High Hopes, Higher Hurdles for Pro-Cannabis SAFE Banking Act

By | October 3, 2019

Regardless of the odds facing a bill designed to enable regular banking and financial services for cannabis business, some experts are encouraged by passage through the House of something that would greatly benefit the insurance and cannabis industries.

The U.S. House of Representatives in late September voted 321-103 to pass the Secure and Fair Enforcement Banking Act, H.R. 1595. The vote on the SAFE Banking Act wasn’t entirely partisan, with 91 Republicans joining 230 Democrats, but it was enough to give some analysts hope that it sets the stage for likely passage in the Senate.

The bill is one of a few pieces of legislation that could benefit those in the insurance industry selling or wishing to get into the business of selling insurance to cannabis businesses. Another is the Clarifying Law Around Insurance of Marijuana Act. The CLAIM Act passed the House and is making gits way through the Senate. It’s now in the Senate Committee on Banking, Housing and Urban Affairs.

The SAFE Act is being closely followed by the entire financial industry, including those in insurance. Its passage through the House drew recent praise from the Independent Insurance Agents & Brokers of America.

The Big I issued a statement following passage that the bill would help protect agents and brokers who write insurance coverage for legitimate cannabis-related businesses from criminal prosecution and civil liability.

“The Big ‘I’ applauds the House of Representatives for passing the SAFE Banking Act and taking the steps necessary to protect agents and brokers,” Charles Symington, Big “I” senior vice president of external, industry and government affairs, said in a statement.

The cultivation, possession and distribution of marijuana are illegal under current federal law, despite 33 states permitting medical marijuana use in some capacity, and several states now allowing the recreational sale and use of marijuana.

The SAFE Banking Act would prevent a federal banking regulator from terminating or limiting the deposit insurance or share insurance of a depository institution, or from taking any other adverse action against a depository institution solely because it provides financial services to a cannabis-related business.

Until something like the SAFE Banking Act passes, many cannabis businesses must deal with large amounts of cash.

Dan Gardenswartz is chief financial officer of Spherex, a large producer of cannabis oil for vaporizer cartridges.

He’s been eagerly following the news on the SAFE Banking Act.

Spherex is based in Colorado, where it has built out operations since 2014, and it has recently gone into California, and has plans for a push into Canada next year.

Despite being a well-established business, Spherex is forced to use a credit union in lieu of a bank, and Gardenswartz counts the business as one of the fortunate ones to be able to at least do that.

“They have provided what I would call bank-like services to us,” Gardenswartz said.

The company can accept and write checks, make deposits, deal in cash at dispensaries, and can transact electronically. Many cannabis operators have access to none of those advantages.

However, Gardenswartz believes the company’s financial services options are limited, and that access to banking services would bring more investment into the sector.

“It’s given us a lot more flexibility, but ideally, we would like to deal with a bank,” he said. “We believe that it opens up opportunity for other types of investors to get into the market, more sophisticated investors, more institutional investors.”

Spherex doesn’t need capital at present, but with the five-year old operation expanding out of Colorado and into international territory, there will eventually be a benefit from having access to a large investment pool.

“Right now, our capital position is pretty strong,” he said. “But it’s something we have on our radar screen, certainly for 2020.”

Stanley Jutkowitz, a senior counsel in the Washington, D.C., office of the law firm Seyfarth Shaw, doesn’t think the bill has a great chance.

But he believes that at some point, politicians will see that it is a better alternative to give cannabis companies access to regular banking than having none.

Considering the industry is expected to grow exponentially – recent estimates have the cannabis market in North America reaching $47.3 billion by 2024 – forcing these companies to do business with large amounts of cash seems almost silly, and certainly reckless, according to him.

“Thinking of an industry that large being conducted in $100 bills is really hard to grasp,” Jutkowitz said. “Put aside what think of other issues, the fact is the industry is here, it’s maturing, and attracting billions of dollars and becoming global industry. Is it better to have them banked, or unbanked?”

Jodi S. Green is a partner at Nicolaides Fink Thorpe Michaelides Sullivan LLP. Her insurance company clients have increasingly expressed interest in the cannabis business.

Green doesn’t have high hopes for the bill’s chances, especially not right now with the Presidential impeachment debate raging in the House, putting the Senate on high alert.

“Anything else may unfortunately fall by the wayside,” Green said. “I don’t’ know if we would see any movement on this before next year.”

Green has been closely monitoring the SAFE Act and the Claims Act to keep her clients advised.

“Many of my clients, they’re interested,” Green said.

While those clients aren’t writing cannabis insurance, they are interested in what other carriers are doing in the cannabis space, which is currently served by about 30 U.S. carriers, mostly surplus lines.

The loss history on cannabis businesses, or lack of it, is one of the biggest reasons her clients remain on the sidelines, she said.

Having large amounts of cash, which can prove tempting to criminals, is a big risk that carriers don’t like, she added.

“The biggest losses that insurance companies have seen, based on the people I have spoken with, are property losses associated with theft,” Green said.

Jutkowitz also believes the bill doesn’t have great chances in the Senate, largely due to Majority Leader Mitch McConnell’s strong stance against marijuana.

“There’s still a lot of hard work to do to get it through the Senate,” he said. “I don’t think the chances of it passing the senate are that great. I don’t think (McConnell’s) going to be too eager to provide any sort of benefit to marijuana. I think it’s going to have a tough time.”

Gardenswartz, on the other hand, believes the legislation may have a chance.

“If you look at percentages, I’ve heard numbers like 20 to 50 percent that it’s going to pass before the election in the Senate,” Gardenswartz said. “From our perspective as a dynamic growing industry player, we would love to see some of this legislation pass.”

He has high hopes for the SAFE Banking Act and the CLAIM Act, and believes they would make getting insurance much easier.

Spherex has property insurance, liability and other basic coverages, but the cost are high and the exclusions are numerous.

“There are significant limitations based on our industry,” he said.

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