Public support for legalized marijuana is at an unprecedented high. According to Quinnipiac University's most recent national poll, 94 percent of Americans now support medical marijuana when directed by a physician and 60 percent of voters say that the use of marijuana should be made legal in the United States. This growing shift in public sentiment has resulted in a legal cannabis market that was worth an estimated $6.6 billion in 2016 and is projected to grow to $24.1 billion by 2025.
Written by Pamela Yu, Special Counsel for Compliance and Research, NAFCU
Nearly three-quarters of the U.S. population lives in states that have legalized medical marijuana. (See, Table). Twenty-nine states and the District of Columbia (DC) currently allow legal medical marijuana. Another two states have pending medical marijuana legislation. In addition, eight states and DC have legalized marijuana for adult recreational use. Most recently, California, Massachusetts, Maine and Nevada all passed measures in November 2016 legalizing recreational marijuana. Meanwhile, 18 states have laws addressing Cannabidiol (CBD), a nonpsychoactive cannabis extract with the reported potential to treat medical patients suffering from inflammation, pain, anxiety, seizures and more. According to the recent Quinnipiac poll, 73 percent of voters oppose enforcing federal cannabis laws against state laws.
Table: States with Legalized Cannabis
| Medical (29+DC) | AK, AZ, AR, CA, CO, CT, DC, DE, FL, HI, IL, ME, MD, MA, MI, MN, MO, NE, NH, NJ, NM, NY, ND, OH, OR, PA, RI, VT, WA, WV |
| NC, WI **legislation pending as of 8/2/17 | |
| Recreational (8+DC) | AK, CA, CO, DC, ME, MA, NE, OR, WA |
| Cannabidiol/CBD (18) | AL, DE, FL, GA, IN, IA, KY, MS, MO, NC, OK, SC, TN, TX, UT, VA, WI, WY |
Despite its growing ubiquity, the marijuana industry has limited access to the financial services that are necessary to regular business operations. Due to a conflict of laws, the industry is, at present, virtually unbankable.
The Budding Cannabis Industry: Too Big to Fail?
Legalized marijuana has not only gained popularity among the public, it has been a huge boon to local and state government coffers. Take Colorado, for example. As one of the first states in the country to legalize recreational marijuana for adults, the marijuana industry in Colorado is booming and thriving. In 2016, legal marijuana sales in that state reportedly surpassed $1.3 billion.
As of May 2017, Colorado had collected more than $500 million in total tax revenue from the $3.6 billion in medical and recreational marijuana sales in the state since 2014. According to publicly-available state tax data, Colorado realized $198 million in taxes and license fees related to state-sanctioned marijuana sales in 2016, and another $96 million through May 2017. At least the first $40 million of funds received and collected annually are earmarked for public school construction projects. See, C.R.S. § 39-28.8-305. To date, $117.9 million in marijuana taxes has already been used to fund school construction and improvements. Other state and local social welfare and community infrastructure programs – ranging from public health initiatives, to affordable housing and help for the homeless, to road and facilities improvements – have reaped the benefits of Colorado's Mary Jane gravy train.
Other states are seeing similar benefits. Taxing cannabis at a high "vice" rate, states are receiving tax revenues that are reportedly three times as much as alcohol tax. Washington, for example, imposes a retail tax rate of 37 percent, and the state's total tax obligation for fiscal year 2017 is expected to top $233 million. California will be taxing marijuana at 15 percent and is projecting $1 billion and up to $100 million in savings annually. Recent reports estimate that states will generate nearly $655 million in tax revenue from retail marijuana sales nationwide in 2017.
Given legalized marijuana's tremendous sales growth potential and the tax revenue that comes with it, industry observers are wondering whether the state-sanctioned marijuana machine has become unstoppable. As states struggle with reduced resources, a cannabis fueled tax boom is an enticing prospect for many state governments. Meanwhile, states that are already seeing the direct and indirect benefits from marijuana-related taxes will be hard pressed to lose that revenue stream. From a purely fiscal perspective, the legalized cannabis industry may have already become too big to fail.
