United States: New York Legalizes Marijuana—Where Is The US Headed?

It's been an eventful week for the marijuana industry. After years of false starts, New York legalized the use of recreational marijuana on March 31-just hours later, New Mexico legislators passed a bill to do the same.¹ Meanwhile, Mexico is expected to legalize recreational marijuana later this month and, with a population of 120 million, is poised to become the biggest marijuana market in the world.² If Mexico's bill is enacted into law, Mexico would become the third country after Uruguay and Canada to legalize marijuana nationally. With these developments, many are asking: Is marijuana legalization at the federal level on the horizon?

Amid growing public support, momentum at the state level, and the shift of power in Washington, the prospects for marijuana reform legislation are as elevated as they have ever been. Last year, public support for legalization of marijuana in the United States hit a record 68%,³ and voters in Arizona, Montana, New Jersey and South Dakota approved ballot initiatives to legalize the cultivation, use and distribution of marijuana.⁴ In total, 47 states and the District of Columbia have legalized some form of marijuana use.⁵ Sixteen states have legalized recreational marijuana, while 36 states and the District of Columbia have legalized medical marijuana.⁶ With US marijuana sales hitting $18.3 billion last year-a 71% increase in revenue over 2019-several more states are looking to marijuana legalization to increase revenue.⁷ In recent weeks, governors in Pennsylvania⁸ and Wisconsin⁹ have renewed calls or introduced proposals to legalize adult recreational use of marijuana, in part to raise revenue to fill COVID-19-related budget holes.

However, it remains unclear whether Congress and President Biden will enact legislation that would legalize marijuana at the federal level, given the razor-thin margins in the Senate, other pressing legislative priorities, and uncertainty as to whether congressional leaders and the Biden Administration want to expend political capital to push for full legalization. Legalization in Mexico is likely to add further momentum to the US legalization movement, but marijuana reform in the United States appears likely to take a more moderate approach. Below, we analyze the primary risks from engaging in business with US marijuana-related businesses (MRBs) and the potential legislative and other reforms that could alter those risks.

I. The Federal Legal Landscape

Notwithstanding the proliferation of marijuana-related commerce in states across the country, the manufacture, sale and distribution of marijuana remain prohibited under the federal Controlled Substances Act (CSA). MRBs are generally operating in violation of federal law, even in states where recreational or medical marijuana sales are legal.

As a result, engaging in business with MRBs carries two primary risks: First, depending on the specific facts and circumstances, engaging in business with an MRB could expose a company to risk of aiding and abetting or conspiring to commit a violation of federal narcotics law.¹⁰ Second, funds received from an MRB could expose a company to risk of violating the US money laundering laws. Federal money laundering laws criminalize conducting or engaging in a financial transaction with proceeds of "specified unlawful activity." See 18 U.S.C. §§ 1956, 1957. Because proceeds from the manufacture, sale or distribution of marijuana are considered proceeds of "specific unlawful activity" in the money laundering context, a company could violate US money laundering laws by engaging in a financial transaction with an MRB with the knowledge that the transaction involved proceeds of marijuana sales and with the intent to promote the unlawful activity. If the transaction is in an amount greater than $10,000, the risk is higher, because the government need not prove intent to promote unlawful activity. See 18 U.S.C. § 1957. In such cases, the government would only need to establish that a company knowingly engaged in a monetary transaction involving more than $10,000 in funds derived from specified unlawful activity.¹¹

II. Predictions on Marijuana Reform Legislation

The prospect of major reform of federal marijuana laws remains uncertain as a closely divided Congress and new Biden Administration work to address numerous competing crises. While there is currently no federal marijuana legalization bill that has been introduced in either chamber of Congress, leading congressional Democrats have announced their intent to introduce "comprehensive cannabis reform legislation" in "the early part of this year."¹² In the last session of Congress, the House of Representatives passed two marijuana reform bills that could significantly alter the risks of doing business with MRBs: (1) the Secure and Fair Enforcement (SAFE) Banking Act and (2) the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. And in late January, Representative Greg Steube (R-FL) introduced the first marijuana reform bill of 2021-the Marijuana 1-to-3 Act of 2021. The SAFE Banking Act and the MORE Act appear to be the two most likely paths to marijuana reform legislation, though other bills, such as the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, may also receive renewed support.

