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Monday, January 30, 2023

Update: Department of Justice and the Safer Banking Act

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as we are blogging About last week, the SAFE Banking Act was trying to claw its way back from the dead during a lame-duck session of Congress. Interestingly, on December 2, Punchbowl News reported that the Department of Justice (DOJ) issued a memorandum outlining the “issues” with the Banking SAFE Act. Here it is note (“note”).

When we get a cannabis-related warrant from the Department of Justice, I get really excited. Mainly because we get a little peak into the minds of the execution and what their priorities are at the time. This five-page memo is of particular interest as it deals with cannabis financial crimes and enforcement. Unless you’ve been living under a rock, you know that two of the biggest problems facing the cannabis industry in general is access to financial institutions and IRC, Section 280E.

Ministry of Justice “issues”

The Banking SAFE Act neither legalizes cannabis nor reschedules it into the Controlled Substances Act. Given this fact, the memo begins by saying that

Since marijuana would still be illegal under federal law, Congress should ensure efforts are made to provide access to financial services to state legal businesses. [sic] Not inadvertently create obstacles to the prosecution of activities or other illegal activities that involve money laundering of other illegal drug proceeds or the sale of marijuana that does not comply with state requirements

The DOJ’s first step then is that the bill would technically immunize from prosecution cannabis businesses or service providers who fall into certain legal classifications under the law, rather than examining the types of legal or illegal activities those entities engage in. The example in the memo is that the DOJ cannot prosecute not only “legitimate cannabis-related businesses” that engage in state-licensed commercial cannabis activities but also fraud. Fortunately, the Department of Justice guides Congress in the memorandum on how to fix offensive language by proposing that immunity be limited to:

“The legal state activities in which the entities engage (again, ensuring that these activities are consistent with state law), rather than based on their classification as a particular business type, i.e. a ‘legitimate cannabis-related business’ or marijuana related ‘service provider’.”

The DOJ also believes that the Banking SAFE Act was drafted very broadly to immunize cannabis companies from existing money laundering laws, essentially for the same reasons listed above. The DOJ also bemoans the fact that such broad protections would place an additional burden on prosecutors to show the difference between legal and illegal activities in the cannabis trade. The DOJ provides the example that “a marijuana-related business could be laundering proceeds from fentanyl sales on the side, or from marijuana sales that take place outside the state’s regulatory framework,” and that the Safe Banking Act (SAFE), as it is written, would not allow law enforcement or prosecutors to do their jobs effectively.

The DOJ also grapples with the fact that the Banking SAFE Act does little to solve the problem of financial institutions fully complying with the Bank Secrecy Act, existing anti-money laundering laws, and anti-funding regulations to collect—or verify—information that shows that a particular business is operating in accordance with applicable state law. This is certainly an issue with segmented cannabis billing: there will always be side effects in terms of compliance with other existing federal laws. The Ministry of Justice also held that there would be confiscation cases related to the interests of depository institutions in guarantees, because the Safe and Financial Banking Services Act also does not amend existing confiscation laws.

Technical Comments

It helps that the DOJ then lists TA’s comments, pointing out to lawmakers where there are legal and interpretive inconsistencies if the SAFE Act is passed “as is.” These mainly touch on things like the definitions in the bill, the use of the term “cannabis” versus “marijuana” compared to existing federal laws, and the ambiguity of enforcement.

marked anxiety

At the end of the note, the Ministry of Justice stated this

Reading Sections 3 and 14 (the “Definitions”) together leads to interpretive uncertainties. The
The definition of “legitimate cannabis-related business” is vague. For example, this section says nothing about how states determine compliance with state law or what happens when state laws conflict—for example, some states have different restrictions on the movement of marijuana in or out of state, or different registration and compliance systems. Nor does it explain how to handle fraudulent ads for alleged compliance with state laws (many states do not have the bureaucratic capacity to ensure full compliance yet, and the DEA has law enforcement intelligence proving that criminal organizations are exploiting the marijuana industry in states in which the industry is legalized).

This is a somewhat troubling note by the DOJ, but it’s probably accurate.

what is happening now?

Without a doubt, Congress will hear from the Justice Department about technical changes to the bill. The fact that the Justice Department isn’t fighting the legislation entirely is a good development. Overall, the proposed changes are mostly useful (from a legal/technical point of view to avoid conflict) and they strike a compromise in that the DOJ still needs to be able to do its job if the SAFE Act is passed. So far, politics has played a large part in the banking SAFE Act going nowhere, but now that we have the DOJ button on the bill, we may actually be crossing into a phase of serious reflection. Stay in touch.


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