A Conflict of Laws
Despite the fact that more than half the country has legalized marijuana in some form at the state level, under the Controlled Substances Act (CSA) marijuana remains a schedule I controlled substance, which makes it illegal under federal law to manufacture, distribute or dispense marijuana. See, 12 U.S.C. § 812(b)(1). In addition, criminal provisions of federal money laundering statutes, unlicensed money remitter statutes and the Bank Secrecy Act (BSA) remain in effect with respect to marijuana-related activity. For example, it is a federal criminal offense to engage in certain financial and monetary transactions with the proceeds of a "specified unlawful activity," including marijuana-related funds. See, 18 U.S.C. §§ 1956 and 1957. It is also a federal criminal offense to transact funds "derived from" marijuana-related activity by or through a money transmitting business. See, 18 U.S.C. § 1960. Financial institutions that conduct transactions with funds derived from marijuana-related activity may also be subject to criminal liability for failing to identify or report financial transactions involving marijuana proceeds. See, 31 U.S.C. § 5318(g).
As such, financial transactions involving proceeds from marijuana-related activity can still form the basis for federal criminal prosecution, despite growing legalization under state law. Due to this conflict between federal and state law, credit unions and banks have been challenged in providing financial services to marijuana-related businesses. Financial institutions have also faced uncertainty about how to provide services to marijuana-related businesses consistent with BSA compliance obligations.
To further exacerbate matters, on September 9, 2015, Department of Justice (DOJ) Deputy Attorney General Sally Yates issued a memo (Yates Memo) to encourage federal prosecutors to pursue the individual accountability of those responsible for illegal corporate conduct. See, Sally Quillian Yates, Deputy Attorney General, U.S. Department of Justice, Individual Accountability for Corporate Wrongdoing. Thus, there is a risk of potential personal liability for credit union directors, management and employees. In light of these liability risks, credit unions and other financial institutions have been reluctant to provide services to the emerging cannabis industry. State-sanctioned marijuana-related businesses remain largely unbanked and typically operate as cash-based businesses, raising concerns about an increased risk of robbery and other crimes.
Cole Memo and FinCEN Guidance: An Imperfect Solution
Citing public safety and other concerns, members of Congress have for the past several years been calling for legislative or regulatory action to enhance financial access for legal marijuana-related businesses. In response to growing calls for action, under the Obama Administration, DOJ issued the "Cole" memos in 2013 and 2014 addressing marijuana enforcement, and the Financial Crimes Enforcement Network (FinCEN) in 2014 issued guidance on BSA expectations regarding marijuana-related businesses. Together, the Cole memos and the FinCEN guidance created a path – albeit somewhat precarious – for a credit union to serve marijuana-related businesses consistent with its compliance obligations.
DOJ Cole Memos
By way of background, on August 29, 2013, DOJ Deputy Attorney General Cole issued a memo (2013 Cole Memo) to federal prosecutors outlining eight key priorities concerning marijuana enforcement under the CSA. See, James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Enforcement
The priorities are:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property.
The 2013 Cole Memo instructed federal prosecutors and law enforcement to focus on whether one or more of these eight enforcement priorities are implicated when considering criminal investigation and prosecution for marijuana-related conduct. The 2013 Cole Memo, however, did not specifically address its applicability to certain financial crimes involving funds from marijuana-related activity. Therefore, on February 14, 2014, DOJ Deputy Attorney General Cole issued a new memo (2014 Cole Memo) on this point. See, James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes
The 2014 Cole Memo clarified that investigations and prosecutions of marijuana-related financial crimes are subject to the same eight enforcement priorities as set out in the 2013 Cole Memo. For example, if an institution or individual provides financial services to a marijuana-related business knowing the business is diverting marijuana to a state where marijuana is illegal under state law or is being used by a criminal organization to conduct financial transactions for its criminal goals, the memo directs that prosecution may be appropriate. Similarly, a financial institution that is willfully blind to such activity by failing to conduct appropriate customer due diligence, may be subject to prosecution. However, if a financial institution or individual offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, prosecution for financial crimes may not be appropriate per the guidance.
The 2014 Cole Memo also emphasized that financial institutions and individuals choosing to serve marijuana-related businesses that are not compliant with state regulatory and enforcement systems, or that operate in states lacking a clear and robust regulatory scheme, are at a greater risk for federal prosecution. The memo encouraged financial institutions to adhere to FinCEN's companion guidance, which is detailed below.
FinCEN Guidance
The FinCEN guidance was issued concurrently with the 2014 Cole Memo; each was intended to supplement the other. The FinCEN guidance clarified how financial institutions can provide services to marijuana-related businesses consistent with BSA compliance obligations. See, BSA Expectations Regarding Marijuana-Related Businesses – FIN-2014-G001. Specifically, the guidance addressed customer due diligence, suspicious activity report (SAR) filings and red flags for marijuana-related businesses. It also indicated FinCEN's enforcement priorities in connection with marijuana-related business transactions should focus on matters of systemic or significant failures, and not isolated lapses in technical compliance.
