Latest Setback for Marijuana Banking Underscores Importance of Federal Change

cannabis banking

By Tony C. Dreibus

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.”

5 comments on “Latest Setback for Marijuana Banking Underscores Importance of Federal Change
  1. Wendy Buck on

    How is the WSLCB can deposit tax revenues raised by all Washington State Licensed recreational Cannabis stores into US Bank but no license holding cannabis business can walk into US Bank and open a business account? Is the WSLCB and US Bank not essentially drug laundering money? How then does that tax revenue suddenly become legitimate when it comes from the WSLCB but criminal when it comes from licensed businesses who have been oh and by the way, fingerprinted, FBI background checked and submit ALL personal financial information of ALL partners involved as well as a business plan? Hypocrisy!!!! If every business owner had to subject themselves to the kinds of finanacial scrutiny to obtain licensure that the cannabis industry did there would be far less embezzlement and extortion out there. You don’t need to sell weed to be a crook. Give them an equal playing field with all the other quasi businessmen out there and let’s see where the scandals really are.

  2. winston throgmorton on

    I agree with the author of this article and applaud his veracity when he identifies local financial institutions as unassuming and low profile in their quest to service the industry. They are indeed risk takers and pioneers in their attempt to forge a path leading to financial service. And only strict due diligence and rigorous compliance can achieve satisfactory results.
    The National Reserve does NOT have to accept money from any financial institution currently that works with the industry because the industry is illegal on a federal level. Fincen and Cole memo be damned. A safe harbor law, rescheduling or legalization is the ONLY way financial institutions will be able to adequately serve the industry.
    Illinois is in a unique position to lead as the Dept. of Professional Regulation controls the banking industry AND the cannabis industry.
    South Porte Bank of Marion Illinois is and intends to remain in the front of the financial institutions working with the industry.

    • Rick Fague on

      “A safe harbor law, rescheduling or legalization is the ONLY way financial institutions will be able to adequately serve the industry.”

      That’s not strictly true, there are alternatives that are legal and approved, but the industry needs to look at compliance companies for their banking solutions instead of traditional banks until 280E goes away and/or MJ is taken off Schedule I.

      Our company, for example, is such a compliance company, which is why we’re allowed to set up bank accounts for MJ businesses in all 50 states. We also offer a full suite of products and services designed to allow MJ businesses to accept our TruCash branded payment cards instead of only cash. TruCash cards can be loaded using traditional bank accounts, cash, credit and debit cards.

      Our MJPayment POS platform also manages payroll, does HIPAA compliant seed to sale and employee tracking, works with most accounting software, and offers MJ businesses real protection and security in situations where regulators call for business audits.

      We offer an excellent interim banking and financial solution for most of the business problems facing MJ businesses while the industry waits for the Fed to drag themselves kicking and screaming into the emerging reality of legal marijuana. Capitalism always finds a way to solve business problems, even if it takes the government a while to catch up.

  3. Paul Esch on

    The denial of deposit insurance to Fourth Corner Credit Union (“FCCU”) by the NCUA was justified because of the defective business model of FCCU.

    Credit unions not only accept deposits from their members, but are also required to make loans to their members. Putting all credit union funds on deposit in a Fed clearing account and making no loans to members is not the legally required action of a proper credit union, which receives a federal tax-exempt status precisely because it makes loans to members.

    All prior press coverage of FCCU stated that its membership would consist solely of licensed marijuana firms, pro-marijuana activists and related non-profit corporations. Its potential borrowers were therefore always restricted to Colorado licensed marijuana firms only.

    Assume for a moment that marijuana would somehow magically be rescheduled from a Schedule I drug to an acceptably lower classification. FCCU would still be restricted to make 100% of its loans to a single industry.

    Making all loans to a single industry is always unsafe and unsound banking. It is no wonder that NCUA denied FCCU federal deposit insurance, for completely sound underwriting reasons, even without regard to marijuana’s illegal status under the Controlled Substances Act.

    There remains the possibility of private deposit insurance. American Share Insurance (“ASI”) insures 1.2% of the credit unions in the U.S., and every one of them has a Fed master account.

    ASI serves 9 states, and Colorado is not one of them. However, ASI is definitely strong enough to qualify to do business in Colorado, if it wanted to do so. It is entirely possible that FCCU asked ASI for private insurance but was turned down by it.

    At this point we have FCCU demanding that it, the only uninsured credit union in the country, be given a master Fed account. I do not believe that FCCU will be successful in either of its lawsuits.

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