A. SAFE Banking Act

Many financial institutions refrain from providing banking services to marijuana businesses given the risk of violating the US narcotics or money laundering laws. As a result, many MRBs operate on a cash-only basis or pay exorbitant fees to maintain bank accounts with state-chartered banks. In response to increasing public support for decriminalization/legalization of marijuana and the marijuana industry's chronic lack of access to banking and financial services, several members of Congress have supported legislation to create safe harbors for financial institutions that provide banking services to the marijuana industry.

On September 25, 2019, the House of Representatives passed the SAFE Banking Act with broad bipartisan support, garnering votes from 229 Democrats, 91 Republicans and one Independent. In total, 321 representatives supported the bill compared with 103 who opposed its passage. The SAFE Banking Act was reintroduced on March 18, 2021.¹³ While dozens of advocacy and industry groups, such as the American Bankers Association, quickly expressed their support for the bill, many of these groups also supported the 2019 version of the law.¹⁴ To date, there is no indication that senators who did not support the bill in 2019 will change their position and support the current version of the bill.

The SAFE Banking Act was designed to increase public safety by providing "cannabis-related legitimate businesses"-i.e., state-licensed MRBs-with access to financial services and by reducing the amount of cash held by such businesses.¹⁵ The proposed law would create several protections for financial institutions that serve MRBs. First, the SAFE Banking Act would create a safe harbor for financial institutions by directing federal banking regulators not to "prohibit, penalize, or otherwise discourage a depository institution from providing financial services to a cannabisrelated legitimate business or service provider."¹⁶ It would also forbid bank regulators from terminating or limiting deposit insurance for financial institutions solely for providing services to MRBs,¹⁷ and protect financial institutions from "criminal, civil and administrative forfeiture" of any collateral interest in financial products or services provided to MRBs or owners of real estate and equipment leased or sold to MRBs.¹⁸ The SAFE Banking Act would also protect employees, officers and directors of financial institutions from potential criminal liability based solely on providing financial services to or investing income from providing such services to MRBs.¹⁹ Finally, the SAFE Banking Act would direct FinCEN to issue written guidance for financial institutions serving MRBs, and mandate that such guidance "not significantly inhibit the provision of financial services" to MRBs.²⁰

It's been an eventful week for the marijuana industry. After years of false starts, New York legalized the use of recreational marijuana on March 31-just hours later, New Mexico legislators passed a bill to do the same.¹ Meanwhile, Mexico is expected to legalize recreational marijuana later this month and, with a population of 120 million, is poised to become the biggest marijuana market in the world.² If Mexico's bill is enacted into law, Mexico would become the third country after Uruguay and Canada to legalize marijuana nationally. With these developments, many are asking: Is marijuana legalization at the federal level on the horizon?

Amid growing public support, momentum at the state level, and the shift of power in Washington, the prospects for marijuana reform legislation are as elevated as they have ever been. Last year, public support for legalization of marijuana in the United States hit a record 68%,³ and voters in Arizona, Montana, New Jersey and South Dakota approved ballot initiatives to legalize the cultivation, use and distribution of marijuana.⁴ In total, 47 states and the District of Columbia have legalized some form of marijuana use.⁵ Sixteen states have legalized recreational marijuana, while 36 states and the District of Columbia have legalized medical marijuana.⁶ With US marijuana sales hitting $18.3 billion last year-a 71% increase in revenue over 2019-several more states are looking to marijuana legalization to increase revenue.⁷ In recent weeks, governors in Pennsylvania⁸ and Wisconsin⁹ have renewed calls or introduced proposals to legalize adult recreational use of marijuana, in part to raise revenue to fill COVID-19-related budget holes.

