Clearly, one of the major hurdles, if not the major hurdle, for investors and retailers in cannabis is access to banking for this still-illegal Schedule I drug.
A series of publications by the Department of Justice (2013 and 2014) and the Department of Treasury (2014) created guidance for banks and credit unions about managing risk and following compliance rules in states where use and consumption have been legalized.
One credit union in Denver, the Fourth Corner Credit Union, took up the issue of providing banking services to cannabis businesses (and other ancillary cannabis-friendly groups) in February 2014. These efforts were bolstered by support of Colorado Governor John Hickenlooper and relying on memos from U.S. Deputy Attorney James Cole’s and the Department of Treasury, which made it clear that the federal government would allow banking for cannabis business as long as the enhanced compliance protocols were followed.
In November 2014, Fourth Corner, with a board consisting of community leaders, seasoned professionals, industry experts, and a world-class anti-fraud and anti-money laundering expert, was granted a state charter to do business by the Colorado Division of Financial Services. The credit union then applied to the Federal Reserve Bank of Kansas City (FRBKC) for a master account that provides access to the payments system with the bank—standard operating procedure for financial institutions because it allows for the electronic movement of money.
In July 2015 however, the credit union’s applications to both the National Credit Union Administration (NCUA)—for deposit insurance—and the FRBKC—for a master account—were denied, effectively blocking Fourth Corner from opening its doors. Through their attorney, South Carolina-based Mark Mason, the credit union filed lawsuits against both the NCUA and the FRBKC.
Currently, the NCUA case is proceeding. The FRBKC case was originally dismissed and is now appealed, with the likelihood that oral arguments in the Tenth Circuit Court of Appeals will happen in November.
Mason explains that in the FRBKC case, the federal judge basically ruled that the credit union was correct in its interpretation of federal law that Fourth Corner should be granted a master account. But the judge determined that he could not grant access to the payment system because the credit union would then use it to facilitate activity that was illegal under federal law. “Our response to the district judge was that Fourth Corner was asking for admission into the monetary system and it would play by the same rules as everybody else,” Mason shared.
“Only the Department of Justice has the authority to enforce the Controlled Substances Act [where cannabis was placed on Schedule I as one of the worst drugs on the list],” he added. “So one of the questions is, if the DOJ isn’t going to come forward and assert the supremacy of the Controlled Substances Act and take a hardline stand on state-legalized cannabis, who is the Fed Reserve Bank of Kansas City to do that? The Federal Reserve Bank is an independent reserve bank and has no authority relative to the subject matter.”
And that seems to be the heart of the matter. Court documents spell it out: Colorado’s regulatory framework has been adopted by other states, and Colorado’s chartering of Fourth Corner actually enhances the state’s ability to regulate cannabis businesses. The Federal Reserve has no authority to determine whether or not Colorado’s specialized credit union is capable of carrying out the enhanced due diligence required for marijuana-related businesses. That is the job of the State of Colorado as the credit union’s regulator.
Something has to give, whether it’s the result of the Fourth Corner Credit Union case or a subsequent case. Will this issue end up in the Supreme Court? Mason says that could happen, but it’s doubtful. “Right now we are singularly focused on presenting our strong arguments to the court of appeals this fall,” he expressed. “We believe in this important cause. We will relentlessly pursue this case to its conclusion.”