Cannabis growers and sellers had their hopes dashed in July after the Federal Reserve refused the Fourth Corner Credit Union’s (FCCU) application to open a master account with the nation’s central bank.
FCCU would have been the first bank established to receive deposits from cannabis businesses. Without a Fed master account, the credit union cannot perform the functions of a bank. Without a bank, cannabis entrepreneurs are forced to operate an all-cash business that is a target for criminals and a constant source of anxiety for those who must hoard and protect revenues without the security FCCU would provide.
At the core of the problem is the federal government’s continued listing of cannabis as a Schedule I substance under the Controlled Substances Act of 1970. The outlawed designation of the plant means that the banks that accept deposits generated from cannabis sales could be held in violation of federal money-laundering laws. Fearful of federal reprisal, established banks have been wary of taking cannabis money despite the huge amount of it being generated in states such as Colorado and Washington, where sales of cannabis are legal at the state level.
Mark Mason, the South Carolina lawyer behind the creation of FCCU, was not surprised by the Fed’s denial of the credit union’s master account application. Mason reported,
“I felt all along like they were trying to figure out a way to deny our application,”
The Fed’s refusal to allow cannabis businesses access to the banking system is an untenable position. With state-sanctioned dispensaries generating huge amounts of revenue—all of it in hard currency—the temptation for robbery is increasing, and business owners are arming themselves or hiring armed security companies for protection. Stashes of cash are spread out and hidden around the states at undisclosed locations to mitigate the risk of theft.
Much of the trouble is the result of inherent contradictions in the Cole Memorandum, the statement issued by the US Justice Department in 2014 to signal that federal drug laws would not be enforced against cannabis businesses if the businesses did not violate any of eight priorities listed in the document. Among the priorities are “preventing revenue from the sale of marijuana from going to criminal enterprises,” and “preventing violence and the use of firearms in the cultivation and distribution of marijuana.”
However, the memorandum also states that “Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the money laundering statutes (18 U.S.C. §§ 1956 and 1957).” Ironically, the memorandum’s statement that banks can be punished for taking cannabis money has led to enormous stacks of cash and the increasing presence of firearms to protect them, making violation of its own enforcement priorities increasingly likely. Subsequent Treasury Department statements to the banking industry have done little to assuage banks’ anxiety over working with the cannabis industry.
As a result of the Fed’s denial of FCCU’s application for a master account, cannabis businesses will for now have to continue to operate unbanked. FCCU has the support of some politicians in states where cannabis is legal, who recognize the public-safety issues and the impediment to taxation that results from a cash-only economy for cannabis sales. Colorado politicians have sponsored legislation that would clarify rules for banks.
In the meantime, the FCCU has filed suit against the Fed, saying that it deserves equal access to the financial system. Peter Conti-Brown, a legal studies professor at the University of Pennsylvania’s Wharton School of Business, believes the credit union faces a formidable challenge in arguing that the Fed lacks the power to deny it a master account. “They are going to face the longest of odds until there is a clear and permanent change to federal policy,” he said.