By Chris Goldstein
It seemed like such a good idea: A credit union for the marijuana industry.
But a federal judge in Denver has rejected a bid by Fourth Corner Credit Union in Colorado to receive full accreditation from the Federal Reserve Bank of Kansas.
Right now businesses working in the cannabis space cultivating, processing or selling marijuana can’t have bank accounts.
The problem is federal prohibition.
Although many businesses found ways to have discrete banking, increasing numbers of financial institutions have closed accounts.
That has left medical marijuana establishments and retail cannabis stores running as cash-only. They cannot process credit cards, get bank loans for property or investment and are left without places to deposit profits.
Special security firms have sprung up filling warehouses with safes. They operate fleets of vehicles staffed with armed guards that pick up the cash from the businesses and put it into the steel vaults.
There was some hope in 2014 when the U.S. Department of the Treasury Financial Crime Enforcement Network issued a set of guidelines for banks to work with cannabis businesses.
That memo stated, in part:
In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of 3 The Cole Memo notes that these enforcement priorities are listed in general terms; each encompasses a variety of conduct that may merit civil or criminal enforcement of the CSA. 4 James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes (February 14, 2014). 3 products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.
But instead of opening doors it seems to have actually caused a chilling effect. Since the memo was issued even cottage businesses for the cannabis industry who do not directly sell the plant have seen their accounts closed.
The banking sector has seemed to take an extremely conservative approach to the multi-billion dollar, state-legal marijuana industry.
The Federal Reserve is not an official government agency like the Department of the Treasury but it does control banks.
Fourth Corner argued that the Federal Reserve lacks the authority to keep them out.
Federal District Judge R. Brooke Jackson sided with the Federal Reserve who argued that because marijuana is illegal under federal law money from cannabis business should not be allowed into the banking system. Judge Brooke went further saying that if banks do accept deposits from the cannabis industry they could be breaking the law.
The Marijuana Businesses Access to Banking Act of 2015 was introduced in Congress last year in both the House and the Senate. There were a number of co-sponsors in both chambers – 33 in the House – but there was no action on the legislation.
Fourth Corner Credit Union had a Board of Directors filled with those already in the medical marijuana industry of Colorado. They had received a routing number from the American Bankers Association and several high profile endorsements including support from CO Gov John Hickenlooper.
Then the National Credit Union Administration refused to issue a charter to Fourth Corner and the Federal Reserve Bank denied their application to assign a master account. Both are required to be a legitimate bank and operate with other financial institutions.
Unfortunately, the ruling on January 5, 2016 will likely quell similar attempts.
Until comprehensive federal reform is accomplished, like Senator Bernie Sanders’ proposal to remove marijuana from the federal Controlled Substances Act, it will likely be cash-only for cannabis.