However, it remains unclear whether Congress and President Biden will enact legislation that would legalize marijuana at the federal level, given the razor-thin margins in the Senate, other pressing legislative priorities, and uncertainty as to whether congressional leaders and the Biden Administration want to expend political capital to push for full legalization. Legalization in Mexico is likely to add further momentum to the US legalization movement, but marijuana reform in the United States appears likely to take a more moderate approach. Below, we analyze the primary risks from engaging in business with US marijuana-related businesses (MRBs) and the potential legislative and other reforms that could alter those risks.

I. The Federal Legal Landscape

Notwithstanding the proliferation of marijuana-related commerce in states across the country, the manufacture, sale and distribution of marijuana remain prohibited under the federal Controlled Substances Act (CSA). MRBs are generally operating in violation of federal law, even in states where recreational or medical marijuana sales are legal.

As a result, engaging in business with MRBs carries two primary risks: First, depending on the specific facts and circumstances, engaging in business with an MRB could expose a company to risk of aiding and abetting or conspiring to commit a violation of federal narcotics law.¹⁰ Second, funds received from an MRB could expose a company to risk of violating the US money laundering laws. Federal money laundering laws criminalize conducting or engaging in a financial transaction with proceeds of "specified unlawful activity." See 18 U.S.C. §§ 1956, 1957. Because proceeds from the manufacture, sale or distribution of marijuana are considered proceeds of "specific unlawful activity" in the money laundering context, a company could violate US money laundering laws by engaging in a financial transaction with an MRB with the knowledge that the transaction involved proceeds of marijuana sales and with the intent to promote the unlawful activity. If the transaction is in an amount greater than $10,000, the risk is higher, because the government need not prove intent to promote unlawful activity. See 18 U.S.C. § 1957. In such cases, the government would only need to establish that a company knowingly engaged in a monetary transaction involving more than $10,000 in funds derived from specified unlawful activity.¹¹

II. Predictions on Marijuana Reform Legislation

The prospect of major reform of federal marijuana laws remains uncertain as a closely divided Congress and new Biden Administration work to address numerous competing crises. While there is currently no federal marijuana legalization bill that has been introduced in either chamber of Congress, leading congressional Democrats have announced their intent to introduce "comprehensive cannabis reform legislation" in "the early part of this year."¹² In the last session of Congress, the House of Representatives passed two marijuana reform bills that could significantly alter the risks of doing business with MRBs: (1) the Secure and Fair Enforcement (SAFE) Banking Act and (2) the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. And in late January, Representative Greg Steube (R-FL) introduced the first marijuana reform bill of 2021-the Marijuana 1-to-3 Act of 2021. The SAFE Banking Act and the MORE Act appear to be the two most likely paths to marijuana reform legislation, though other bills, such as the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, may also receive renewed support.

A. SAFE Banking Act

Many financial institutions refrain from providing banking services to marijuana businesses given the risk of violating the US narcotics or money laundering laws. As a result, many MRBs operate on a cash-only basis or pay exorbitant fees to maintain bank accounts with state-chartered banks. In response to increasing public support for decriminalization/legalization of marijuana and the marijuana industry's chronic lack of access to banking and financial services, several members of Congress have supported legislation to create safe harbors for financial institutions that provide banking services to the marijuana industry.

On September 25, 2019, the House of Representatives passed the SAFE Banking Act with broad bipartisan support, garnering votes from 229 Democrats, 91 Republicans and one Independent. In total, 321 representatives supported the bill compared with 103 who opposed its passage. The SAFE Banking Act was reintroduced on March 18, 2021.¹³ While dozens of advocacy and industry groups, such as the American Bankers Association, quickly expressed their support for the bill, many of these groups also supported the 2019 version of the law.¹⁴ To date, there is no indication that senators who did not support the bill in 2019 will change their position and support the current version of the bill.

