The Marijuana Industry’s Access to Banks

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Legal scholar offers solutions to regulatory obstacles preventing businesses from using financial institutions.

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Vaults, armed guards, and paranoia are costs of doing business today in the recreational marijuana industry. Because they have little access to banking, marijuana business owners must conduct their day-to-day operations entirely in cash. “Nothing has gotten violent yet,” says Andrew Freedman, Colorado’s marijuana coordination director, “but we’re kind of asking for it.”

In a recent paper, University of Alabama law school professor Julie Andersen Hill argues for legislative and regulatory changes to allow marijuana businesses to open up bank accounts.

Currently, four states – Alaska, Colorado, Oregon, and Washington – along with the District of Columbia allow recreational marijuana use. These states regulate marijuana in a manner akin to alcohol, prohibiting sales to minors, requiring business registration, and taking regulatory measures to keep other illegal drugs out of the industry.

But marijuana is still illegal under federal law. This prohibition poses numerous challenges to the rapidly growing trade, including limiting access to banking. Not only does the use of cash pose a public safety issue, but it forces marijuana businesses to forego traditional loan services and gives business owners an incentive to underreport taxes, Hill argues.

The U.S. banking system consists of both federal and state-chartered banks. A marijuana business might therefore choose to bank with a state-chartered institution in a state that has legalized marijuana use. The federal government still retains regulatory control over state-chartered banks and credit unions, however, leaving even state-level marijuana industries under the control of federal regulatory agencies.

Because marijuana is illegal under federal law, individuals and institutions that assist marijuana businesses – for example, by providing a loan, a checking account, or credit card processing – can be criminally punished as accessories and money launderers, leading to substantial fines and costly civil forfeiture.

The U.S. Attorney General issued guidance in 2013 explaining that federal authorities will not prioritize punishing financial institutions working with state-level marijuana industries. But the guidance is not binding, and the Attorney General can at any time choose to punish banks for their transactions with marijuana businesses. Even if a bank is willing to risk being prosecuted, federal law also requires it to conduct costly due diligence investigations and report any “illegal and suspicious activities” to the federal Financial Crimes Enforcement Network (FinCEN).

Additionally, all states require that banks obtain insurance from the Federal Deposit Insurance Corporation (FDIC). Similarly, most states require that credit unions acquire insurance from the National Credit Union Share Insurance Fund (NCUA). With these sources of federal insurance comes additional federal regulation. Violating federal criminal laws might lead the FDIC or NCUA to revoke a bank or credit union’s insurance – a consequence known as the “death penalty” because it almost inevitably results in the bank’s closure. The agencies can also take enforcement action when they believe a financial institution is engaging in risky transactions.

Even if a marijuana-associated bank or credit union avoids a FDIC or NCUA enforcement action, the Federal Reserve can use its terms and conditions to block the institution’s access to payment services. These services are often crucial to the bank or credit union’s operations and include check clearing, electronic fund transfers, and currency services. For example, the Colorado-chartered Fourth Corner Credit Union, which apparently offers services to businesses in the marijuana industry, filed suit in July against the Board of Governors of the Federal Reserve because the Board denied it a “master account” that would allow it to interact with other financial institutions.

Banks are generally unwilling to risk criminal punishment and potential scrutiny from financial regulators, says Hill. These obstacles therefore keep banks and credit unions out of the marijuana industry, resulting in the present cash-only business practices.

Colorado has tried to combat the risks posed by the cash-only system by passing a bill permitting financial institutions to deal with the state’s recreational marijuana businesses. But even though the statute does not require so-called “cannabis credit co-ops” to obtain federal insurance, it does require them to receive Federal Reserve approval in order to access payment services. Thus far, the Fed has been unwilling to provide its endorsement. Given the Fed’s refusal and other questions surrounding the legality of financial transactions with the marijuana industry, some analysts predict the primary function of the Colorado law will be to force the federal government to give a clearer answer about the permissibility of marijuana banking.

Hill argues that congressional action is the only feasible solution to the marijuana industry’s banking problems. She claims that Congress must legalize or decriminalize marijuana, pass legislation protecting banks that service marijuana businesses, or both.

This spring, Representative Ed Perlmutter introduced the bipartisan Marijuana Business Access to Banking Act of 2015, which protects banks transacting with marijuana businesses. The bill was referred to the House Subcommittee on Crime, Terrorism, Homeland Security, and Investigations. Senator Jeff Merkley then introduced a companion bill, which was referred to the Senate Committee on Banking, Housing, and Urban Affairs, where it awaits a vote.

But even if Congress takes action, Hill contends that federal financial regulators will still be able to discourage banks from associating with the marijuana industry by imposing high due diligence costs. Although Hill concedes that some due diligence is warranted, she argues that financial regulators are not well positioned to enforce marijuana laws. Instead, she believes that regulators should set clearer and more achievable due diligence standards for banks doing business with marijuana-related companies.