SAFE vs SAFER – What Financial Institutions Need to Know
SAFE Banking Act vs. SAFER Banking Act - what's the difference?
As one might guess from the name, the “Secure And Fair Enforcement Regulation Banking Act,” also known as the “SAFER Banking Act” is an enhanced version of the SAFE Banking Act introduced by Senator Jeff Merkley (D-OR) in September 2023. Meant to address some of the shortcomings identified in its predecessor(s), this is one of the few examples I can think of in the history of Congress where a “second draft” truly improves on the original. It’s clear that whoever wrote SAFER sought input from the cannabis banking industry and cannabis industry stakeholders and SAFER is far more robust than SAFE. The fact that there are 16 sections in SAFER and only 14 in SAFE may not sound like a big difference but financial institutions need to be aware of how some of the adjusted language could affect their operations.
Who’s Covered
Firstly, what would qualify as a covered financial institution has been broadly expanded. Originally SAFE had forfeiture protections for “Depository Institutions” and “Federal Reserve Banks and Federal Home Loan Banks,” but SAFER expands that to also include “Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, and Federal Agencies Making, Insuring, or Guaranteeing Mortgage Loans or Securities” as well as “Other Parties to Mortgage Loans,” i.e. a non-depository lender.
SARs
While largely overlooked in SAFE, SAFER would require FinCEN to revisit their 2014 guidance (BSA Expectations Regarding Marijuana-Related Businesses) regarding SARs.
“Not later than the end of the 180-day 1-year period beginning on the date of enactment of the Secure And Fair Enforcement Regulation Banking Act, the Secretary shall amend the February 14, 2014, guidance titled ‘BSA Expectations Regarding Marijuana-Related Businesses’ (FIN–2014–G001) or issue new guidance to ensure consistency with the purpose and intent of the Secure And Fair Enforcement Regulation Banking Act, and the amendments made by that Act, and that such guidance ensures that a financial institution, and any director, officer, employee, or agent of a financial institution, continues to report suspicious transactions pursuant to this subsection, as applicable, relating to State-sanctioned marijuana businesses and service providers to preserve the ability of the Financial Crimes Enforcement Network to prevent and combat illicit activity.”
One may recall that following the legalization of hemp in 2018, guidance was issued in 2020 that made it clear that financial institutions were no longer required to file marijuana-specific SARs on hemp businesses because they were no longer engaged in federally-prohibited activity. This was a huge relief to compliance officers everywhere as fulfilling quarterly filing requirements can be incredibly time-consuming. Additionally, there is still a lack of consensus on exactly what kind of cannabis-related businesses a financial institution needs to file on, with some disagreement on whether non-plant-touching businesses (Indirects, dispensary employees, etc) are covered entities.
The reconsideration and reassessment of this compliance requirement could significantly mitigate the burden of marijuana-specific SAR filing post SAFER.
Uniform Exam Guidelines
Another way that SAFE and SAFER seek to bring consistency to cannabis banking is by calling on the FFIEC to issue exam guides for cannabis banking programs. With this, bankers can confidently build programs that they know will meet their examiners’ expectations. While Section 7 in SAFE gives the FFIEC 180 days max to issue “uniform guidance and exam procedures for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers” SAFER extends this deadline to a year, which seems a more realistic timeframe considering the endless delays we’ve seen with rolling out FinCEN’s national beneficial ownership database.
Legacy Funds
SAFER addresses legacy deposits directly; an aspect of cannabis banking largely overlooked in SAFE. This refers to funds collected by a cannabis business before their relationship with an FI begins. ALL FIs need to come up with a position on whether or not to accept these, and under what circumstances, so it’s valuable to have that specifically called out in SAFER.
Hemp and Guilt by Association
SAFER acknowledges the challenges of hemp banking. This can surprise people because hemp is federally legal so logically those businesses would be treated like any other, but it’s an industry that suffers guilt by association with its federally prohibited cousin “marihuana”. This is particularly challenging in agricultural lending and crop insurance. Just as SAFER would require FinCEN to revisit the 2014 guidance on marijuana it would also require them to revisit the 2020 guidance on hemp that notably removed the MJ Limited SAR requirements and lowered the bar for onboarding due diligence.
Mortgage Accessibility
Section 9 of SAFER, “Treatment of Income from a State-Sanctioned Marijuana Business for Qualification for a Covered Mortgage Loan,” addresses the issues that those associated (directly and indirectly) with the cannabis industry have accessing mortgage loans. As an extension of the protections for lenders, this is by proxy a protection for employees of cannabis businesses. Their income “shall be considered in the same manner as any other legal income for purposes of determining eligibility for a covered mortgage loan.”
Moving from Opt-in to Opt-Out
Section 10, “Requirements for Deposit Accounts” is where things get controversial. This is where we see the move from “opt-in” to “opt-out” where financial institutions are involved. SAFER lays out that federal regulatory agencies are required to ensure that their supervised financial institutions are “operating in a safe and sound manner” but that they cannot use that as a blanket excuse to stand in the way of a financial institution banking a federally-controlled substance. The duty to ensure safety and soundness “rests on laws and regulations, not on personal beliefs or political motivations” and “undue pressure and coercion designed to restrict access to financial services for lawful businesses have no place at any appropriate Federal banking agency”. Section 13 in SAFE has a much more stripped down version of this, essentially saying that a banking regulator cannot ask a financial institution to stay out of cannabis “solely [based] on reputation risk”. Which, by the way, we know isn’t really an issue in the same way it might have been just a couple of years ago. After all, the title of a Pew Research study from 2022 says it all: “Americans overwhelmingly say marijuana should be legal for medical or recreational use.”
Conclusion
When looking at SAFE and SAFER side by side, it’s clear that the latter has far more “teeth” than the former. The changes to SAFER, while controversial in places, directly address some of the concerns and frustrations we at Green Check have heard from our partner financial institutions. It’s a worthy successor to SAFE and ultimately will be far more useful in enforcing consistency across programs, regulatory agencies, examiners, and auditors. Hopefully this would encourage those that have yet to embrace the industry for fear of a lack of clarity to reach out to those marijuana businesses in their community that need their support.
