R-Fla.), Ken Buck (R-Colo.), Jared Polis (D-Colo.), and Barbara Lee (D-Calif), along with senate members Rand Paul (R-KY), Catherine Cortez Masto (D-NV), Cory Booker (D-NJ), Lisa Murkowski (R-AK), Dan Sullivan (R-AK), Michael Bennet (D-CO), Jeff Flake (R-AZ), and Amy Klobuchar (D-MN), have all expressed their support for the bill. Senator Cory Gardner stated, “The federal government is closing its eyes and plugging its ears while forty-six states have acted. The bipartisan STATES Act fixes this problem once and for all by taking a states’ rights approach to the legal marijuana question. The bipartisan, commonsense bill ensures the federal government will respect the will of the voters—whether that is legalization or prohibition—and not interfere in any states’ legal marijuana industry.”

As with any federal legislation, especially in an election year, the STATES Act faces an uphill battle in Congress. But with a majority of Americans supporting marijuana legalization, the support of the President, and endorsements ranging from the American Civil Liberties Union (ACLU) to the National Conference of State Legislatures to the Cooperative Credit Union Association, the STATES Act has a real chance of gaining some traction on Capitol Hill, and perhaps even becoming law.

What the STATES Act would do

According to the bill’s sponsors, the STATES Act is intended to ensure that each state has the right to determine for itself the best approach to marijuana within its borders. The bill also extends these protections to Washington D.C., U.S. territories, and federally recognized Indian tribes. Further, the bill contains common-sense guardrails to ensure that states, territories, and tribes that have legalized and regulated marijuana do so in a manner that is safe and respectful of the impacts on their neighbors. In short, the STATES Act would exempt marijuana complying with state or tribal marijuana laws from the Controlled Substances Act (CSA), allowing states or tribes to regulate marijuana based on state regulations.

Section 2 of the STATES Act would amend the CSA (21 U.S.C § 801 et seq.) so that its prohibitions concerning marijuana-related activities no longer apply to persons who are in compliance with state or tribal marijuana laws regarding medical or adult use, subject only to a few specific provisions of the CSA. Currently, the CSA classifies marijuana as a Schedule I substance, but the STATES Act would create a safe harbor under the CSA for any person or business complying with state or tribal marijuana laws. This would allow businesses to manufacture, produce, distribute, dispense, administer or deliver marijuana without concerns of violating the CSA.

Under the STATES Act, a person would still violate the CSA, regardless of whether they are compliant with individual state or tribal marijuana laws, if they (1) knowingly or intentionally manufacture, distribute, or dispense, or possess with intent to manufacture, distribute or dispense within 1,000 feet of a truck stop or safety rest area; (2) knowingly or intentionally manufacture, distribute, or dispense, or possess with intent to manufacture, distribute or dispense to any person under the age of 21, unless such person is dispensing, or possessing medical marijuana; or (3) endanger a human life while manufacturing, attempting to manufacture, transporting, or causing to be transported materials, including chemicals, to manufacture marijuana.

Additionally, a person would still violate the CSA if that person violates any provision with regard to any controlled substance other than marijuana, violates any state law regarding marijuana, or employs or hires any person under 18 years of age to manufacture, produce, distribute, dispense, administer, or deliver marijuana.

Further, the STATES Act would amend the definition of “marihuana” under the CSA (21 U.S.C. § 802(16)) by excluding industrial hemp, as defined in section 7606(b) of the Agricultural Act of 2014 (7 U.S.C. § 5940(b)). However, the STATES Act would not alter section 417 of the CSA (21 U.S.C. § 858), which prohibits endangering a human life while manufacturing a controlled substance and provides enhanced sentencing for such activity.

One amendment to the CSA, however, creates some confusion for determining whether compliance with individual state law could still lead to a violation of the CSA. The STATES Act would amend section 409 of the CSA (21 U.S.C. § 849), by adding subsection (d), which would provide that “[s]ubsections (b) and (c) [of § 849] shall not apply to any person who possesses, or possesses with intent to distribute marihuana in compliance with section 710” of the STATES Act. Subsections (b) and (c) provide enhanced sentences for anyone who “distribut[es] or possess[es] with intent to distribute a controlled substance in or on, or within 1,000 feet of, a truck stop or safety rest area,” one of the provisions listed in the STATES Act as still being subject to punishment federally. Thus, it is unclear whether: (1) lawmakers intend section 409 to be one of the prohibitions that remain in effect pursuant to the STATES Act; (2) the intent is to still punish possessors and distributors who violate section 409, but to not enhance their sentences; or (3) one may distribute within 1,000 feet of a truck stop or safety rest area so long as that person complies with state law. Perhaps this language will be re-drafted and clarified as the bill makes its way through the congressional process, but the current version of the bill leaves at least this question open to interpretation.

Laboratories of democracy: the States’ Rights Approach to Marijuana

As of today, even as the federal prohibition against marijuana remains in effect, 46 states have laws permitting or decriminalizing marijuana or marijuana-based products. Washington D.C., Puerto Rico, Guam, and a number of tribes have similar laws. These states, territories and tribes are, in the famously paraphrased words of Supreme Court Justice Louis Brandeis, “laboratories of democracy.”

Justice Brandeis’ opinion—which actually says that a state “may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country”—is perhaps the most eloquent explanation of federalism and states’ rights under the Tenth Amendment of the U.S. Constitution. The Tenth Amendment states that “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” While it can be easy to forget in today’s interconnected world, the U.S. still operates as 50 semi-autonomous states. This allows different states to enact and test different policies without directly affecting the entire country. And if any of these policies are successful, they can be adopted by other states or expanded to the national level through federal legislation.

