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With no federal clarity, CU takes next step in serving marijuana industry

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With no federal clarity, CU takes next step in serving marijuana industry

Fourth Corner Credit Union recently cleared a key legal hurdle to provide financial services to companies connected with Colorado's marijuana industry, but legal ambiguity at the federal level still stands in the way of the Denver-based credit union's ambitions to freely bank cannabis businesses.

After four years of legal battles, the Federal Reserve Bank of Kansas City cleared Fourth Corner on Feb. 2 to access key capabilities, but only if the company promised to not bank any business that directly touches the production, distribution or sale of marijuana.

The marijuana-focused credit union's inability to serve a large portion of the marijuana industry is the product of contradictory law at the state and federal level. For Fourth Corner, the only solution that would allow it to fully service the industry is an act of Congress.

Conditionally approved

In 2014, Fourth Corner obtained a charter from the Colorado Division of Financial Services to operate with a field of membership including supporters of marijuana legalization; trade organizations; advocacy groups; charitable organizations; and marijuana-related businesses, or MRBs. The company then applied for federal deposit insurance from the National Credit Union Administration and a "master account" from the Federal Reserve. A master account makes it easier for the credit union to offer deposit services and access the Fed's settlement network.

In July 2015, the regulators rejected the requests, so the credit union launched lawsuits against them. The Kansas City Fed argued that if given a master account, the company would violate the Controlled Substances Act, a federal law prohibiting companies from facilitating the illegal use of marijuana.

After more than two years, the Fed and Fourth Corner resolved their dispute; the agency would grant a master account only if Fourth Corner promised not to bank any MRBs, which includes cannabis dispensaries, packaging companies and retail delivery firms. Fourth Corner must also obtain share deposit insurance from either the NCUA or a private provider, and secure regulatory approval from the Colorado Division of Financial Services. Both the Kansas City Fed and the NCUA declined to comment for this story.

Fourth Corner President and CEO Deirdra O'Gorman said in an interview that being barred from servicing the industry's central businesses is not crippling for the company's business model. She said Fourth Corner had originally planned on basing 25% of its portfolio in direct relationships with MRBs, with the other 75% in ancillary businesses, trade associations and legalization advocates.

"We're just focusing most of our efforts on 75% of our business plan, and then when [federal] legalization comes, we'll be ready and have the services for the industry tailored to them," O'Gorman said.

Federal ambiguity

Fourth Corner has been a litmus test for how financial institutions are being policed in a marijuana industry that is not federally legal. Marijuana legalization is slowly taking hold in individual states such as Colorado, but Attorney General Jeff Sessions is threatening to push back by enforcing federal law.

In early January, Sessions rescinded the Cole Memo, a 2013 document outlining the Justice Department's intention not to prosecute marijuana laws as long as industry participants followed a list of priorities, such as not selling to minors. The move called into question the standing of the Treasury Department's Financial Crimes Enforcement Network, or FinCEN, guidance allowing banks and credit unions to service the industry as long as they followed the Cole Memo and filed marijuana-specific suspicious activity reports, or SARs.

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Treasury Secretary Steven Mnuchin told Congress on Feb. 6 that he was not consulted in Sessions' decision to rescind the Cole memo. Mnuchin said Treasury's "intent is not to take [the FinCEN guidance] down without a replacement that can deal with the current situation." In a statement, FinCEN spokesperson Stephen Hudak verified that the guidance "remains in place."

For the hundreds of banks in the country that provide banking services to marijuana-related businesses, the lack of federal clarity is discouraging. Amanda Averch, a spokesperson for the Colorado Bankers Association, said in an interview that banks may "back off" as the federal government alters the rules around marijuana.

Colorado's lead regulatory agency over the marijuana industry also says it is at a dead end. Michael Hartman, executive director of the Colorado Department of Revenue, says the greatest opportunity to improve the regulatory environment is by teaming up with the banking industry to monitor cash inflow and outflow. Hartman said the Cole Memo "got it right," adding that its rescission does not strengthen the state's ability to monitor marijuana financing.

"Short of federal action in Congress, it would be really difficult to increase the ability of the banking industry to serve this marketplace today," Hartman said in an interview.

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For the time being, MRBs such as dispensaries have access to basic depositary services but little else. Native Roots Dispensary, with 20 locations in the state, says its biggest issue is an inability to transact credit card payments, which blocks any online purchasing option even for verified customers. Native Roots CEO Ryan Brown wrote in an email that federal regulation also limits options for raising capital and expanding the company.

Wait and see

Joseph Lynyak III, a partner at law firm Dorsey & Whitney LLP, said he has been called in to talk to boards about the possibility of taking on the risk to make money in the growing marijuana industry.

"If you ask me, I'm going to tell you it is still a felony and you're probably aiding violations of federal drug laws," Lynyak says. He added that even with the FinCEN memo, SARs leave a paper trail that would expose a financial institution to federal prosecution if illegal activity is uncovered in any of its relationships. He said the risks are too large, which is why "virtually no large bank" is opting to enter the business.

In contrast, Fourth Corner is banking on the hopes that the United States will federally legalize marijuana soon. CEO O'Gorman said her credit union will be prepared to take on the heavy lift of SARs and regulation in order to service the industry.

"At some point there has to be some watershed moment," she said.