Story By Jeff Gee
Banking has long been one of the last hills to climb for legal cannabis industry participants. Volumes have been written on how industry participants must carry the weight by holding cash and paying in cash or money orders. Some jump through complex hoops to create money market accounts and such just to deal with payroll, suppliers and taxes. This is a significant burden not to mention the risks cash entails, we all know the tune. The problems are vast. In this article, we present a high-level snapshot of what is happening in the US Congress and the states that legalize cannabis consumption, medically and recreationally, and some tips to help move this along.
Although federal regulators and state laws where cannabis is legal have shown support and created guidance, bankers feel the overhead in navigating the regulation and managing the cash is too costly. They may also feel they have limited protection aggressive regulators. Or, the regulator will not provide support as the regulator is a federal entity and must uphold the laws of the United States.
This type of problem exists all throughout the federal government. As an example the Bonneville Power Administration is unwilling to allow cannabis growers to benefit from their various incentive programs. The USDA will not create guidelines for cannabis in its National Organic Program. The IRS taxes gross sales of cannabis industry businesses. They are not allowed to take any deductions. The list is long. Federally managed entities are refusing to provide any support from the multitude of programs and grants they make available.
Case in point, late last December, the Denver Post reported U.S. District Judge R. Brooke Jackson criticizing US Treasury and Justice Department memos describing pot regulations as "nothingburgers". This litigation is Colorado’s Fourth Corner Credit Union saga. The credit union seeks an injunction against the Federal Reserve Bank of Kansas City.
In this case, the Honorable Judge Jackson rules that the Federal Reserve Bank of Kansas City is not required to provide Fourth Corner a master account, which is bank speak for an operations license. In effect, this account manages all transactions the institution has with the Reserve Bank. The Federal Reserve Bank is not a public or federal institution. It is a private bank that is overseen by Congress. It just happens to be the central bank of the United States. Digital currency transactions traverse the Federal Reserve. Last year, the Federal Reserve had floated the idea of a new fiat currency version of bitcoin that central banks would control. This shows where digital currency is potentially headed.
Change is coming around. 2015 and 2016 encompass the 114th United States Congress. Bills H.R.2076 & S.1726, Marijuana Businesses Access to Banking Act of 2015, sponsored by Rep. Perlmutter (D-CO) and Sen. Merkley (D-OR) respectively, aim to specifically eliminate any risk to depository institutions and business in the cannabis industry. The bills provide protections for depository institutions, their directors, employees and officers. There is protection for real estate and loans and, importantly, protection from forfeiture laws.
Key to this legislation is Section 2 of the bill Safe Harbor For Depository Institutions.
“A Federal banking regulator may not— (1) terminate or limit the deposit insurance or share insurance of a depository institution under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) or the Federal Credit Union Act (12 U.S.C. 1751 et seq.) solely because the depository institution provides or has provided financial services to a marijuana-related legitimate business;
(2) prohibit, penalize, or otherwise discourage a depository institution from providing financial services to a marijuana-related legitimate business;
(3) recommend, incentivize, or encourage a depository institution not to offer financial services to an individual, or to downgrade or cancel the financial services offered to an individual
The bill is has flexibility by giving banks a choice in the matter in Section 4, Rule of Construction.
“Nothing in this Act shall require a depository institution to provide financial services to a marijuana-related legitimate business.”
If a bank doesn’t want to offer services to those in the industry, it has that right. But, there will be no shortage of credit unions or banks that won’t service the new industry. The bill clearly provides support communities that want this assurance and support.
But, as legislation goes, it can be a real struggle. Ashley Verville, Communications Director for Rep Perlmutter (D-CO), gives us some insight into the current status of H.R.2076 in the House,
“We have been unable to get a hearing for the bill in the Financial Services Committee so we are pursuing other avenues such as offering it as an amendment to appropriations bill or attaching it to other pieces of germane legislation. Earlier in 2015, Rep. Perlmutter offered a procedural amendment to an appropriations bill which passed 231 – 192 with the support of 45 Republicans. The hard part is getting the bill across the finish line but Rep. Perlmutter has every intention to see it through.
Of the bills' cosponsors, primarily Democrats, a few Republicans throw in their support.
Kudos to the Republicans that do support this. A number of Republicans supported efforts to amend the Financial Services & General Government appropriations bill. Verville explains,
“In December Rep. Perlmutter (D-CO), along with Reps. Dana Rohrabacher (R-CA), Joe Heck (R-NV) and Denny Heck (D-WA), sent a letter to appropriators asking for the inclusion of a marijuana banking rider in the FY16 appropriations to prohibit the use of funds to penalize banks who are providing services to legal marijuana businesses. So, the letter basically urges House appropriators not to reject the Senate language during negotiations, however this language did not make it in the final FY16 omnibus.”
It is worth mentioning that each citizen in America has the right to petition support from his or her US congressional representative. Their office is a phone call and email away. Come as a group, and you may get more attention. Organize employees, customers, etc., to jointly open dialog with those resenting you in your district. Schedule a polite town hall meeting.
For helpful talking points to use with your congressman or congresswoman, follow the lead positioning point from Rep. Perlmutter (D-CO) office. Ashley Verville explains,
“For Rep. Perlmutter, this is an issue of public safety first and foremost. The tremendous amount of cash that these businesses are forced to keep on hand is a genuine safety risk to residents, businesses and the communities. These businesses are targets for crime, robbery, assaults - plus other crimes such as tax evasion or skimming.”
