The sale of cannabis is illegal under federal law in all 50 states, U.S. territories and U.S. possessions. Yet, as of May 1, 29 states, the District of Columbia, and Guam and Puerto Rico recognized the legality of marijuana in some form (raw or processed) and for some purpose (medicinal or adult-use/recreational). The federal Drug Enforcement Administration (DEA) lists cannabis as a Schedule I Substance, lacking any beneficial or medical value. However, under a federal funding statute, popularly called the Rohrabacher-Farr Amendment, the DEA is barred from prosecuting any person or entity that participates in or operates a medical marijuana program that is legal under state law. This budget limitation functionally extends to every medical marijuana entity that simultaneously participates in a “state-legal” medical and adult-use market (i.e., almost every state-legal adult-use market participant).

“State-Legal” cannabis operations rely on a shifting landscape of regulations and directives issued by federal enforcement agencies. Two memoranda issued in 2013 and 2014 by then Deputy Attorney General James M. Cole (Cole Memo) directed federal prosecutors to refrain from pursuing charges against companies that operated in accordance with state-authorized medical marijuana programs, so long as those state laws and programs advanced federal priorities to prevent distribution to minors, funding of criminal enterprises, transfer of monies to states where cannabis remained illegal, violence associated with illegal cultivation, drugged driving, and related offenses and use/possession/cultivation on public lands and federal property. On Jan. 4, U.S. Attorney General Jeff Sessions revoked the Cole Memo. The Department of Justice has not (yet) prosecuted any business that relied on the policies established by Cole. Other federal agencies, most notably the Department of the Treasury, have not repudiated statements and guidance that were issued in reliance on or in conjunction with the Cole Memo.

Cannabis businesses in the United States (and its territories) presently operate within the borders of states that appreciate the tax, employment and social benefits of cannabis. Many such entities operate as cash-only businesses because they cannot participate in interstate payment systems (such as credit cards) or the interstate banking system. Smaller banks, credit unions and community banks may be willing to work with cannabis businesses, but this often involves incurring charges associated with the high risk and increased reporting requirements.  Cannabis businesses cannot sell any product across state borders. They must carefully consider any spending or investment of their revenue across state borders, which might lead to federal scrutiny. To add insult to injury, every cannabis business must pay federal taxes on their business income or face criminal prosecution and jail time, just like Prohibition Era “alcohol entrepreneur” Al Capone.

At present, state-legal cannabis businesses are primarily subject to state law and regulation and are permitted to avoid federal oversight by restricting their operations within state borders. This situation is not altogether unique. Federal law yields to state law in other areas. Marriage, divorce and custody laws are defined primarily by states (in accordance with rights granted to all citizens under the federal Constitution). Doctors, lawyers and other professionals are licensed, monitored and, potentially, disciplined on a state level, separate and apart from federally regulated privileges they may seek to enjoy (e.g., writing prescriptions for substances scheduled by the DEA, appearing and arguing in federal courts, and so on). By tradition and statute, insurance largely remains a state-regulated endeavor, though federal oversight of the industry has increased over time.

The difficulties facing the growing state-legal cannabis sector in Pennsylvania can be seen by comparing and contrasting those businesses to the state-regulated insurance industry.

In some ways, the insurance and cannabis industries face similar regulatory burdens:

• The commonwealth is required to approve both insurance and cannabis products. Under the Medical Marijuana Act, P.L. 84 No. 16 (Apr. 17, 2016) (MMA), all cannabis products must contain a certain amount of active tetrahydrocannabinol (THC), must list the percentage of active ingredients and bear labels approved by the Department of Health (DOH). Similarly, the Department of Insurance (DOI) must approve polices offered, minimum levels of coverage, basic terms and materials available to the public. Consumer costs/rates also are regulated in both industries.

• Background checks are required for workers in both industries. The MMA precludes financial backers, principals and employees from working in the industry (in paid or even volunteer positions) if they have prior convictions for the sale or possession of drugs, narcotics or controlled substances. Similarly, persons or entities who have a criminal felony conviction involving dishonesty or a breach of trust from “engaging” or “participating” in the business of insurance,” without the express written consent of the DOI. In point of fact, Notice No. 2000-04 is the DOI's means of enforcing a federal statute, the Violent Crime Control and Law Enforcement Act of 1994, 18 U.S.C. Sections 1033-1034. In the case of insurance, the state regulator may waive the prohibition and allow someone with a prior conviction to participate in the insurance industry; however the prohibition against convicted possessors or users of marijuana is not waivable in the cannabis industry.

