Despite remaining federally prohibited, almost half of the American population reside in a state where, for those over age 21, marijuana is legal for both medical and recreational use. The consistent wave of states legalizing the substance has garnered much attention, and so has the Department of Justice’s recent proposal to reschedule marijuana from Schedule I to Schedule III. The potential rescheduling has raised many eyebrows and perhaps even more questions, including questions related to its effect on banking.

What We Know
The Controlled Substances Act (CSA) categorizes substances into five schedules, gauging their potential for abuse, medical utility, and risk of harm. As of June 10, 2024, marijuana and derivatives with over a 0.03% THC concentration, maintain the dreaded “Schedule I” status. Substances in this category are deemed “armed and dangerous,” with essentially no redeeming qualities. As such, they face the most stringent controls, garner the longest prison sentences, and lack any recognized medical applications.

Rescheduling marijuana to Schedule III would not instantly legalize it federally or remove it from DEA and FDA oversight. The change, however, could offer advantages to marijuana-related ventures and facilitate sorely needed clinical research. Specifically, moving marijuana from Schedule I to Schedule III would allow state-legal marijuana businesses to deduct ordinary business expenses on federal tax filings. Schedule I drug businesses are not allowed such deductions. Additionally, some criminal penalties for CSA violations would be reduced.

What Financial Institutions Should Know

Whether or not marijuana is rescheduled, Financial Crimes Enforcement Network (FinCEN) guidance, including the Suspicious Activity Report (SAR), Bank Secrecy Act (BSA) and the Secure and Fair Enforcement Regulation Banking Act (SAFER Banking Act) would likely remain unchanged. FinCEN’s guidance addressed the obligations of financial institutions when dealing with marijuana-related financial crimes and outlines how institutions must comply with the BSA. These guidelines remain current and include the obligation to conduct proper “due diligence” and file SARs.

Due Diligence
Due diligence requirements are outlined by the Cole Memorandum (Cole Memo), issued on the same day as the FinCEN guidance. It stated that money laundering statutes, unlicensed money remitter statutes, and the BSA were still applicable to marijuana-related conduct. This would also remain intact. Financial institutions will continue to screen companies and verify whether a company is duly licensed and registered, review the state license application, and request available information about the business and related parties. Financial institutions will also continue monitoring available sources for information about marijuana businesses, monitor for suspicious activity, and periodically refresh information to evaluate the risk.

SARs Filings
Financial institutions must continue to file a “Marijuana Limited” SAR, when they reasonably believe that the activity does not implicate one of the Cole Memo priorities or violate state law. This SAR should include identifying information of the subject and related parties, such as addresses, and state that the filing institution is submitting the SAR solely because the subject is engaged in a marijuana-related business, with no additional suspicious activity identified.

Importantly, if a financial institution detects that one of the Cole Memo priorities or state law is violated, it should file a “Marijuana Priority” SAR. This SAR should include details particularly relevant to law enforcement like identifying information of the parties, details regarding the priorities it believes have been implicated; identifying information about the specific financial transaction involved in the suspicious activity. If the financial institutional terminates its relationship with a marijuana-related business, it must file a “Marijuana Termination” SAR describing the basis for termination. It is worth noting that SAR filings remain confidential and may not be disclosed except for specified circumstances, and FinCen requires confidentiality of any officer or employee who has knowledge of such a report. Compliance with these steps should continue regardless of whether marijuana is rescheduled. The guidance also provides “red flags” that, if present, would alert a financial institution to conduct further due diligence.

What We Don’t Know

Legal Finalization and Implementation
The proposed rescheduling of marijuana from Schedule I to Schedule III by the DEA is still subject to multiple procedural steps, including a review and public comment period, and final approval from the White House Office of Management and Budget. This process introduces uncertainty regarding the timeline for finalization, and there is no guarantee that the rescheduling will be approved without amendments, if at all. Additionally, any changes resulting from public comments or inter-agency reviews could further delay or alter the final decision.

Impact on Financial Institutions
Rescheduling marijuana to Schedule III could reduce some criminal penalties and allow marijuana businesses to take federal tax deductions under Section 280E of the IRS Code. However, it does not ensure immediate or significant changes in the operational landscape for financial institutions. As explained above, existing requirements under the Bank Secrecy Act (BSA) and FinCEN guidance, which mandate rigorous due diligence and Suspicious Activity Report (SAR) filings, will remain in place unless explicitly revised.

Financial institutions will continue to face challenges in providing services to marijuana-related businesses due to the potential for changes in enforcement priorities and regulatory framework. Additionally, rescheduling will not eliminate the conflict between federal and state laws. Presumably for at least the time being, marijuana will remain illegal under federal law for recreational use, and state-legal activities involving marijuana would still be federally prosecutable at the DOJ’s discretion. Compliance with state laws does not shield institutions from federal legal exposure.

Financial institutions must therefore stay vigilant in monitoring regulatory updates and enforcement actions. The rescheduling could invite increased scrutiny from federal agencies, and institutions should prepare for potential audits and compliance reviews. They must weigh the potential benefits of engaging with marijuana-related businesses against the regulatory and operational risks.

What Is Coming Next?

Regulatory and Legal Adjustments
Should the rescheduling proposal be finalized, further regulatory adjustments are expected. The FDA might impose stricter standards on marijuana products, like those for pharmaceutical drugs. This could increase scrutiny and compliance costs for marijuana businesses. Additionally, the DEA will likely establish new guidelines and regulations for manufacturing, distribution, and prescription of marijuana, which could create new compliance burdens.

Increased Financial and Ancillary Services
The rescheduling could potentially lead to increased involvement from banks, insurers, and other financial service providers. The “safe harbor” provisions in proposed laws like the SAFER Banking Act may further protect these institutions from criminal, civil, and administrative penalties​. While the SAFER Banking Act has not yet passed into law, it represents a significant step toward reducing risk for financial institutions working with marijuana-related businesses. The proposed legislation aims to allow state-legal marijuana businesses access to traditional financial services and reduce the risk for financial institutions, lenders, insurers, and others serving the industry.

Potential Legislative Actions
There may be legislative actions to align other federal laws with the new schedule. This includes potential amendments to the CSA and the Internal Revenue Code to fully integrate marijuana into the legal business landscape​. Lawmakers might also introduce new regulations to address issues such as interstate commerce, advertising, and product safety.

Economic and Market Impact
Rescheduling could attract more investment into the marijuana industry, boosting market growth and development. However, the exact impact will depend on how state and federal regulations evolve and how quickly the financial industry adapts to these changes.

Likelihood of Passage by Election Date
President Biden has expressed support for rescheduling marijuana, viewing it as a step toward a more rational drug policy. However, there are significant challenges. The DEA, which has the final authority to reschedule substances, has shown resistance to this move. Health and Human Services Secretary Xavier Becerra acknowledged while his agency supports the rescheduling based on scientific evidence, the final decision lies with the DEA​​.

The likelihood of the rescheduling proposal passing before the upcoming election is uncertain and heavily influenced by the political climate. Key factors include the current administration’s stance on marijuana policy, public opinion, and the priorities of Congress. Historically, marijuana policy has been a contentious issue, with significant divisions along party lines. However, increasing bipartisan support for marijuana reform, particularly for medical use and financial regulation, may accelerate the process. The upcoming election could serve as a critical juncture, potentially swaying the final decision depending on the electoral outcomes and the composition of the next Congress.

Fox Rothschild summer associates Joanna Scotti  and Wendy Xia  also assisted with this article.