DENVER—Colorado’s social experiment to legalize marijuana will only succeed if cannabis businesses have access to mainstream financial services, contends one of the attorneys behind what may become the first FI to serve the marijuana industry.
And that access to banking services may be coming much sooner to Colorado pot businesses due to an obscure law passed 33 years ago.
In one of the most unusual approvals of its kind, on Nov. 19, the Colorado Division of Financial Services issued The Fourth Corner Credit Union an unconditional charter to operate. Next steps are for the credit union to obtain insurance from NCUA and a master account from the Federal Reserve System.
“In order for this social experiment to succeed it needs the tools for success – the most important of which is access to banking,” said Mark Mason, attorney at The Mason Law Firm in Mt. Pleasant, S.C. Mason is among a team of attorneys assisting Fourth Corner organizers.
Access to legal services for marijuana dispensaries has been an issue almost from the moment legislatures in states such as Washington and Colorado approved such operations. Legitimate, licensed marijuana businesses face the threat of crime and violence that can come with an all-cash business. Often these enterprises open an account with a bank or credit union only to eventually be asked to leave, as recently took place in New Mexico.
Despite Colorado and Washington legalizing marijuana for recreational use and more than 20 states approving it for medical use, most credit unions and banks have shied away from accepting deposits from marijuana businesses due to federal law and concerns over being considered criminally liable for the actions of the businesses' customers. Drug enforcement agencies also have the power to seize dispensaries' deposits.
Obscure Law Moves Up Timeline
The Fourth Corner Credit Union would not be preparing to serve the marijuana industry in this state so soon if it were not for an obscure law passed by Colorado lawmakers in 1981 that the CU’s lawyers focused on shortly after what they describe as a discouraging phone call with NCUA.
The law, in part, reads, "No credit union shall be granted a charter by the commissioner unless such credit union has applied forinsurance on its shares and deposits."
On Oct. 30, 2014, NCUA told The Fourth Corner it could take as long as two years for the agency to make a decision on providing insurance coverage, said Mason, who explained the law allows a CU to open its doors while awaiting approval of federal insurance.
Chris Myklebust, Colorado commissioner of financial services, told CUToday.info that The Fourth Corner can open for business while NCUA is making its decision.
When the CU opens, it will be based in Denver and begin with one branch, said Mason, who hopes shared branching and e-services will extend its reach. The Fourth Corner will be open to any legal marijuana enterprise in Colorado, as well as to anyone who is a member of a nonprofit that supports legalized cannabis.
“Credit unions have a long history of cooperation in the provision of services,” said Mason. “We hope that shared branching will be available to all of our members.”
Mason did not say whether The Fourth Corner planned to expand its operations to serve other states that may legalize marijuana. He said the focus is to perfect operations inside a state that has “implemented responsible seed-to-sale regulation . . . Criminal enterprises, gangs and cartels have no place in this regulatory environment. If a person is involved in a criminal enterprise, Fourth Corner Credit Union would be a bad place to bring their dirty money. We will detect such conduct and deal with it in strictly in accordance with AML (anti-money laundering) and BSA requirements.”
Pot Banking Book Not Written
No book or manual has been written on how to bank marijuana businesses, acknowledged Mason. FinCEN, NCUA, the FDIC and the Comptroller of the Currency’s August 18 letter instructed financial institutions opening accounts for cannabis businesses to “manage the risk.”
The credit union’s compliance program will be guided by renowned anti-money laundering and anti-fraud lawyer Martin Kenney, who recently won a lifetime achievement award from the Association of Certified Fraud Examiners. The CU’s AML compliance manual has been written by a team of lawyers and an AML training company that provides AML training to regulators, explained Mason.
Mason added that credit union policies will be refined by involving “all of the stakeholders”—the industry, and state and federal regulators.
Myklebust said the state carefully reviewed the Fourth Corner charter application earlier this year, adding that the CU is needed. Myklebust acknowledged that little interest has been show in forming cannabis credit co-operatives, a financial services co-operative to serve licensed marijuana dispensaries in Colorado. In May, state lawmakers passed a bill to establish the co-ops, which are not CUs.
Myklebust said his office processed the Fourth Corner charter application and conducted due diligence on the organizers. “Then we looked at things state law does not emphasize, like the credit union’s business plan, who the organizers are, do they have the ability to present an economically viable organization. I did not look at this and say this is a different animal because the credit union will serve the marijuana industry. I looked at this application on the merits of the organization and as a credit union and made all of my decisions based on those points alone.”
Mason said that The Fourth Corner will offer basic deposit and payment services. The credit union will not loan CU funds prior to obtaining insurance coverage on its deposits. Income at first from will come from investments and “fair and reasonable” fees charged for services—transaction fees and fees to cover payment validation and compliance reporting to the federal government. Mason said he believes Visa, MasterCard, American Express will still view the cannabis industry as too risky to serve.
“There still exists an impediment to the provision of services in certain areas which will have to be addressed,” said Mason.
Fourth Corner filed its formal application for NCUSIF coverage Sept. 4. While the credit union waits on NCUA’s decision, it can operate uninsured or with private deposit insurance. The CU has its routing number in hand and hopes to have its master account at the Federal Reserve System by Dec. 10.
“The credit union hopes it will be granted NCUSIF coverage,” said Mason. “If NCUA declines, the CU can operate with private share deposit insurance, merge with another credit union, or take action in Colorado to change the law to allow it to operate uninsured.”
NCUA spokesperson John Fairbanks said he could not comment on whether a credit union has filed an application for NCUSIF coverage. “I can say that review of insurance applications is comprehensive and methodical and so can take some time.”
But Mason is hopeful, saying the tide is turning regarding regulator’s views on FIs serving licensed marijuana businesses.
“There has been a shift in policy,” pointed out Mason. “It started with the DOJ and FinCEN guidance. In August, NCUA Chairman Debbie Matz signed a letter to the Governor of Washington which stated, in essence, that credit unions could bank marijuana money if they had systems in place to manage the risk. This letter was also signed by the Comptroller of the Currency, the Chairman of the FDIC and the Chair of the Board of Governors of the Federal Reserve System.”
Myklebust see a great deal of good being done by Fourth Corner.
“I have always been under the impression that as soon as we can properly regulate (serving marijuana businesses) through the existing banking system that we can shed light on the marijuana industry and bring it out of the shadows,” the commissioner explained. “Then, the people acting illegally will begin standing out like sore thumbs and law enforcement can take action on them. And, folks who are running legitimate marijuana businesses will be safer and confident they can receive basic banking services.”
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