• In each industry, companies must submit a business plan, satisfy minimum capital requirements and maintain commonwealth-issued licenses.

• Each industry has segmented sections that are subject to different levels of scrutiny and oversight. In insurance, the DOI oversees licensed insurance companies, reinsurers (licensed and qualified unlicensed), surplus-line companies, insurance administrators, reinsurance intermediary brokers, viatical settlement providers and others. In cannabis, the DOH regulates grower/processors, dispensaries, practitioners, patients, testing laboratories and academic clinical research centers.

While cannabis and insurance are primarily state-regulated industries, there are significant differences in the ways they are permitted to do business:

• Corporate Location. Insurance companies that satisfy the requirements for doing business in Pennsylvania can be incorporated in any state or any part of the world. International insurance corporations may elect to open domestic subsidiaries, and are permitted to make management and corporate decisions from anywhere in the world.

Cannabis companies face significant legal issues if they manage their affairs across state lines. Any interstate efforts to direct a marijuana business will almost undoubtedly draw the attention of federal authorities. The risk of federal investigation increases exponentially if a cannabis business is managed by persons outside of the United States. The cannabis business is thereby denied the management expertise developed in other countries, most notably Canada and Israel, where medical marijuana operations have flourished.

• Operations. Insurance companies may conduct Pennsylvania operations in whole or in part almost entirely outside the Commonwealth. A licensed insurance company can employ workers in different states (or in different countries) to handle customer service, bill processing or sales.

Cannabis entities must employ all workers within the Commonwealth to avoid charges for improperly transferring monies generated from federally prohibited activities across state lines. While this may increase the number of cannabis jobs within the Commonwealth (and within every other state that allows cannabis sales), it restricts a company's access to vendors (packaging, labeling, professional services, and the like) and reduces a company's ability to negotiate with vendors.

• Payment Systems. Insurance companies can accept and distribute payments across state lines (or internationally). Pennsylvania consumers regularly make mail, wire or transfer insurance premium payments to licensed insurance businesses operating outside of the commonwealth. Loss claims are paid to Pennsylvania residents from bank accounts located in other states or other countries. Insurance payments and claims disbursements can be transferred by check, credit card or wire from a credit card company, brick-and-mortar banks or electronic-banking entities (such as PayPal).

Interstate payment systems involve the participation of the federal government and state governments where cannabis remains illegal.  At present, cannabis companies cannot use interstate payment systems such as credit cards or internet transfers. As a consequence, most sales revenue is generated in cash. More banking services are being offered by local, intrastate banks or credit unions, but those financial institutions must adhere to strict regulatory reporting requirements to avoid potential federal seizure of assets. Due to this increased risk and regulatory burdens, cannabis businesses pay exorbitant fees for any banking services, reportedly an average of $3,000−$5,000 as a basic fee per account per month.

The greater majority of Pennsylvania cannabis businesses pay employees, and creditors in cash. Like any business, cannabis companies have to pay for utilities, rent, insurance, transportation, and a host of other costs, which most pay in cash. The commonwealth, which taxes state-legal cannabis, routinely receives payments from marijuana businesses in stacks of paper dollars.

Having cash-intensive operations makes marijuana businesses a target for theft. The largest bonded cash-transportation company in Pennsylvania refuses to work with cannabis businesses. The Treasurer of Pennsylvania, Joe Torcella, recently disclosed that his department declined to use the Pennsylvania Treasury vault, a steel behemoth spanning an entire city block in Harrisburg, for storing cannabis tax revenue because the commonwealth could not thereafter guarantee the safety of its staff working there.

Federal law on cannabis could change. However, until the DEA “de-schedules” or “reschedules” cannabis (by regulation or otherwise), the specific legal provisions governing the cultivation, processing, possession and use of marijuana will vary by state (and territory). This may create more jobs at a state level, but these fractured regulations will contribute to additional compliance requirements and attendant costs for cannabis businesses.

William F. McDevitt is a partner in the Philadelphia office of national law firm Wilson Elser Moskowitz Edelman & Dicker, where he is a member of the firm's cannabis law practice. He can be reached at [email protected].