Customer Due Diligence
Under the guidance, customer due diligence for a marijuana-related business should include verification with state authorities that the business is duly licensed and registered, a review of the marijuana-business license application and related documentation, and a request to state licensing and enforcement authorities for available information about the business. Appropriate due diligence also means an understanding of the normal and expected activity of the business, and ongoing monitoring for suspicious activity, including any red flags, and periodically updating customer due diligence information, commensurate with the risk.
SAR Filings
The FinCEN guidance emphasizes that, notwithstanding any state law that legalizes marijuana-related activity, BSA regulations require a financial institution to file a SAR when it knows, suspects or has reason to suspect that a transaction: 1) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; 2) is designed to evade regulations promulgated under the BSA; or 3) lacks a business or apparent lawful purpose. See, 31 C.F.R. § 1020.320. Marijuana remains illegal under federal law. Therefore, a financial institution is required to file a SAR on any activity involving any marijuana-related business, including a business operating legally under state law.
The guidance describes three types of SAR filings for transactions involving a marijuana-related business: 1) Marijuana Limited; 2) Marijuana Priority; and 3) Marijuana Termination. A financial institution providing financial services to a marijuana-related business that does not implicate one of the eight federal enforcement priorities or violate state law should file a "Marijuana Limited" SAR, which would include streamlined information. A financial institution providing services to a marijuana-related business that implicates one or more of the federal enforcement priorities or violates state law should file a "Marijuana Priority" SAR, which would include comprehensive details in accordance with existing BSA regulations and guidance. Finally, if a financial institution decides to terminate its relationship with a marijuana-related business due to anti-money laundering concerns, it should file a "Marijuana Termination" SAR, which would include a narrative description of the basis for the termination.
Keep in mind that the National Credit Union Administration (NCUA) has long held that a credit union may not suspend or terminate a member's basic rights granted by the Federal Credit Union Act (i.e., the right to maintain a share account and the right to vote at annual meetings) without following the process in the Act for member expulsion. See, 12 U.S.C. §§ 1759, 1764, 1769. Thus, it is unclear whether a credit union may terminate a marijuana-related business' membership without following the formal expulsion process.
Red Flags to Distinguish Marijuana Priority SARs
The FinCEN guidance also provides several examples of red flags that might indicate the need for a "Marijuana Priority" SAR filing. Red flags implicating a federal enforcement priority or violation of state law include, among others, the appearance that a marijuana-related business is being used as a front to launder money derived from criminal activity not related to marijuana; the business is unable to produce satisfactory documentation to demonstrate it is duly licensed under state law; or a business seeks to conceal or disguise its involvement in a marijuana-related activity. The red flags contained in the guidance are not exhaustive and indicate only possible signs of such activity. The presence of any of the red flags may indicate a need for additional due diligence by the financial institution.
While the FinCEN guidance and 2014 Cole Memo provide some parameters for how financial institutions may provide marijuana-related businesses with access to financial services, it is important to understand that neither one expressly grants permission to handle marijuana-related funds or to provide financial services to the marijuana industry. The 2014 Cole Memo, notably, simply states the DOJ will not devote resources to prosecution where such activities are otherwise being conducted in accordance with state law. But there is a very clear disclaimer in the 2014 Cole Memo:
"As with the Department's previous statements on this subject, this memorandum is intended solely as a guide to the exercise of investigative and prosecutorial discretion. This memorandum does not alter in any way the Department's authority to enforce federal law, including federal laws relating to marijuana, regardless of state law. Neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law ... This memorandum is not intended, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal ... Finally, nothing herein precludes investigation or prosecution, even in the absence of any one of the factors listed above, in particular circumstances where investigation and prosecution otherwise serves an important federal interest." (Emphasis added.)
In effect, while the FinCEN guidance and Cole Memo provide "a guide" for marijuana banking, they offer limited assurance (and negligible legal cover) for credit unions that wish to handle funds derived from state-sanctioned marijuana.
Case Study: Fourth Corner Credit Union
With the lack of financial services for the marijuana industry becoming more and more untenable, The Fourth Corner Credit Union (Fourth Corner) stepped forward to endeavor to become the nation's first cannabis credit union.
Fourth Corner, perhaps recognizing that the credit union model is uniquely situated to address the needs of an unbanked industry, sought to address the cannabis banking void by forming a state-chartered credit union to exclusively serve marijuana-related businesses and supporters of legalized marijuana in the state of Colorado. According to its Facebook page, the credit union's mission is "to [provide] compliant banking services to those who share a common bond of support for the legalized marijuana industry." The credit union, chartered under an obscure provision in Colorado law that permits the state financial services commissioner to grant a charter so long as the credit union has "applied for" share insurance, was formed in late 2014.
