The Federal Reserve System has a clear stance on when banks are allowed to serve the legal-marijuana industry: it's never OK to do business with pot companies, except when it is.
That, at least, is the confusing message that emerges from comparing the Federal Reserve Board's tolerance of the practice with the hard line taken by one of the system's regional banks in a legal dispute with a Colorado credit union.
The Fed board in Washington has adopted guidelines published last year by the Justice Department and the Financial Crimes Enforcement Network, which permit lenders to serve marijuana businesses if they obey strict rules on oversight and reporting. These guidelines, and Justice's earlier Cole Memorandum asking prosecutors not to go after legal-pot businesses, were seen as a tentative go-ahead for banking the industry.
The Fed does permit banks it supervises to serve pot companies — in some cases. As of the end of July, there were 34 institutions regulated by the Fed serving marijuana businesses, according to a Fincen document. It was obtained through the Freedom of Information Act and provided to American Banker by anti-money-laundering consultants Alison Jimenez, president of Dynamic Securities Analytics, and Steven Kemmerling, president of MRBMonitor.com.
Yet the Federal Reserve Bank of Kansas City has staked out a position strongly against the practice. That is significant because the Kansas City Fed supervises banks in Colorado, perhaps the nation's biggest cannabis market, and in all or parts of six other states.
In court filings over the past several months, the Kansas City Fed has compared pot banking to helping evade sanctions against North Korea and trading in endangered species. It has argued that the fact that marijuana is still federally illegal overrides Fincen's green light for serving pot businesses.
Pot-legalization laws like Colorado's "are preempted as in conflict with the federal prohibition," the Kansas City Fed's attorneys wrote. "The Cole Memorandum and the Fincen guidance … do not change that analysis."
That argument stems from a dispute with Fourth Corner Credit Union in Denver, which was formed last year to serve Colorado's thriving legal-weed business. Organized by a group including Mark Mason, a South Carolina attorney, Fourth Corner was granted a charter by Colorado in November 2014.
It then applied to the Kansas City Fed for a master account, which would allow it access to the U.S. payment system. The application is a one-page form usually processed in five to seven days. The Kansas City Fed took nearly nine months to process the request, before finally turning it down. The credit union then filed suit in the U.S. District Court for Colorado to force the Kansas City Fed to issue an account.
The Kansas City Fed's court filings are some of the clearest statements from any bank supervisor on marijuana banking, and they are bad news for lenders that serve the industry.
It argues that Fourth Corner's charter is null and void because the company intends to "further criminal activity." The credit union's promises to comply with Fincen's guidance are meaningless because its entire reason for existing is to violate the law, court filings say.
"Plaintiff's amendment does not alter the fact that the State of Colorado granted it a charter for the purpose of facilitating businesses that produce and distribute marijuana," it wrote. "Such a charter is void … and [Fourth Corner] cannot bring this litigation."
The Kansas City Fed and the Federal Reserve Board declined to comment on the suit.
In an email to American Banker, Mason, who also serves as Fourth Corner's attorney, blasted the Kansas City Fed's argument, calling it inconsistent.
"The position of [the Kansas City Fed] that banking state-licensed [marijuana-related businesses] is absolutely prohibited is contrary to the formal federal guidance," he wrote.
Mason also took issue with the comparison to sanctions violations.
"The comparison of a social movement using democratic means to end prohibition with a communist dictatorship engaged in crimes against humanity establishes [that the Kansas City Fed] does not understand democracy, or Colorado," he wrote.
This dispute could churn the already muddy legal waters of cannabis banking, and may discourage some banks from taking on marijuana businesses, observers say. Part of the problem is the dearth of clear statements from regulators, said Don Childears, president of the Colorado Bankers Association.
"There has not been a lot said officially by the regulators, and that has left banks in a vacuum," he said. "I wish I could say there is now consistency in the treatment of this issue, but for all the time Colorado has been in this business there have been inconsistencies between and within agencies, and not just the Fed."
As of July 31, there were 266 depository institutions nationwide that had open accounts with marijuana businesses, while 388 have served marijuana companies at some point, according to the Fincen document obtained through the FOIA request.
Still, there is a huge unmet demand. Many in Colorado have warned that the industry's reliance on cash is a threat to public safety because it makes pot businesses prime candidates for robbery. Better bank access could also help ensure that pot companies pay their fair share of taxes.
Fourth Corner was founded last year to address this problem, but instead it has revealed the limits of regulators' tolerance for pot banking.
The Kansas City Fed said it can accept or reject applications for master accounts as it sees fit. Fourth Corner, as well as other lawyers who specialize in banking and legal marijuana, say the regional Fed bank, which is technically a private corporation and has limited power to set policy, overstepped its authority by excluding a legally chartered credit union.
"This is an abuse of discretion by the bank because [the granting of a master account] is supposed to just happen automatically," said Bob Hoban, an attorney at Hoban & Feola in Denver, who has worked extensively in cannabis law. "As long as you complete the appropriate paperwork, you get it — hands down, no questions asked."
The Kansas City Fed's court filings barely touch on the hundreds of banks currently serving the pot industry, or the seeming contradiction between its position and that of the Fed board. It addresses this question only in a footnote, where it makes a distinction between Fourth Corner and companies that serve pot businesses only "incidentally."
Fourth Corner's "charter is distinguishable from other financial institutions that incidentally provide banking services to marijuana-related entities, as those entities are not formed for the express purpose of serving … the cannabis and hemp industries," the Kansas City Fed's attorneys wrote.
Mason argued that this is a double standard.
"It appears [the Kansas City Fed] wants to punish [Fourth Corner] for being open and transparent about an aspect of its business plan, while at the same time allowing reserve bank services to be used to serve [marijuana-related businesses] — so long as the use is covert," he wrote.
A Colorado district court judge will hear oral arguments in the case on Dec. 28 and issue a judgment sometime thereafter.
Observers doubt that the credit union will prevail. Tyler Anthony, of the law firm Harris Moure, is "not bullish" on the credit union's chances.
"Federal courts generally are deferential to agency decisions," he said.
And the crux of the Kansas City Fed's argument — that federal criminalization takes precedent over state law — is hard to dispute, he and other lawyers say. "There's no question with regards to banking law, federal jurisdiction preempts completely" Colorado's law, Anthony said.
Hoban sees this as a case of regulatory confusion. The lack of clarity on rules for pot banking also presents difficult choices for the staff of entities that oversee banks, which can sometimes cause them to send contradictory signals, he said. In this case, a "rogue regulator" is simply doing its best to interpret contradictory laws, Hoban says.
"In any job with the federal government, you're sworn to uphold every single law," he said. "But we have a patchwork of other laws suggesting that you should not enforce" marijuana prohibitions.
Like banks themselves, bank supervisors "are in a very tough position" when it comes to marijuana, Hoban said.