How SAFER Banking Act poses new dangers to marijuana and other legal industries

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Marijuana has been in the news lately, and the news seems to be overwhelmingly favorable to the industry in terms of reducing uncertainty as to its legal status.

The Drug Enforcement Administration (DEA) will likely soon be taking the long-awaited step of stripping marijuana of its current status as a Schedule I drug – the DEA’s most severe category of danger for a narcotic that effectively bans the substance under federal law. And on Capitol Hill, there is talk of inserting into an upcoming spending bill the SAFER Banking Act – the latest version of legislation intended to clarify that banks and credit unions are not in violation of federal laws when they provide financial services to marijuana-related businesses operating in states that treat the substance as legal.

Libertarians should applaud any policy moves that reduce government paternalism and criminalization of individual choices. Yet toxic provisions inserted into the SAFER Banking Act last fall could enable a new type of backdoor paternalism and criminalization. If these provisions go into effect, they will make it easier for financial regulators to pressure banks to cut ties to industries unpopular with certain members of the political class. The immediate effects could lead to debanking of industries on the outs with the Biden administration, such as oil and cryptocurrency. But a future anti-marijuana administration could very well utilize these provisions to punish the marijuana industry once again in new ways.

CEI has long taken a position against banking regulation being utilized to punish legal industries, or in the case of marijuana, industries that are operating in certain states in accordance with the laws of those states. As I testified before the House Financial Services Committee in 2021, “CEI believes that the federal government should neither discourage nor encourage banks and credit unions in dealing with legal industries, whether marijuana, guns, or oil and gas.” This type of “financial exclusion,” as I called it, results in “harmful consequences to the workers and consumers in the industry’s orbit.”

We have supported both broad and piecemeal reforms to reverse or lessen this state-sanctioned financial exclusion. CEI enthusiastically supported the bipartisan SAFE Banking Act – the predecessor to the SAFER Banking Act – to prevent the federal government from punishing banks and credit unions that service marijuana business operating in states that treat the substance as legal. With equal enthusiasm, we backed Rep. Blaine Luetkemeyer’s (R-MO) Financial Institution Customer Protection Act, which prevented regulators from pressuring banks and credit unions to cut ties with industries due to “reputational risk,” as happened in the Obama administration’s “Operation Choke Point.”

So we were very happy when in 2019 – at our urging and that of others – the bills were essentially merged in the final version of the SAFE Banking Act that passed the House.  We felt that the bills belonged together, as both measures overturned government-backed financial exclusion. Adding Luetkemeyer’s provisions also brought many more Republicans onboard in support. The SAFE Banking Act, with Luetkemeyer’s anti-Choke Point legislation attached, has been reintroduced in subsequent Congress sessions with dozens of co-sponsors from both parties.

Yet in September 2023, the Senate Banking Committee passed a version of the law – renaming it the SAFER Banking Act — that essentially gutted the “reputational risk” provisions that were added from Luetkemeyer’s bill. The committee changed the language banning the use of “reputational risk” as a reason “to request or require” financial institutions to terminate a specific deposit account or groups. The new open-ended language – inserted mostly at the behest of Sen. Jack Reed (D-RI) – allows regulators to make this request or requirement for financial institutions unless “reputational risk is the dipositive factor” and “there is a valid reason for that request or requirement.” As if this language were not loose enough in stating what regulators could do, the revised bill later defines “valid reason” as basically any “reason, determined to be valid in the discretion of the agency, for making that request or imposing that requirement.”

When the revised bill passed the Senate Banking Committee, Luetkemeyer declared that “as it’s currently written, it is dead on arrival in the House.”  Mercatus Center scholar Brian Knight wrote that the new bill would be “worse than the status quo.”

Knight and Luetkemeyer are correct in their opposition and their reasoning. On reputational risk, the new bill would indeed be worse than the status quo, because federal statutes do not currently say anything about “reputational risk.” That meant the Obama administration regulators were clearly acting outside the law – in “dark matter” as Wayne Crews has phrased it – in promulgating Operation Choke Point and were vulnerable to court challenges.

But the new bill would explicitly allow regulators to police reputational risk in the banking system. Yet if this bill passed as is, the next Choke Point 2.0 could very well be operating under color of the law and thus be less vulnerable to court challenges. And ironically, the new language could hurt the original premise of the SAFE Banking Act, as a future administration could go after banks and credit unions for dealing with marijuana businesses if the regulators have a self-defined “valid reason” for doing so.

With these provisions, the SAFER Banking Act could authorize Operation Choke Point 3.0 – a fully legal and sanctioned crusade by banking regulators against any industry they choose, without fear of being stopped by the courts. The legislation would be an enabling act for the worst excesses of the administrative state. For these reasons, the SAFER Banking Act should not be passed until the House’s restrictions on reputational risk are restored, or the legislation once again becomes a stand-alone bill without any sections on reputational risk.

We will have more to say about the details of the DEA’s marijuana reclassification as it proceeds. We have previously criticized the DEA’s affixing marijuana as a Schedule I drug and asked for a less restrictive classification.