by Terry Cawley, Liability Claims Manager
Many consulting and data analytics start-up companies have recently launched in Silicon Valley to provide services to marijuana-related businesses in states that have decriminalized marijuana for medical and recreational purposes because major tech firms like IBM and SAP are reluctant to do business with marijuana-related businesses. (“Silicon Valley’s Unlikely New Frontier,” by Elizabeth Dwoskin, Wall Street Journal, November 18, 2015.)
This story line is familiar to community bankers. Colorado calculated that almost $700 million in taxable sales revenue was generated by marijuana-related businesses in 2014, the first full year since the state passed its decriminalization law. Oregon, Washington and Alaska passed similar measures and are also seeing substantial sales revenues being generated. Sales of medical marijuana, closely regulated and legal in over twenty states, are significant. The opening up of the market for recreational and medical marijuana is so lucrative that it has been dubbed the “Green Rush.” Marijuana-related businesses in these states, like most businesses, need to receive suitable banking services; however, banks are generally unwilling to establish and fulfill these banking relationships.
Why are banks unwilling to offer services to marijuana-related businesses, even in states that have decriminalized marijuana?
Too many uncertainties. For starters, the Controlled Substances Act, a federal law, still prohibits the manufacture, distribution, possession or dispensation of marijuana and also punishes those who assist or facilitate the commission of one of these crimes.
Oregon’s legislature, to take one example, says it is permissible to sell marijuana if done within Oregon’s established statutory requirements, BUT the Controlled Substances Act counters, stating that the very same conduct is a federal crime. Understandably, bankers are concerned that prosecutors or bank regulators will take a harsh view of the provision of depository, lending or other services to an Oregon firm that, as a technical matter, appears to be in regular violation of the Controlled Substances Act. This difficulty illustrates the constitutional doctrine of federalism, a concept as old as our Republic. Federalism is concerned with the Constitution’s handling of a conflict between a federal law and a state law, or one between the laws of several states. To date, the U.S. Supreme Court has not been asked to apply federalism principles to the conflict between the Controlled Substances Act and a state law decriminalization act.
Banks need reassurance
The U.S. Department of Justice has published several position statements to indicate the extent of its deference to those individual states, and to highlight when it might choose not to defer to them. These papers, referred to as “The Cole Memos,” cannot provide much reassurance to community bankers that covet “Green Rush” companies as prospective customers. The position papers indicate an awareness that banks will offer banking services to such businesses, and remind banks that they must maintain a vigilant compliance program to detect any abuses if they do so. The Cole Memos, and a related paper prepared by FinCEN, direct banks to file copious numbers of SARs—including whenever a banking relationship is established with a marijuana-related business.
Published comments from bankers indicate that the majority of banks have calculated what these compliance programs will require and concluded that the costs (new hires, programs, paperwork, etc.) outweigh foreseeable benefits from relationships with marijuana-related businesses.
The void created by the reluctance to bank with marijuana-related businesses has led to the emergence of some start-ups, including the Fourth Corner Credit Union.
Formed in Colorado, Fourth Corner intended to service Colorado’s legal marijuana industry, but its launch was stymied by the Federal Reserve Bank’s decision to deny access to the FRB’s suite of electronic banking solutions and platforms, including its cash, check processing, electronic payments, Fedwire and ACH systems. In July, 2015, Fourth Corner brought suit against the Federal Reserve Bank.
In 2014, legislation passed in Colorado allowing licensed marijuana businesses to join together and form “financial services cooperatives.” This law has not yet made any notable impact, however.
Even if these costs were not so high, bankers want to receive reassurance, from the U.S. Department of Justice, or even bank regulators, that if they follow specific guidance, they will be spared any regulatory grief and the threat of prosecution for aiding and abetting violation of the Controlled Substances Act.
The Cole Memos (and the guidance published by FinCEN) studiously avoid giving any such broad reassurance. In fact, the Memos reserve the right to take any action deemed necessary to protect and promote the purposes of the Controlled Substances Act, the Bank Secrecy Act, and the Money Laundering Control Act, including prosecution of financial institutions.
No wonder that, until the federalism conflict is resolved, most community banks will probably continue to stay on the sidelines. A spokesperson for Bank of America, for instance, has said, “As a federally regulated financial institution, we abide by federal law and do not bank marijuana-related businesses.” Smaller banks are making similar calculations, and staying away from these potential customers, at least publicly.
Without some legislative action to solve the federalism problem, most banks simply won’t offer banking services to marijuana-related businesses. This is clearly a negative development for those marijuana-related businesses, as they are forced to develop highly unusual cash management and security practices, including the use of private armored facilities. As for banks, they are losing out on potentially lucrative opportunities to earn revenue from the “Green Rush” in the states that have opted to decriminalize.
Terry Cawley is the Liability Claims Manager for ABA Insurance Services and can be reached at 800-274-5222 or firstname.lastname@example.org.