What Re-Scheduling Cannabis Means For Financial Institutions Contemplating Cannabis Lending

Introduction to Cannabis Banking and Legal Framework

Overview of the Presentation

• Chris Van Djk introduces himself as an attorney at Cogent Law Group, discussing the focus on cannabis rescheduling under the Controlled Substances Act and its implications for financial institutions involved in cannabis banking and lending.

• The presentation is expected to last approximately 45 minutes, followed by a 15-minute Q&A session. Attendees are encouraged to ask questions throughout.

Speaker Background

• Chris shares his background as a former financial regulator from 2006 to 2014, highlighting his experience with the FinCEN guidance on marijuana banking issued in 2014. This guidance has evolved significantly over time.

• He has been a partner at Cogent Law Group for two years, advising banks and credit unions on managing cannabis banking programs that balance growth with risk mitigation.

Experience in Cannabis Banking

Professional Journey

• Prior to joining Cogent Law, Chris worked nearly ten years at a financial institution where he helped establish one of the first profitable cannabis banking programs in the nation, contributing significantly to overall revenue.

• His roles included general counsel, BSA officer, chief risk officer, and vendor management oversight—demonstrating his multifaceted expertise within financial institutions.

Services Offered

• Chris outlines five primary services he provides:

• Assisting institutions new to cannabis banking.

• Offering board presentations about risks associated with cannabis banking.

• Developing tailored policies and procedures along with risk assessments for specific institutions.

• Advising on structuring BSA departments effectively alongside business departments.

• Preparing institutions for regulatory examinations focused on high-risk programs like cannabis banking.

Challenges in Cannabis Lending

Expanding into Lending

• For those already engaged in deposit services within cannabis banking, Chris offers advice on expanding into lending while addressing additional risks associated with this sector. The FinCEN guidance does not differentiate between lending and deposit services but acknowledges heightened risks in lending activities.

• He emphasizes the importance of having specific covenants tailored for commercial loan documentation related to the cannabis industry rather than using standard agreements without modifications. This can lead to compliance issues if not addressed properly.

Remediation Efforts

• Chris discusses experiences working with financial institutions facing regulatory challenges due to their cannabis programs; he assists them in achieving compliance and operational efficiency amidst these difficulties.

Current Landscape of Cannabis Regulation

Introduction to Client Support and Accessibility

• The speaker emphasizes their commitment to advising clients on cost-saving efficiencies while ensuring compliance with regulatory standards.

• They highlight their accessibility, providing clients with direct contact information for prompt responses to inquiries related to cannabis programs.

Overview of the Webinar Agenda

• The agenda includes discussions on the current treatment of cannabis under the Controlled Substances Act and recent attempts at rescheduling by the Biden administration.

• The speaker plans to delve into developments during the Trump administration and interpret implications from current statements regarding rescheduling efforts.

• Key topics will include tax implications under 280E, risk perspectives for financial institutions, and commercial loan offerings for cannabis businesses post-rescheduling.

Understanding Cannabis Scheduling

• Currently, marijuana is classified as a Schedule I drug under the Controlled Substances Act, indicating no accepted medical use and high potential for abuse.

• Historical context is provided about this classification stemming from Nixon's war on drugs in the early 1970s, which included public campaigns against drug use.

Recent Developments Under Biden Administration

• In May 2024, President Biden directed federal agencies to propose rescheduling cannabis from Schedule I to Schedule III due to procedural delays in rulemaking.

• An example of a Schedule III substance is provided (Tylenol with codeine), illustrating a significant shift in how cannabis could be perceived legally if rescheduled.

Implications of Rescheduling Cannabis

• The discussion transitions into how Trump's administration had previously shown support for marijuana legalization but faced challenges that stalled progress on rescheduling efforts.

Cannabis Rescheduling and Political Dynamics

Overview of Cannabis Statements by Trump Administration

• During his campaign, Trump made various pro-marijuana statements. After taking office, he indicated on August 11 that his administration was "considering rescheduling" cannabis, hinting at a potential formal announcement.

• Trump's comments were non-committal regarding the rescheduling of cannabis. Attorney General Pat Bondi affirmed during the discussion but no further details have emerged since.