For policy makers, public safety is the primary reason for banking reform. It is a good platform to take to one’s own congressional representatives.
At this time, from a regulatory perspective, guidance has already been given from the US Treasury Department's Financial Crimes Enforcement Network (FinCEN) as well as the Cole memo from the US Justice Department. There are also the various state governments’ support of banking law reform in the cannabis industry.
But, at the federal level, until laws are enacted, like those from Rep. Perlmutter (D-CO) and Sen. Merkley (D-OR), there will be ongoing worries in the banking community and the continued public safety risk. Managing an account from both the account holder and financial institution will still be muddy. At the very least, there is substantial activity being promoted in Congress to address this quagmire. Nowadays, the question is not if the legislation becomes law, but when.
At the state level, there are improvements and then there is continued struggle.
Alaskans working in their recently voter approved industry may have a tough time. Just paying taxes will be interesting. There are no known credit unions or banks openly supporting the industry. Sums of cash and large money orders may have to be moved long distances because of the vastness of the place. In today’s society, without digital funds transfer, commerce is a mess. In Alaska, the nearest city to manage the cash could be many hundreds of miles away. Alaskans are creative and some good workarounds will come around. But, they should still have local banking access.
In Colorado, there is the ongoing litigation over the Fourth Corner Credit Union and the Federal Reserve of Kansas City. This is the big battle in the federal courts. The outcome of this litigation will certainly be the case law standard nationally assuming any amendment or federal bill cannot find its way into law before this is resolved. This case could very well make it to the Supreme Court. The Honorable Judge Jackson is sympathetic to the plight of the cannabis industry, but feels his hands are tied because at the federal level, the Federal Reserve’s claim that cannabis is and has been illegal is valid.
Colorado is carrying the load for federal support even though banking is not solely a Colorado problem. Still, they have excellent representation at the federal level and the current litigation in federal court.
In February 2016, the Oregon House of Representatives voted overwhelmingly in support (55-4) with just four Republicans voting no and one no vote. In the Senate, things were a bit tighter (18-6-6) where six senators abstained. Only two Senate Republicans were for the bill, the rest either voted no or abstained. It is unclear if Republicans are slowly supporting these efforts. It seems that it is only a matter of time before the inertia will move them in this direction. That inertia needs to come from somewhere and that somewhere easy would be constituents themselves.
Oregon's HB4094, which explicitly states:
“exempts financial institutions that provide financial services to marijuana related businesses, researchers and laboratories from any criminal law of this state … [if] that person provides financial services to person who lawfully possesses, delivers or manufactures marijuana or marijuana derived products,”
The Oregon bill is a much broader bill than just supporting the banking institutions. From the quoted text, it exempts numerous parties from any legal issues at the state level. Yet, banking is a primary target to support in this bill.
Still, it is unclear how many credit unions or banks in Oregon are going to openly take on cannabis industry clients in the near term. Maps Credit Union is popular in the industry news about its support for Oregon cannabis industry customers. Then, there is the Mbank story of an Oregon bank that wanted to service Colorado cannabis accounts. This appeared to fail for both potential Colorado accounts and for existing Oregon accounts.
Ultimately, this is a victory for Oregon's economy. All direct players in the cannabis industry, at the state level, can go about business. The credit unions and banks will trickle in.
In Washington, there has been a lot of activity since 2014. It is perhaps the furthest along of any state. There is a fair amount of documentation supporting the Washington State Department of Financial Institutions via their web site. And this activity is a compilation of information both federal and state.
In particular, in July of 2014, both the FDIC and the National Credit Union Administration (NCUA) provided a statement to the Director at the Washington State Department of Financial Institution (DFI) clarifying that it has provided guidance to the Financial Crimes Enforcement Network (FinCEN) with regards to servicing state licensed marijuana businesses.
With that, Washington State appears to have the least amount of contention in terms of depository institutions open to the cannabis industry, state clarification and federal issues. The DFI clearly states that it is a public safety priority to have basic banking services available to the cannabis industry in order to prevent large amounts of cash from being subject to armed robbery and money laundering. This is another case of public safety driving the policy.
Yet, even 18 months after such letters arrived and positions taken within Washington State, three credit unions openly provide services to the I502 cannabis industry: Obee Credit Union, Numerica Credit Union and Salal Credit Union. Of course, there may be others. They just don't openly promote their support.
Interestingly enough in November 2015, Securities Analytics reported that there are 266 depository institutions that have open marijuana related businesses in the United States. But these numbers include Marijuana Priority Suspicions Activity Reports (SAR). So, the data is not entirely correct.
Much has already been written about how participants in the legal cannabis industry are working around these limitations, but if a bank decides to file a Marijuana Termination or Marijuana Priority SAR to the FinCEN, the account is subject to closure and other problems including forfeiture.
In the end, there will be a solution for the industry. Cannabis is a multi-billion dollar industry and growing. There is no way around it.
However, as mentioned, the US is still a democracy, a representative democracy in fact. This means we have the right to engage our democratically elected congressional members within our districts on legislation or issues important to us.
Every legal recreational and medicinal cannabis industry participant should openly encourage their employees, customers, friends and community members to engage with their congressman regardless of party affiliation. This is how a representative democracy works. Just like the initiative processes that made cannabis legal, engaging with our congressmen and women is very useful too. They are not the enemy, rather the enabler, even if they don’t want to be.
Take charge, respectfully.