Today, marijuana legalization is perhaps the best example of states’ rights at work. If Colorado or Massachusetts want to legalize medicinal or recreational marijuana, they are free to do so, while Idaho and Kansas can keep it fully illegal. And the STATES Act specifically looks to build on this same framework; the Tenth Amendment is even there in the name of the bill. As Senator Gardner tweeted, “Our bill does not legalize marijuana. Instead, it allows the principle of federalism to prevail as the founding fathers intended and leaves the marijuana question up to the states.” Many believe this is the best way to approach the marijuana issue, both from a legal and a political perspective.

By amending the CSA as proposed, the STATES Act would remove its prohibitions only for those acting in compliance with local state or tribal laws relating to marijuana activities; for all others, the CSA would remain in full effect. This particular approach, likely the least disruptive way to respect each state’s specific decision on marijuana legalization, has been called “cooperative federalism” and has been championed by many, including renowned legal scholar Erwin Chemerinsky. For Chemerinsky and others, cooperative federalism strikes the best balance by “empowering state experimentation with marijuana regulation while maintaining a significant federal role in minimizing the impact of those experiments on states wishing to proceed under the federal marijuana prohibition.”

Considering politics, as one must do with federal legislation, the states’ right approach is also likely a winner. Although Republicans historically have not supported marijuana legalization, they have supported states’ rights, particularly on hot-button issues of abortion, healthcare, guns and same-sex marriage. President Trump has been particularly vocal about supporting states’ rights, for example committing to the nation’s governors to “make states the laboratories of democracy once again.” By framing marijuana use as a states’ rights issue, Senators Warren and Gardner might gather support from their Republican colleagues, if only so that those other Senators can avoid perceptions of hypocrisy.

What the STATES Act would mean for Marijuana Banking

Unlike some other marijuana-related bills that have been introduced in Congress, such as the “Secure and Fair Enforcement Banking Act,” the STATES Act does not specifically address banking. But it would address the financial issues caused by the federal marijuana prohibition by clarifying that compliant transactions are not trafficking, and do not result in proceeds of an unlawful transaction.

These changes should alleviate most of the issues that financial institutions would face in providing services to marijuana-related businesses. Under current law, the classification of marijuana as a “Schedule I” drug under the CSA prohibits everyone, including banks and credit unions, from dealing with marijuana or the proceeds from marijuana. Financial institutions that do engage in transactions involving the proceeds of marijuana activity are likely in violation of federal anti-money laundering statutes and other federal financial laws; technically, any bank that currently accepts marijuana-related deposits is itself committing money laundering. Furthermore, financial institutions cannot lend against marijuana-related inventory or receivables because the collateral is illegal. The assets of a marijuana business remain subject to forfeiture, and banks rightly do not view those assets as sufficiently secure against government seizure to be worth the risk. The changes proposed by the STATES Act could alleviate these concerns, because state-legal marijuana transactions would no longer raise money laundering concerns or be subject to forfeiture as illegal proceeds, paving the way for marijuana-related businesses to access the U.S. financial system.

Many financial institutions may want even more affirmative approval, though, before banking cannabis-related companies, such as guidance from the prudential banking regulators. Even with the changes in the STATES Act, banks will still face a range of compliance issues by accepting money linked to marijuana-related operations. Many financial institutions likely will want the FDIC and other regulators to weigh in before jumping into the cannabis banking business.

For their part, the banking regulators have signaled an interest in seeing changes on marijuana banking. At a recent press conference, Federal Reserve Chairman Jerome Powell said, with regards to marijuana banking, “It puts [federal regulators] in a very, very difficult position …. We’d just love to see it clarified.” And new FDIC Chairwoman Jelena McWilliams, in her first public speech since being sworn in, said that she is open to discussions on how federal regulators approach state-legal marijuana banking issues. “Unfortunately, our hands are somewhat tied and I have asked the staff to take us to the next level and think about what we can do here,” McWilliams said at a conference on June 19, 2018. “It’s not our job as an agency to set federal policy [on marijuana banking], but it is our job to help our regulated entities learn how to comply in a way that makes sense.”

Several of the major banking trade associations have also expressed support for a change to federal law. According to Politico, a spokesman for the American Bankers Association said, “the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where marijuana has been legalized for medical or adult use.” The Independent Community Bankers of America and the Credit Union National Association have gone a step further and endorsed specific marijuana banking legislation, including the STATES Act.

Estimates suggest that sixty-three million Americans reside in areas where anyone over the age of twenty-one may legally possess marijuana. Despite the growing agreement that a solution to the marijuana banking problem is needed, the likelihood of a change to federal law remains slim. If and until the STATES Act (or other federal marijuana-related bill) becomes law, states should continue moving forward with their own banking solutions. For states like Michigan and California, that means continuing with state proposals to establish a state-run bank or a limited-purpose state charter for privately financed banks that can work with cannabis businesses regardless of federal banking laws or regulations. And for existing financial institutions, the decision of whether to do business with the legal-marijuana industry remains a question of risk tolerance. However, banks must also be aware that as the marijuana industry grows, the number of ancillary businesses it touches expands. Particularly in states with legal cannabis, banks are likely taking in marijuana-related proceeds on a regular basis, even if they do not know it or have a policy against it. For now, the best plan for financial institutions to continue to minimize their risk is to ensure they have robust compliance programs in place.

To sign up for e-mail updates from the NextGen Financial Services Report, click here.