Recent Developments in Cannabis Policy

• On September 28, Trump praised cannabinoids in a video on Truth Social and endorsed Medicare coverage for CBD. This marked a notable shift towards supporting cannabis-related health benefits.

• The following day, the Department of Justice issued a memo reinforcing stricter enforcement against marijuana possession on federal property, reiterating existing coal memo priorities.

Legislative Actions and Industry Impact

• On November 12, Trump signed a spending bill that imposed significant restrictions on the hemp industry, which seemed contradictory to his previous support for hemp's virtues.

• Notably, on September 29, the DOJ filed to extend proceedings regarding cannabis rescheduling until January 27, 2026. This indicates ongoing deliberations without immediate resolution.

Predictions and Political Considerations

• The speaker suggests that it is more about "when" rather than "if" cannabis will be rescheduled based on mixed signals from the administration regarding its stance.

• The GOP has politicized marijuana issues significantly; despite midterm setbacks for Republicans, there is potential political gain in supporting rescheduling due to public favorability towards legalization.

Lobbying Forces and Future Outlook

• Strong lobbying efforts from industries like big pharma and alcohol are opposing cannabis reform as they view it as a threat to their markets.

• A provision in the recent spending bill making most hemp products illegal was influenced by Mitch McConnell's ties to the alcohol industry in Kentucky.

• While there were rumors of possible descheduling earlier this year, those discussions have diminished. Current expectations lean towards rescheduling rather than complete descheduling with potential developments anticipated around 2026.

Rescheduling Cannabis: Legislative and Tax Implications

Legislative Attempts for Rescheduling

• Gregory Stub, a Republican congressman from Florida, introduced Bill 123 aimed at rescheduling cannabis. However, its current status is unclear as there have been no recent updates indicating progress.

• The Biden administration may utilize federal agency rulemaking with a notice and comment period as the most probable method for rescheduling cannabis under their governance.

• Fast-track rulemaking without a comment period is also an option, although it is uncommon; this has occurred previously with other drugs under the Controlled Substances Act.

• There are provisions in the Controlled Substances Act that could allow Trump to reschedule cannabis via executive order, potentially directing action within 60 days.

• The timing of rescheduling varies significantly based on the method chosen: federal agency rulemaking takes months while fast-track methods or executive orders could be completed in two months.

Tax Implications for Cannabis Businesses

• Current tax code prohibits deductions for businesses involved in trafficking controlled substances classified under schedules one and two of the Controlled Substances Act.

• Rescheduling would alleviate some tax burdens (specifically Section 280E), benefiting both adult-use and medical cannabis businesses financially.

• If marijuana is rescheduled to schedule three, businesses will need to obtain a DEA license; currently, there’s no regulatory pathway for medical cannabis businesses to achieve federal compliance.

• Despite potential benefits from rescheduling, adult-use cannabis businesses will still operate outside federally legal parameters even if marijuana is classified as schedule three.

• It’s advised that all cannabis businesses seek specific tax advice regarding implications of any changes in scheduling.

Financial Institutions' Perspectives on Rescheduling

• Moving cannabis to schedule three could lead to reputational derisking for banks and credit unions, which is crucial given the importance of reputation in financial services.

• While there are risks associated with banking cannabis-related businesses, the potential shift towards more favorable regulations may improve relationships between these institutions and the industry.

Understanding Cannabis Banking Risks and Opportunities

Reputational and Legal Risks in Cannabis Banking

• The speaker believes that the reputational risk associated with cannabis banking is relatively minor compared to other risks. They compare cannabis to Tylenol, suggesting a normalization of its perception.

• There is an expectation of legal de-risking as well, with the speaker noting that no prosecutions have occurred against banks for servicing cannabis businesses, indicating a low legal risk.

• The potential rescheduling of cannabis to a Schedule 3 substance could further reduce these risks, making it more acceptable for financial institutions to engage in cannabis banking.

Market Dynamics Post-Rescheduling

• Rescheduling may lead to increased participation from banks and credit unions in the cannabis sector, resulting in heightened competition among financial institutions. This could drive down fees and interest rates for services provided to cannabis businesses.

• As more financial institutions enter the market, cannabis businesses will likely engage in "bank shopping," seeking better terms and services than previously available. This shift indicates a move away from reliance on single banking relationships.

