Federal law still treats marijuana as an illegal drug, creating headaches for states

Most states in the U.S. are in violation of a major federal drug statute.

The 1971 Controlled Substances Act lists marijuana in the most dangerous category defined in the law, on par with cocaine and heroin because of its supposed potential for abuse and lack of medical applications.

But 36 states plus the District of Columbia allow either full legalization for adult use or wide scale medical use, putting them at odds with federal law. Congress so far has been unable to come up with a solution, despite support from leading Democrats for a smoother relationship between the states and the federal government.

State acceptance happened quickly, with Colorado and Washington the first to legalize adult use less than 10 years ago.  By the first of the year, marijuana possession will be legal for all adults in 18 states — including Arizona, Colorado, Maine, Michigan, Montana, Nevada, New Jersey, New Mexico, Oregon and Virginia –— that make up 44 percent of the national population.

That number has recently been growing: The governors of New Mexico and Virginia signed their legalization laws just this year. Montana’s, enacted through a ballot measure in 2020, will go into effect New Year’s Day.

The disconnect between a federal ban and increasing state liberalization has not stopped the marijuana industry from blossoming where it is legal. Since Colorado and Washington’s moves in December 2012, the federal government has largely stayed away from enforcing federal law in states where the drug is legal.

But the policy gap widens as more states join in legalization, touching on everything from banking to tribal jurisdiction.

“While the federal prohibition of cannabis clearly is not preventing states and territories from enacting cannabis legalization laws, federal prohibition is still creating a number of hurdles for states, for businesses and for consumers,” said JM Pedini, the development director of the advocacy group National Organization for the Reform of Marijuana Laws, or NORML, and the executive director of the group’s Virginia chapter.

Banking

Among the most obvious problems — and the lowest-hanging fruit for legalization advocates — concerns banking.

Marijuana businesses, and some that sell related goods, are denied credit, small business loans and even checking accounts.

That’s because banks fear federal authorities may prosecute them for working with businesses that technically fit the federal definition of drug traffickers, said Mason Tvert, a communications adviser with the Denver-based cannabis specialty law firm Vicente Sederberg, and partner with the firm’s separate public policy office, VS Strategies.

“A lot of financial institutions will look at the law and determine that it’s not worth the risk because cannabis is illegal at the federal level,” he said. “They worry there is a potential risk of running afoul of federal money laundering and drug trafficking charges.”

Banks and insurers that do work with marijuana businesses often add a major markup for their services, Tvert added.

Nick Kovacevich, the CEO of Greenlane Holdings, said that affects even businesses like his, which sells marijuana-related products but doesn’t cultivate or sell the plant itself.

A proposal in Congress to allow banks to do business with state-legal marijuana sellers would provide assurances to the banking industry, advocates say.

The bill, known as the SAFE Banking Act, passed the House this year as part of the annual defense authorization bill but was removed in the Senate. It would go a long way in promoting mainstream business acceptance of the marijuana industry, Kovacevich said.

“It’s a risk-reward thing,” he said. “A lot more banks say, ‘OK, now I’m comfortable,’ and I think the risk-reward profile changes for them dramatically.”

Dropped from defense bill

The banking bill, first introduced in the Senate in 2017 by a bipartisan group, advanced in previous Congresses, but advocates were hopeful the new Democratic Senate would pass it this year.

“There were very high hopes it would be included in the national defense bill,” Tvert said. “But ultimately it was not included.”

Kovacevich, Tvert and others blame Democratic allies for blocking the bill in the Senate.

Sen. Cory Booker of New Jersey and Majority Leader Chuck Schumer of New York released their own draft legislation with Oregon’s Ron Wyden this year to lift the federal prohibition, expunge criminal records for those convicted of marijuana offenses and create an investment fund for communities harmed by the decades-long war on drugs.

In a July news conference, Schumer said the banking bill was too narrow and that a more comprehensive solution was needed, especially for minority communities that have been harmed by federal prohibition.

“Communities of color have paid such an awful price for the historical over-criminalization of marijuana that we want to make sure that that money goes back to them, and doesn’t just get the biggest, strongest banker to just scoop it all,” he said, according to a transcript provided by his office.