After getting an approval from the Colorado financial services commissioner, the newly-chartered credit union planned to open its doors in Denver in early 2015. But the credit union's momentum was short-lived. In July 2015, NCUA denied Fourth Corner's application for federal share insurance and, shortly after, the Federal Reserve Bank of Kansas (Fed Bank) denied Fourth Corner's application for a master account, basing its denial, in part, on NCUA's insurance denial. In response, Fourth Corner filed suit against the Fed Bank and NCUA in two separate, but related, actions essentially alleging that "The NCUA and [the Fed Bank] acted in concert to unlawfully block [Fourth Corner] from gaining access to the Federal Reserve payments system," which the credit union deems is crucial to its operations. See, The Fourth Corner Credit Union v. National Credit Union Administration, Case No. 15-CV-01634, Complaint, ECF No. 1 (July 30, 2015). Indeed, without access to a master account, the credit union cannot access the Fed's payments system to electronically transfer funds. In short: no master account, no business. Fourth Corner's doors have yet to open.
Fourth Corner v. Fed Bank: District Court Decision
In December 2015, the U.S. District Court for the District of Colorado dismissed, with prejudice, Fourth Corner's lawsuit against the Fed Bank. Fourth Corner had asked the court for a mandatory injunction directing the Fed Bank to grant it a master account, but the court declined to grant such relief, finding that "courts cannot use equitable powers to issue an order that would facilitate criminal activity." See, The Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City, Case No. 15-CV-01633, Dismissal Order, ECF No. 46 (January 5, 2016). While acknowledging that the "situation [is] untenable," the District Court nevertheless concluded that the credit union's stated purpose in providing financial services to marijuana-related businesses violated the CSA and "[a] federal court cannot look the other way" just because "financial institutions don't mind violating the law." See, Dismissal Order. Fourth Corner appealed the decision to the U.S. Court of Appeals for the 10th Circuit, which heard oral argument on the matter in November 2016.
Fourth Corner v. Fed Bank: 10th Circuit Court of Appeals
In a deeply divided decision, the three-judge panel of the 10th Circuit issued three separate opinions that overlapped on some points, but were in direct conflict on others. Essentially, however, the appellate court vacated the lower court's order and directed the District Court to dismiss the amended complaint without prejudice. In short, the decision allows Fourth Corner to reapply to the Fed Bank for a master account and to have the case heard again if the bank denies that request. The court also noted that according to statute the Fed Bank must indiscriminately make Federal Reserve services available to "all depository institutions." See, 12 U.S.C. § 248a(c).
It is important to note thatthe appellate decision largely relied on Fourth Corner's promise in its amended complaint that it would service marijuana-related businesses only if doing so is legal:
"The district court dismissed the amended complaint, reasoning that Fourth Corner would use the master account to violate federal drug laws. This ruling was erroneous. The district court should have presumed that Fourth Corner would follow the court's determination that servicing marijuana-related businesses is illegal.And in the amended complaint, Fourth Corner essentially promised to obey the law that would be set out in the eventual declaratory judgment. In these circumstances, the district court had little reason to jettison the standard on a motion to dismiss and rely instead on suspicions about what Fourth Corner would do." (Emphasis added.)
In other words, the appeals court found the District Court relied on mere suspicions about what Fourth Corner might do, which was an insufficient standard to approve a motion to dismiss. Thus, the appellate decision came with a significant caveat – while Fourth Corner may serve marijuana industry supporters and advocates, it may not serve marijuana-related businesses that are illegal under federal law.
Given Fourth Corner's original goal of bringing vital financial services to unbanked marijuana-related businesses, the 10th Circuit decision is only a limited win for the would-be credit union. The credit union is now presumably free to adjust its business plan, reapply for a master account and, if granted, to open for business to serve legal-marijuana advocates and other individuals and groups within its field of membership that it may legally serve under federal law. But, regardless of the disposition in court, the credit union was already able to serve those legally innocuous groups. The key, of course, has always been the ability to serve marijuana-related businesses that are legal under state law but illegal under federal law. Viewing the decision through that lens, it is hard to say the 10th Circuit ruling has moved the ball forward for marijuana banking. In fact, the decision may have brought the conflict of laws into even sharper focus.
Indeed, the appeals court was unambiguous in one regard: "Today, two of the three panel members hold that servicing marijuana-related businesses remains illegal under federal law. With this holding by a panel majority, Fourth Corner will know that servicing marijuana-related businesses is illegal." (Emphasis added.)