• Financial institutions will need to adapt by offering value-added services such as fee capping and smart safe offerings to attract and retain cannabis clients amidst growing competition.

Implications for Cannabis Lending

• With potential changes in tax burdens (specifically referencing Section 280E), profitability for cannabis businesses is expected to improve, enhancing their appeal as lending prospects for banks. This shift could lower underwriting risks associated with lending practices within this sector.

• Increased profitability among cannabis businesses may also lead to downward pressure on interest rates due to greater competition among lenders willing to finance these enterprises. Businesses are likely to seek out favorable loan terms actively.

Compliance Obligations Remain Unchanged

• Despite potential shifts in the landscape of cannabis banking, existing compliance obligations under FinCEN guidance remain intact; this guidance has not been updated despite significant changes in state laws regarding marijuana legalization over the past decade. This highlights ongoing challenges faced by financial institutions operating within this space.

Impact of Rescheduling on Cannabis Banking Regulations

Ongoing Compliance Requirements

• The continued due diligence, account monitoring, and rolling SAR filings remain essential even if cannabis is rescheduled. This raises questions about potential revised guidance from FinCEN.

• A possible approach for FinCEN could involve eliminating the requirement for financial institutions to file limited marijuana reports when no suspicious activity is detected, while still ensuring enhanced monitoring of these accounts.

Perception of Cannabis Accounts

• There is a common belief that rescheduling or descheduling cannabis would normalize these accounts to the level of any other business account; however, cannabis accounts will always be considered higher risk due to regulatory scrutiny and cash-intensive operations.

• Regardless of changes in scheduling or guidance from FinCEN, compliance requirements for cannabis accounts will persist, necessitating clear communication with banking customers about associated risks.

Financial Institutions' Risk Management

• Banks and credit unions charge fees based on time and risk management; thus, enhanced risks linked to cannabis accounts justify ongoing premium charges despite potential changes in legal status.

Legislative Context: Safer Banking Act & Moore Act

• Discussion shifts to the effects of rescheduling on federal legislation like the Safer Banking Act and Moore Act. The former aims to provide legal safe harbor for financial institutions dealing with cannabis businesses.

• Historical context reveals that previous attempts at passing the Safer Banking Act have failed despite perceived diminished risks associated with its passage.

Potential Outcomes of Rescheduling

• Opinions vary regarding whether rescheduling would increase momentum in Congress for passing either the Safer Banking Act or Moore Act. Some believe it may lessen pressure while others argue it could facilitate progress.

• The speaker believes that rescheduling might indeed prompt Congress to pass at least the Safer Banking Act, enhancing financial integration for cannabis businesses.

Challenges in Evaluating Cannabis Businesses

• The biggest challenge faced by institutions evaluating whether to bank cannabis businesses lies in navigating regulatory expectations set forth by FinCEN guidance, which lacks formal definitions and clarity.

• Uncertainty surrounding regulatory expectations complicates building effective systems within financial institutions aimed at managing cannabis-related banking activities.

Cannabis Banking: Key Insights and Strategies

Establishing Policies and Procedures

• The importance of implementing policies and procedures for cannabis banking is emphasized to streamline the program.

• Engaging with board members about cannabis banking risks is crucial; they need to understand and be comfortable with these risks.

• Risk mitigation strategies available for banks are discussed, highlighting their role in managing cannabis-related financial activities.

Compliance Software Solutions

• Reputable vendors provide compliance software tailored for cannabis banking, which alleviates burdens on financial institutions.

• Utilizing such software can create efficiencies that ultimately reduce operational costs for banks involved in cannabis banking.

Open Communication and Support

• The speaker encourages attendees to reach out with questions, particularly regarding hemp banking programs.

• Significant developments related to hemp due to recent legislation (spending bill passage) have important implications for financial institutions.

Impact of Financial Reform on Compliance Framework

• A discussion on potential changes in compliance frameworks if financial reform occurs, specifically regarding rescheduling of cannabis.

• Rescheduling may not drastically alter existing policies or procedures but could influence risk management strategies and fee structures within banks.

Conclusion and Further Engagement

• Appreciation is expressed towards attendees for their participation; an invitation is extended for further discussions on both cannabis and hemp banking topics.