Asked about Booker’s position on the banking bill, a spokesman provided a statement.

“Although the SAFE Banking Act is common-sense policy that I support, it has to be coupled with strong restorative justice provisions that seek to right the many injustices experienced by Black and brown communities as part of our nation’s failed war on drugs,” Booker said in the statement.

“To that end, I have worked with Majority Leader Schumer and Senator Wyden to propose … comprehensive legislation that would reverse decades of unfair, unjust and discriminatory drug policy.”

Representatives for Schumer did not immediately respond.

It’s unclear where the legislation stands heading into 2022.

The Schumer-Booker-Wyden bill remains only a discussion draft and hasn’t been formally introduced, though The Hill reported this month that Schumer may bring his bill up for a floor vote this spring.

A large number of Republicans are unlikely to support full legalization, at least in part because their Senate leader, Kentucky’s Mitch McConnell, strongly opposes it, said Justin Strekal, the political director for NORML.  

At the July availability, Schumer said he would work on senators to support the larger bill and pledged to “get something done.”

“This is a very comprehensive bill,” he said. “We’re going to now go to our colleagues and ask explicitly to all of them: what don’t you support here? What can you support here? We’re going to get something done.”

Tribal rights and interstate sales

Though banking reform is the major focus in Congress, the federal prohibition also complicates state legalization in other ways — for example, in states like Montana and New Mexico with substantial Native American populations and reservations.

Federal authorities with the Bureau of Indian Affairs have jurisdiction on tribal lands, which means they could potentially enforce federal drug laws there, even within the borders of states where it would otherwise be legal.

Such was the case in a September raid on tribal land in New Mexico — after the state’s legalization law went into effect.

Citing the New Mexico raid, Montana state Sen. Shane Morigeau, a Democrat and member of the Confederated Salish and Kootenai Tribes of the Flathead Nation, said in an interview that tribes don’t enjoy even the level of certainty afforded to states that federal authorities will allow them to conduct their own regulation of marijuana.

Morigeau championed a provision that was included in Montana’s marijuana law to give the state’s eight tribes a unique opportunity to gain licenses to both cultivate and sell marijuana products to consumers.

Morigeau, who highlighted the potential for revenue from legalized marijuana, said the provision was an attempt to involve tribes, which he said were generally “at the bottom of every social indicator,” in the new revenue stream.

“The state of Montana, they can sleep a little easier at night because of this memo saying we’re going to be hands off with you guys,” he said, referencing U.S. Justice Department guidance to leave state-legal activity alone. “That just doesn’t exist for the tribes… For us, it was really pretty straightforward: These are areas in the state that could benefit from revenue.”

The federal ban also means product grown in one state can’t be shipped to another, even in neighboring states where both have a legal program, like Oregon and Washington, for example.

That can be good for growers in states with relatively small marijuana cultivation industries.

But in Oregon, a relatively fertile ground for marijuana farming, with a relatively small population, growers are overproducing and driving prices down.

Montana may have the opposite problem, Morigeau said. With limited growers and a prohibition to go outside the state’s borders for supply, there could be a shortage after legal sales begin Jan. 1, he said.

Virginia’s ‘quagmire’

Not every complaint about a state marijuana program is the product of federal policy.

Plenty of states have shown how to operate successful programs, Virginia Delegate Glenn Davis, a Republican who is unhappy with Democratic leaders’ rollout of the state’s marijuana policy, said.

Virginia should have looked to programs in Colorado and elsewhere, he said. Instead, when the commonwealth legalized possession of marijuana this year, the legislation didn’t create a legal market until 2024. That means marijuana is legal to possess and even use, but not to buy or sell for three years.

Davis called the situation a “quagmire.”

“Obviously, there are some challenges because of the feds,” he said. “But the quagmire that the Democrats created wasn’t because of the federal government.”

Still, the various complications with states’ marijuana programs caused by the federal ban has frustrated those who want to see the industry treated like any other endorsed by any particular state.

“Given the trajectory of public support and the growing number of states that have adopted these laws and the extent to which this debate has progressed, the industry clearly seems here to stay,” Tvert said. “But it needs to be protected and it needs to be treated like a legal business.”