The SAFE Banking Act was designed to increase public safety by providing "cannabis-related legitimate businesses"-i.e., state-licensed MRBs-with access to financial services and by reducing the amount of cash held by such businesses.¹⁵ The proposed law would create several protections for financial institutions that serve MRBs. First, the SAFE Banking Act would create a safe harbor for financial institutions by directing federal banking regulators not to "prohibit, penalize, or otherwise discourage a depository institution from providing financial services to a cannabisrelated legitimate business or service provider."¹⁶ It would also forbid bank regulators from terminating or limiting deposit insurance for financial institutions solely for providing services to MRBs,¹⁷ and protect financial institutions from "criminal, civil and administrative forfeiture" of any collateral interest in financial products or services provided to MRBs or owners of real estate and equipment leased or sold to MRBs.¹⁸ The SAFE Banking Act would also protect employees, officers and directors of financial institutions from potential criminal liability based solely on providing financial services to or investing income from providing such services to MRBs.¹⁹ Finally, the SAFE Banking Act would direct FinCEN to issue written guidance for financial institutions serving MRBs, and mandate that such guidance "not significantly inhibit the provision of financial services" to MRBs.²⁰

Footnotes

1 New Mexico set to legalize marijuana as New York ends its pot prohibition., Washington Post (April 1, 2021).

2 Mexico Set to Legalize Marijuana, Becoming World's Largest Market., N.Y. TIMES (March 10, 2021).

3 Support for Legal Marijuana Inches Up to New High of 68%., GALLUP (Nov. 9, 2020).

4 State Medical Marijuana Laws., NATIONAL CONFERENCE OF STATE LEGISLATURES (Jan. 11, 2021).

5 State Medical Marijuana Laws., NATIONAL CONFERENCE OF STATE LEGISLATURES (Jan. 11, 2021).

6 Only Nebraska, Idaho and Kansas continue to criminalize any use of marijuana. See State Medical Marijuana Laws, NATIONAL CONFERENCE OF STATE LEGISLATUREs (Jan. 11, 2021).

7 Marijuana sales data reveal Americans bought 71% more weed to survive 2020, LEAFLY (Nov. 9, 2020).

8 Pennsylvania Gov. Tom Wolf Wants To See State Start Process To Legalize Adult-Use Of Marijuana In 2021, CBS PHILLY/ASSOCIATED PRESS (Feb. 17, 2021).

9 Gov. Tony Evers proposes legalization of recreational marijuana in his 2021-23 biennial budget, WISCONSIN STATE JOURNAL (Feb. 8, 2021).

10 To aid and abet a violation of the CSA, a person or organization must "take[] an affirmative act in furtherance of that offense," with the "intent of facilitating the offense's commission." Rosemond v. United States, 572 U.S. 65, 71 (2014).

11 For a more detailed overview of US narcotics and money laundering law and analysis of the risks in providing financial products and services to MRBs, see Michelle Nicole Diamond, et al., Developments in the Marijuana Industry and the Implications for Financial Institutions, WilmerHale (Feb. 7, 2019).

12 Press Release, Booker, Wyden, Schumer Joint Statement on Cannabis Reform Legislation (Feb. 1, 2021).

13 Press Release, SAFE Banking Act Reintroduced as Momentum for Cannabis Reform Continues to Grow (March 18, 2021).

14 Financial Group Throws Support Behind New Pot Banking Bill, LAW360 (March 17, 2021).

15 H.R. 1595, Secure And Fair Enforcement Banking Act of 2019, § 1(b).

16 H.R. 1595, Secure And Fair Enforcement Banking Act of 2019, § 2(b).

17 H.R. 1595, Secure And Fair Enforcement Banking Act of 2019, § 2(a).

18 H.R. 1595, Secure And Fair Enforcement Banking Act of 2019, § 4(d).

19 H.R. 1595, Secure And Fair Enforcement Banking Act of 2019, § 4(d).

20 H.R. 1595, Secure And Fair Enforcement Banking Act of 2019, § 6

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