Reclassification of cannabis in the US

DEA’s Marijuana Rescheduling: Implications for Financial Institutions and Compliance

May 20, 2024


Key Takeaways

  • DEA aims to reclassify marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA).
  • This change would acknowledge medical use but not legalize recreational marijuana.
  • Financial institutions' legal risks in serving marijuana businesses would remain essentially unchanged.
  • Further federal actions could arise, continuing to shape marijuana regulation.

Background and Proposal

The Drug Enforcement Administration (DEA) plans to reclassify marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA) based on an August 2023 recommendation from the Department of Health and Human Services (HHS).

Marijuana is currently a Schedule I substance, indicating a high potential for abuse and no accepted medical use.

Schedule III substances have recognized medical use and lower potential for abuse and dependence.

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Impact on Marijuana Policy

As per a report by Debevoise & Plimpton LLP, the reclassification would not legalize recreational marijuana federally. It would allow medical use under conditions regulated by the Food and Drug Administration (FDA) and the DEA, reflecting growing acceptance of marijuana's medical benefits.

Financial Services and Legal Risks

Immediate Impact on Financial Institutions

According to the report, the reclassification is unlikely to significantly change financial institutions' legal risks in serving marijuana-related businesses. Marijuana, for both medical and recreational use, remains a controlled substance under federal law.

Financial institutions could still face legal challenges related to anti-money laundering laws and aiding and abetting violations of the CSA.

Legislative and Regulatory Developments

The rescheduling may lead to further federal actions liberalizing marijuana regulation. However, the conflict between federal and state laws persists, deterring many financial institutions from engaging with marijuana businesses due to potential legal repercussions.

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Implications for Marijuana Businesses

Tax Benefits

The report notes that reclassifying marijuana to Schedule III would allow marijuana businesses to deduct certain expenses on federal tax returns. Currently, Section 280E of the Internal Revenue Code prevents businesses from deducting expenses related to Schedule I and II substances. Reclassification would enable deductions for rent, payroll, and other business expenses.

Compliance Requirements

Medical marijuana businesses would need to comply with FDA and DEA regulatory requirements, ensuring that marijuana products meet specific medical standards. This compliance offers a pathway to legitimizing medical marijuana use under federal oversight.

Timeline and Procedural Considerations

Federal Rulemaking Process

The report states that the DEA's proposal must undergo the federal rulemaking process, including a public comment period following review by the Office of Management and Budget (OMB). This process, which could take several months, allows for public and congressional scrutiny before making a final decision.

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Congressional Action

The report highlighted that Congress could change marijuana's legal status independently of the DEA's actions, including moving marijuana to a different schedule or removing it from the CSA entirely. Some members of Congress advocate for reclassification or legalization, while others oppose such changes.

Why We Care

The DEA's proposal to reclassify marijuana from Schedule I to Schedule III represents a significant shift in U.S. drug policy. This change acknowledges marijuana's medical potential and facilitates further research but does not legalize recreational use at the federal level. Thus, the conflict between state laws permitting marijuana use and federal law will persist.

The immediate impact on financial institutions is minimal. Rescheduling to Schedule III does not eliminate the legal risks associated with providing services to marijuana businesses due to ongoing federal restrictions. Future legislative changes, such as the proposed SAFER Banking Act, are necessary to protect banks serving state-legal marijuana businesses.

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The reclassification would allow marijuana businesses to deduct ordinary expenses under the Internal Revenue Code, reducing financial burdens. The U.S. cannabis industry is expected to generate $40 billion in revenue by 2024, adding $115.2 billion to the economy and supporting over 440,000 full-time jobs.

Public support for marijuana legalization is high, with 70% of Americans in favor. This acceptance is reflected in the 38 states that have legalized medical marijuana and the 24 states permitting recreational use.