Why Colorado's 'Cannabis Credit Co-Ops' Won't Solve the Marijuana Banking Problem

Denver Post videoDenver Post videoYesterday the Colorado legislature approved a bill aimed at giving state-licensed marijuana businesses access to banking services by creating "cannabis credit co-ops." The summary of H.B. 1398 explains: 

Because marijuana is illegal under federal law, financial institutions are reluctant to serve state-licensed marijuana businesses. These businesses therefore currently operate almost entirely on a cash-only basis, which raises their costs, increases the risk of crime, and impedes the state's ability to account for these businesses' revenues.

Although Gov. John Hickenlooper's office has indicated he will sign the bill, it will not actually solve the problem it purports to address. The cannabis credit co-ops cannot offer checking and credit card services without approval from the Federal Reserve, which is not likely to look kindly on financial institutions dedicated to serving businesses that federal law treats as criminal enterprises, especially since those organizations will not be covered by deposit insurance. "H.B. 1398 is likely not a solution to the banking problem, but an opportunity to move the conversation forward," says Mike Elliott, executive director of Colorado's Marijuana Industry Group. "It will allow cannabis credit co-ops to form, and seek permission from the Fed to access merchant services and checking. The Fed will likely not grant this access. Colorado is doing everything possible to solve this issue, and H.B. 1398 will give us a new opportunity to try to get approval by the Fed. The ultimate solution to banking lies with the United States Congress."

But what about those memos that the Justice Department and the Treasury Department's Financiancial Crimes Enforcement Network (FinCEN) issued in February? Weren't they supposed to "reassure banks that they won't be punished for doing business with legitimate marijuana shops in states that have legalized sales," as The Huffington Post puts it? As I explained at the time, what the memos actually did was highlight the legal and regulatory peril of daring to accept marijuana money. Here is how John Davis, who runs two medical marijuana dispensaries in Seattle, puts it: "The DOJ says, 'If you do this, you're violating this law, this law, and this law. And FinCEN says, 'On your filings, you are to admit to those crimes.' So the banks, very conservative institutions, are looking at this and saying, 'Nope. This doesn't give us any assurances. This says that we can be arrested.'" Don Childears, president of the Colorado Bankers Association, said "no bank can comply" with FinCEN's monitoring and reporting demands, which require financial institutions to "know and control their customers' activities, and those of their [customers'] customers." He summed up the memos' message this way: "Serve these customers at your own risk." 

In light of all that, it was pretty funny last week when Republicans grilled Treasury Secretary Jack Lew during a congressional hearing about his supposed eagerness to accommodate federal felons. "The issuance of a green light for banking institutions to do business with these illegal marijuana shops and subsequent action by the Treasury Department to, in effect, rubber stamp that, gives me some pause," said Rep. Hal Rogers (R-Ky.), chairman of the appropriations subcommittee holding the hearing. "This is still an illegal product in practically every state....What about cocaine dealers? Shouldn't they be given the same break?" Lew explained that "our guidelines in no way change federal law"—which is why they have not had any noticeable impact on the availability of banking services to cannabusinesses. 

As Childears observed, "an act of Congress is the only way to solve this problem." The Marijuana Businesses Access to Banking Act, introduced last summer by Reps. Ed Perlmutter (D-Colo.) and Denny Heck (D-Wash.), would protect banks that deal with state-legal marijuana businesses from criminal investigation or prosecution and from regulatory repercussions, including loss of federal deposit insurance.

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  • R C Dean||

    My familiarity with banking regulation is at least two rounds of reforms ago, but why can't the state just essentially set up an account on the state ledger for these businesses, layering the cannabis transactions into all the other state transactions, and daring the Fed and DOJ to shut down the state government to get at the evil potheads?

  • derpules||

    Because the Fed and DOJ would shut down the state government to get at the evil potheads.

  • Jerryskids||

    The cannabis credit co-ops cannot offer checking and credit card services without approval from the Federal Reserve.

    I haven't been paying attention to banking laws apparently - since when can states not charter banks outside of the federal system? Have we come this far that where once there was a SCOTUS argument over whether or not the federal government could establish a bank it is now accepted that only the federal government can establish banks?

  • PapayaSF||

    Sure, they can, but it's not a trivial undertaking. And starting a bank to serve a state's marijuana businesses is a bit like building a road for your new car: it's even more trouble and expense.

  • The Late P Brooks||

    There was a brief and factually incomplete mention of this on Bloomberg this morning.

    Bankers are meanies because they won't expose the enterprise (and the owners thereof) to a huge legal liability by providing services to businesses which have been explicitly declared illegal by the federal government.

  • The Late P Brooks||

    and impedes the state's ability to account for these businesses' revenues.

    Now we're getting somewhere.

  • The Late P Brooks||

    I'm pretty sure bankers read the papers. How many of them, after observing the treatment of Bank of America and J P Morgan, will gladly lay their heads on the chopping block based on "assurances" from Treasury they have nothing to fear?

  • ||

    These businesses therefore currently operate almost entirely on a cash-only basis, which raises their costs

    A cash only business may have some inconveniences, but unless credit card companies have suddenly started giving vendors money instead of taking 3% of every sale, I don't see how cash-only raises costs.

  • PapayaSF||

    Wouldn't you have more need of safes and armed guards than you would for a normal business?

  • kinnath||

    Pay the rent, with cash cause you don't have a checking account.

    Pay the utilities, with cash cause you don't have a checking account.

    Pay your employees, with cash cause you don't have a checking account.

    Pay your state and federal withholding, with cash cause you don't have a checking account.

    etc, etc, etc, etc.

  • bassjoe||

    Not having a bank account could cause accounting and taxation headaches, at the very least. For one thing, you can't use a payroll processing company.

    Even small businesses might make 6-figure transactions regularly; I don't know about you but I'd much prefer to hand the guy a check for the amount rather than stacks of $100 bills (for safety, accounting, and liability reasons).

  • Mainer2||

    Gov. Hickenlooper ? More like Dick-in-Pooper, amirite ?
    /immature

  • bassjoe||

    Good.

    Hopefully, this will be the beginning of moving away from the FED/FinCEN idiocy that is American banking. It is absolutely retarded that banks are responsible for their customers' customers' actions.

    Maybe CO can insure deposits at these institutions directly or maybe the co-ops can find a private insurance company willing to take the risk?

  • Loki||

    But what about those memos that the Justice Department and the Treasury Department's Financiancial Crimes Enforcement Network (FinCEN) issued in February?... "The DOJ says, 'If you do this, you're violating this law, this law, and this law. And FinCEN says, 'On your filings, you are to admit to those crimes.'

    "IT'S A TRAP!" - Adm. Ackbar

  • George1||

    I have an actual solution to the banking problem. Visit HealersBank.com.

  • terrymac||

    Know Your Customer should be repealed. The banks are effectively being conscripted into doing the work of the government, and granted an exemption from the requirement for government agents to obtain a warrant before demanding their customer's private information.

  • Robert||

    I don't get it. Can't anyone "pay to the order of" anyone else? They might not get banks to take them, but isn't half the job just getting their vendors redeemable somethings? Then they can go to whoever it is and get FRNs or a check on that person's acc't.

  • George1||

    Check http://www.healersbank.com for dispensary bank accounts.

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