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U.S. senators on Tuesday appeared to agree that banks should be able to do business with state-licensed cannabis firms, and debated legislation that would shield them from enforcement of a federal ban on the substance.

Thirty-three U.S. states and the District of Columbia have legalized marijuana for either medical or recreational use, or both, but the federal government still outlaws its possession and distribution under Schedule 1 of the Controlled Substances Act, where it is listed next to heroin and LSD.

Funds derived from violations of the 1971 law constitute the proceeds of a specified unlawful activity under U.S. statutes against money laundering, rendering financial institutions that maintain accounts for marijuana-related businesses, or MRBs, exposed to regulatory action and even criminal prosecution.

The “untenable disconnect” between federal and state law has largely confined the multibillion-dollar, state-authorized cannabis industry to transacting in cash only, left MRBs vulnerable to robbery, and impeded efforts to collect taxes from them and shield them from financial crime, Sen. Cory Gardner (R-CO), said in testimony Tuesday.

“We are making it hard for these businesses to comply with the law,” said Gardner, who was testifying before his colleagues on the Senate Banking Committee as the main cosponsor of the Secure And Fair Enforcement Banking Act.

The SAFE Banking Act, introduced by Sen. Jeff Merkley (D-OR) in April, would bar federal regulators from prohibiting, penalizing or “otherwise discourag[ing]” lenders from holding accounts for MRBs licensed by states.

At the hearing Tuesday, John Lord, chief executive of a Colorado-licensed grower and retailer of cannabis products, told lawmakers that he previously rented the former premises of a bank so that he could store cash proceeds in the vault.

His firm, LivWell Enlightened Health, has since established a more stable banking relationship, Lord said, but still pays fees “in excess of $3,000 per month” to cover the high compliance costs the financial institution incurs from the relationship.

As well as barring federal enforcement of the CSA in the context of state-authorized cannabis, the SAFE Banking Act would also direct the Treasury Department and federal regulators to develop specific guidance for financial intuitions that serve MRBs and procedures for federal examiners that audit their anti-money laundering programs.

Separate guidance on marijuana-related banking issued by the department’s Financial Crimes Enforcement Network would also become law, pending a determination that it does not contradict the aim of the bill or “significantly inhibit” the cannabis industry’s access to financial services.

The guidance, which FinCEN issued more than five years ago, directs banks to flag their interactions with MRBs in one of three types of suspicious activity reports, regardless of whether they decide to maintain accounts for those firms.

Even if those measures survived a markup, the SAFE Banking Act, though a solid first step, would fall short of fully addressing the financial services industry’s reticence to process transactions for MRBs, said Joanne Sherwood, president and chief executive of Denver-based Citywide Banks, which has shunned such business.

“The crux of it is that it is still illegal,” said Sherwood, who testified on behalf of the American Bankers Association.

On Tuesday, Sen. Kamala Harris (D-CA) and Rep. Jerrold Nadler (D-NY) introduced the Marijuana Opportunity Reinvestment and Expungement Act to remove marijuana from the CSA.

Rep. Ed Perlmutter (D-CO) introduced the House version of the SAFE Banking Act in March.

Contact Valentina Pasquali at vpasquali@acams.org