Fourth Corner v. NCUA
Meanwhile, Fourth Corner's lawsuit against NCUA is still pending. While it remains unclear how the court might ultimately rule on the insurance dispute, the Colorado state financial services commissioner appears to have hinted that a denial of federal share insurance is not necessarily fatal to the credit union's business plan. This is because Colorado law provides that state credit unions must apply for federal insurance "or comparable insurance approved by the commissioner." In other words, while Colorado rules generally require credit unions chartered in that state to be federally insured by NCUA, the requirement may be waived by the state's financial services commissioner. As such, if the court rules against Fourth Corner and upholds the agency's insurance denial, the credit union could ask the Colorado commissioner to allow it to be privately insured.
Nevertheless, a court ruling in favor of NCUA would certainly raise yet another roadblock for the embattled credit union. Thus, while Fourth Corner has indicated it will move forward in pursuing a master account, the credit union continues to face a difficult road ahead.
An Uncertain Path Forward
If there was not already enough uncertainty surrounding marijuana banking, the situation has become even more unclear under the new administration. Credit unions providing, or interested in providing, financial services to marijuana-related businesses already face significant legal, compliance and operational challenges under the FinCEN guidance and Cole Memo, and these difficulties may be about to get worse. The Trump Administration appears to be signaling that a major shift in federal marijuana enforcement policy could be just around the corner. Indeed, comments from the White House and the attorney general may be hinting at a potential reversal from the previous administration's policy that the federal government would not direct its investigative and prosecutorial resources to states where marijuana is allowed under state law.
In February, for example, while drawing some distinction between medical and recreational marijuana, the White House press secretary indicated "there is still a federal law that we need to abide by when it comes to recreational marijuana," and "you will see greater enforcement of it." Meanwhile, during his Senate confirmation proceedings, the attorney general testified, "I won't commit to never enforcing federal law," after previously stating, "good people don't smoke marijuana." And the Drug Enforcement Administration announced in August 2016 that marijuana will remain illegal for all purposes as a schedule I controlled substance, maintaining the agency's long-held position that marijuana has "no currently accepted medical use and a high potential for abuse."
Most recently, in July 2017, the attorney general send a letter to the governor of Colorado to share his concerns and "serious questions" about the efficacy of marijuana regulatory structures in the state and to remind the governor of the 2014 Cole Memo's disclaimer that it "does not alter in any way the [DOJ's] authority to enforce federal law, including federal laws relating to marijuana, regardless of state law." Press reports indicate the attorney general sent similar letters to the governors of Alaska, Oregon and Washington, the other states with recreational cannabis businesses in place as of earlier this year.
While still speculative at this point, a change in federal drug enforcement priorities could mean even greater uncertainty for credit unions already serving or looking to serve marijuana-related businesses. The Cole Memo and FinCEN guidance have provided a framework for offering financial services to marijuana-related businesses but the fact remains that marijuana is still illegal under federal law. At the end of the day, agency guidance and enforcement policies are not binding law. The Trump Administration has full discretion and authority to overturn the Cole Memos and alter federal enforcement priorities with respect to marijuana-related activity. If that happens, credit unions providing financial services to marijuana-related businesses are even more vulnerable to uncertain legal and compliance liabilities.
Keep in mind that FinCEN's guidance relies on the enforcement posture articulated in the 2013 and 2014 Cole Memos:
"FinCEN is issuing this guidance in light of recent state initiatives to legalize certain marijuana-related activity and related guidance by the U.S. Department of Justice ("DOJ") concerning marijuana-related enforcement priorities. This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities."
Accordingly, if federal law enforcement priorities change or the Cole Memos are repealed or revised, credit unions can no longer rely on the FinCEN guidance for serving marijuana-businesses, heightening BSA compliance and other risks. It is also unclear at this point how NCUA would respond to any change in federal drug enforcement policy. While the agency provided the DOJ and FinCEN guidance to its examiners, this falls short of a full endorsement of banking marijuana businesses, and all bets are off if the current White House reverses course. NCUA will likely comply with any new directives from the Trump Administration with respect to federal enforcement of marijuana-related activities.
It seems lawmakers have a serious conundrum. The current administration appears to be contemplating a rolling back of Obama-era drug enforcement policies but the growing wave of public and state support for legalized cannabis shows no signs of abating. If the U.S. keeps moving toward national state-level legalization, the conflict of laws and the marijuana banking void can only become more problematic.