Latest Setback for Marijuana Banking Underscores Importance of Federal Change

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The cannabis industry has experienced a handful of high-profile banking setbacks this year, deflating hopes that marijuana companies, state lawmakers and financial institutions will be able to come up with workable solutions anytime soon.

The latest roadblock came last month, when the U.S. Federal Reserve Bank of Kansas City denied a Colorado credit union a master account.

The account would have allowed the financial institution – The Fourth Corner Credit Union – to conduct electronic transactions and process checks and credit and debit cards. Without that account, the credit union can’t move forward.

Other efforts are underway to bring banking services to the industry, including moves in Nevada to create marijuana-focused “thrifts” and a push in California for a state-run bank.

But in light of the recent developments, some industry and banking experts are now more convinced than ever that the situation will not improve unless the federal government reschedules marijuana or passes laws that protect financial institutions working with marijuana companies.

“The only true solution is a change in federal law,” said Jenifer Waller, the senior vice president of the Colorado Bankers Association. “That’s the only way to fix it. It’s still the illegal nature of the activity, and that’s what no financial institution can get over.”

Numerous banks serve cannabis companies across the country, but most of them are smaller, local institutions that don’t publicize their affiliation with the marijuana industry or actively seek out MJ businesses.

Two financial institutions that had hoped to become big players in cannabis banking – and were open publicly about their plans – reversed course earlier this year. Oregon’s MBank closed all of its cannabis accounts, while First Security Bank of Nevada in May said it would no longer accept deposits from the sale of marijuana.

All eyes turned to Fourth Corner, which was attempting to pioneer a new banking model by focusing solely on cannabis companies. As a credit union, it hoped to get around some key issues by operating under a state – rather than national – charter.

The institution received a state charter late last year and established a branch location. But officials got word last month that it was not approved for the account, said Mark Goldfogel, a spokesman for Fourth Corner.

The company also was denied deposit insurance by the National Credit Union Association (NCUA), which was not a surprise, Goldfogel said.

Executives at the financial institution had planned to seek private insurance from an outside source, but soon after the NCUA’s denial came word from the Fed, he said.

The credit union has filed a lawsuit asking the U.S. District Court in Colorado to direct the Federal Reserve Bank to grant Fourth Corner a master account under federal regulations that say all Fed services “shall be available to non-member depository institutions.” Fourth Corner also filed a suit asking for a judicial review of the NCUA’s actions in denying it federal share deposit insurance, saying it wasn’t given due process.

“We don’t believe the Federal Reserve Board is within its jurisdiction to say ‘you don’t have insurance from the guys we wanted you to have insurance from, so you can’t play,’” he said. “They don’t have legal standing to deny us legal access.”

Matthew L. Schwartz – a partner with a New York-based law firm that works with cannabis companies, investors and banks – said Fourth Corner’s model seemed to comply with guidance established by the U.S. Financial Crimes Enforcement Network (FinCEN) in February 2014.

FinCEN said financial institutions that choose to do business with marijuana companies should verify that the company is licensed in the state, review the appropriate licenses, and ensure the company is not violating priorities outlined in 2013’s Cole Memo.

“Some people thought if you put together a compliance program to detect risks unique to marijuana businesses, that this might work,” Schwartz said. “A lot of people thought doing that would be consistent with what the Treasury and Department of Justice had put out, in particular saying banks should take a risk-based approach to marijuana customers.”

Schwartz said removing marijuana from Schedule I would be a “step in the right direction” toward giving legalized marijuana businesses access to the financial system, and solve the issues faced by Fourth Corner.

Passing safe-harbor laws – such as those proposed in House Resolution 2076 that would exempt financial institutions from penalties related to working with cannabis businesses – would likely lead to larger banks working with marijuana companies.

“If that happens, then real institutional money will come into marijuana and businesses will have access to financial institutions,” he said. “It’s not saying marijuana is legal or shouldn’t be on Schedule I, it’s just saying where it’s legal, businesses should have access to banks. Some people would view this as a less-aggressive approach.”

While Fourth Corner’s failure to land a master account definitely hurts marijuana companies, it also hurts the agencies in charge of ensuring money derived from the sale of cannabis is not being used for nefarious purposes.

Keeping money from well-regulated banks essentially keeps the government from knowing from where it came, for what it’s being used and where it goes, Schwartz said.

“At higher levels of government, you want marijuana money to be in institutions that have robust compliance programs to ensure it’s being spent in (legitimate) ways,” he said. “Right now, if you’re a law enforcement officer and you want to follow the money, that’s difficult to do with an all-cash business.”