Pot and Pollution: The Feds Versus the States

By DirectorCorps

September 10, 2019 All Industries Regulatory

The federal government and the states just can’t seem to agree these days.

There’s the issue of marijuana. It’s an illegal drug at the federal level, deemed unfit even for medical uses. But 11 states and the District of Columbia have elected to legalize it for recreational use; even more states have legalized it for medical use. There’s also the issue of the environment. President Donald Trump’s administration is fighting legal battles with states over environmental laws.

Companies must navigate a tricky landscape that involves federal laws at one level and state regulations on another. In some instances, such as the proliferation of marijuana legalization across the states, the landscape can leave businesses trying to comply with conflicting laws caught in a smoke-filled haze. In other instances, the federal government is actively fighting states, leaving the companies they regulate caught in the middle.

For Ed Wilson, Jr., a partner in Venable’s Washington office, the tension calls to mind an African proverb: “When elephants fight, it’s the grass that suffers.”

States and the federal government have been fighting about the issue of states’ rights since the nation’s founding. Anti-federalists opposed the ratification of the U.S. Constitution, on the grounds that it gave too much power to the federal government. These days, the fights are just as epic.

Recently, the Environmental Protection Agency proposed changing Clean Water Act regulations to streamline the approval process for pipelines and other major infrastructure projects, as well as bolstering federal authority against states that previously blocked pipelines. The Department of Justice sued California last year to stop the state’s net neutrality law, which would prohibit companies such as AT&T and Comcast Corp. from blocking or slowing down certain internet traffic. The Trump administration also proposed a rule challenging the right of the states to set their own pollution standards, rolling back fuel efficiency mandates for cars that were established during President Barack Obama’s term. That put the federal government on another collision course with California, which has succeeded in nailing down agreements to improve efficiency from Honda Motors Co., Ford Motor Co., Volkswagen and BMW, according to The New York Times. The concern is that the conflict could encase efficiency standards in a legal quagmire for years, making it hard for manufacturers to plan ahead.

The pot problem is another sticky issue for companies operating in states where marijuana is legal. “From an industry perspective, it’s maddening,” says Christopher Allen, a partner with Arnold & Porter in Washington.

What if you’re a landlord who wants to rent to a marijuana dispensary? What if you’re a bank who wants to provide banking services to cannabis companies? What if you’re a cleaning company that wants to service a marijuana warehouse as a client? Are you aiding and abetting a criminal enterprise?

These questions sound ludicrous, but they’re very serious and one of the reasons why so many large banks and major credit cards companies want nothing to do with marijuana businesses. This can create an unsafe situation for marijuana businesses that store piles of cash and employ delivery personnel with backpacks filled with cash, Wilson says.

When it comes to marijuana, the federal government has so far decided to stay on the sidelines. The Financial Crimes Enforcement Network issued guidance in 2014 that clarifies how financial institutions can service marijuana-related businesses, making careful monitoring of one’s clients key, Wilson says. Those clients have to be in compliance with local laws.

So far, there are two Congressional bills aimed at resolving the problem of the federal government versus the states, Allen says. The so-called SAFE Banking Act was introduced in both the U.S. House of Representatives and U.S. Senate earlier in 2019 to create a safe harbor for banks who provide financial services to legal marijuana businesses. The States Act, introduced by Senators Elizabeth Warren, D-Mass., and Cory Gardner, R-Colo., amends the Controlled Substances Act so it no longer applies to individuals complying with state marijuana laws. Although there is widespread support for such measures, there’s no telling if either will get passed in 2019.

Outside of those bills, Congress hasn’t done a whole lot so far when it comes to marijuana. Banking regulators won’t instruct firms to bank marijuana businesses, but they can’t offer safe harbors, either.

Wilson says when there’s a disagreement between a state and federal regulatory agency, it’s best to go to the regulators and explain the problem. Sometimes, the regulators may back down. If that doesn’t work, try contacting your Congressman or governor for help. In this case, the grass can only hope the elephants stop fighting.