The U.S. Senate Banking Committee hearing held on Feb. 5 was supposed to focus on the impacts of debanking on “federally legal” businesses and their workers and whether there was “improper influence” by federal financial regulators.
But that didn’t stop committee members and one witness from calling attention to ongoing banking issues facing state-legal cannabis businesses.
Committee Chairman Tim Scott, R-S.C., called the hearing two weeks ago, urging debanked Americans to utilize the committee’s whistleblower resource to prevent what he claimed to be “choke-point” activities under President Joe Biden’s administration from happening in the future.
An Obama-era initiative, “Operation Choke Point” involved federal financial regulators putting pressure on banks to break ties with specific “high-risk” industries like firearm manufacturers and payday lenders. Specifically, Republicans accused federal regulators of exploiting their powers by pressuring banks to cut off services to individuals and businesses with conservative dispositions.
Scott indicated during Wednesday’s hearing that those activities returned in full force under Biden.
“The FDIC under President Trump’s leadership released a fresh set of never-before-seen supervisory documents, which further proved that Choke Point 2.0 was real,” the chairman said. “I’ll be going through the documents in greater detail, but rest assured for those in this room and those watching at home, they paint a disgusting and disheartening picture of abuse.”
While Scott’s initial announcement of the debanking hearing on Jan. 24 was met with reactions from the cannabis industry, where more than 440,000 full-time employees are at banking risk, the committee chairman later clarified that the hearing’s focus was on “federally legal” businesses and the people they employ.
Still, it was difficult to steer clear of mentioning cannabis businesses when discussing the topic of debanking.
“Cannabis businesses have been unable to open accounts, and employees of those businesses have been debanked,” Sen. Elizabeth Warren, D-Mass., the committee’s ranking member, said during the hearing. “This shouldn’t be happening, and we need to figure out why and who is responsible.”
One of the four witnesses who provided testimonies during the hearing took the opportunity to address banking access challenges for state-licensed cannabis businesses and their employees.
Aaron Klein, a senior fellow in economic studies at the Brookings Institution, questioned whether suspicious activity reports (SARs) filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) are fulfilling their purpose. He said banks filed 2.5 million SARs in 2023, compared to just 288,000 in 2023, and that banks claim each filing requires more than 20 hours of work.
“The costs of SAR filings are staggering and have grown sharply over the past two decades,” Klein said in his written testimony. “These costs are passed back on to consumers and businesses both generally and specifically toward those who are the subject of SAR filings.
“Consider the reporting required of banking a person who works at a state-licensed cannabis company. Because cannabis is illegal under federal law, banks must flag these workers’ accounts as suspicious and begin copious reporting. Failure to do so, or reporting less than is expected, can trigger regulatory fines and other sanctions. For many banks, these costs are simply not worth it, leading them to deny services and debank people and businesses.”
Klein called attention to a 2021 report indicating that only three banks or credit unions in Maryland banked cannabis companies at the time, charging them roughly $20,000 annually to open and maintain a simple bank account.
The federal government provided guidance in 2014 for financial institutions to work with state-licensed cannabis businesses, giving the thumbs up to banks and credit unions as long as they file SARs and comply with other regulations, such as anti-money laundering requirements under the Bank Secrecy Act.
However, due to the costs and risks associated with the regulatory burdens, Klein said in his testimony that “many cannabis companies are effectively debanked and forced to operate with cash (since payment processing firms are wary of finding themselves debanked for serving cannabis companies), which makes these business targets for criminals.”
As part of his debanking solutions that Klein offered to the Senate Banking Committee members on Feb. 5, he suggested that Congress work to reform anti-money laundering laws and rules by, in part, improving and passing the Secure and Fair Enforcement (SAFE) Banking Act—legislation to provide safe harbor to financial institutions wishing to service the cannabis industry.
“Specifically with respect to debanking cannabis, the SAFE Banking Act, which passed the Banking Committee last year, would be a helpful piece of legislation,” he said. “However, because it does not directly address any element of the costly and unproductive SAR filing associated with banking state-licensed cannabis companies, I fear the bill’s impact would likely underwhelm what its proponents have argued. I encourage the committee to either combine SAFE Banking with broader SARs reform or enhance SAFE Banking to address the problems with SARs filing on state-licensed cannabis businesses.”
During Wednesday’s hearing, Sen. Jack Reed, D-R.I., said one factor involved in debanking is that of the reputational risk, which is often the justification for the actions and rules of the federal banking regulators.
In 2023, Reed held reservations about advancing the SAFE Banking Act over language involving federal regulators’ ability to raise the alarm about “bad actors” that he said was too broad beyond the scope of the cannabis industry.
“I worked with my colleagues to come up with a compromise that would still allow reputational risk to be effective but to put up some guardrails with regard to its application,” Reed said during Wednesday’s hearing. “And, Mr. Klein, can you elaborate on the importance of maintaining reputational risk as a factor in evaluation and also the guardrails that might be in place?”
Klein said in response that the compromise on reputational risk worked out in the last Congress’ rendition of the SAFER Banking Act “effectively addressed that problem.”
“Look, at the end of the day, all banks are a reputation-based business,” he said. “Trust is the cornerstone of all banks. Consumers trust that the banks have their money, and when a bank loses trust, it has the possibility to have a run on it. So, the need to consider reputational risk is real and it is important. It is possible that it is abused, and you need to have guardrails on it, but it is absolutely a certain and important part of bank regulation and supervision.”
Later in the hearing when responding to a question from Sen. Andy Kim, D-N.J., Klein said if the Drug Enforcement Administration (DEA) wanted to shut down any cannabis company in a state, “they can.”
“You don’t need a bank report to tell you where the cannabis shop is: It’s called Google Maps,” he said. “Why are we forcing the banks to continue to file all of these things? … If you’re running a state-licensed cannabis business, you should be treated like other businesses.”
The end result of SAR filing requirements for banks equates to low-profit customers getting pushed out and high-profit customers keeping their accounts, Klein said.
Aaron Klien, of the Brookings Institute, told lawmakers that legislation for the cannabis industry needs to address ‘costly and unproductive’ SAR filings. Read More
