Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

Friday, January 23, 2015

Are the marijuana industry's banking difficulties starting to work themselves out?

The question in the title of this post is prompted by this notable recent Denver Post article sent my way by one of my terrific students.   The article is headlined "Oregon bank opens doors to Colorado marijuana businesses," and here are excerpts:

An Oregon bank is openly offering service to the marijuana industry in Colorado at a time when banks here are lurking mostly in the shadows. MBank, based outside Portland, is part of a growing number of financial institutions, mostly Washington-based credit unions, that are banking openly with marijuana businesses.

But it is the first to venture across state lines and the only bank to announce publicly that it is serving Colorado marijuana businesses. The bank said it also is taking marijuana-related deposits in Washington, the other state where recreational pot is legal and has been serving Oregon-based medical marijuana dispensaries since September.

While some industry analysts see its announcement as somewhat brazen, considering pressure from regulators to keep any participation with the marijuana sector quiet, MBank officials say they're confident it's a good idea. "It's a bold maneuver and not one for a lot of folks to take on," MBank president and CEO Jef Baker said Tuesday. "We looked to regulators, both state and federal, to help us come to the conclusion that we can do banking in this sector."

The $165 million bank, in business since 1995, is putting trust in what it said is "tacit approval" — bank-speak for acceptance that isn't in writing — from the Federal Deposit Insurance Corporation. "We had to vet the program and expose ourselves to additional audits," Baker said. "But to be sure, we've put together something that meets without objection, though not necessarily specific approval."

An FDIC spokesman said the agency does not comment on bank operations.

MBank partnered with Guardian Data Systems to hook marijuana businesses. Already about five in Colorado have established accounts, Baker said, with about 30 other applications pending. "Finding access to traditional banking services has been one of the most daunting challenges faced by owners and operators in our industry" said Lance Ott, principal at GDS, which is handling the preliminary screening of account applicants.

"To date, there has not been a permanent (federally) compliant solution to the cannabis industry. With this partnership, cannabis industry operators no longer must shield the nature of their business from banking institutions," he said....

Federal regulators have offered guidance to bankers willing to work with the industry, mostly by requiring a restrictive set of rules and filing reports about account-holder transactions. Bankers balked at opening their doors to the industry, at least publicly. Some business owners offered anecdotes of account closures if even a hint of their participation became known to others. As a result, banks willing to work with the industry have remained a trade secret that businesses protect.

A number of business solutions — such as point-of-sale ATMs and credit-card processing machines — regularly are offered to marijuana shops, but all require the participation of a bank and the vendors aren't willing to identify their partner.

For that reason, Colorado bankers doubt that MBank's openness will work. "I wonder if this bank will suffer the fate as those in Colorado that tried to work openly, only to be told to close accounts," said Jenifer Waller, vice president of the Colorado Bankers Association. "I'm not sure Colorado banks will step out again after this since each test trial has met with the same result: closed accounts."

Colorado Springs State Bank was the last to openly work with the marijuana industry here. In October 2011, it closed about 300 industry accounts amid concerns about working with companies that violate federal law.

Marijuana remains on the government's list of illegal drugs, and no bank has stepped into the light since. That has not happened in the Pacific Northwest, where others willing to openly bank the pot industry have crept forward, including Washington credit unions in Olympia, Spokane and Seattle.

Although Colorado awaits the opening of the world's first pot credit union, that won't happen until federal regulators approve a master account for the Fourth Corner Credit Union to operate....

MBank first took on Oregon-based medical marijuana businesses in September after clearing its plan with state and federal regulators, but at the time it remained focused on dispensaries in that state alone. That changed as the bank saw opportunity in "an underserved sector," Baker said.

MBank won't have a physical office or employees in Colorado. Cash deposits are to be picked up by contracted armored-car services and brought to a Federal Reserve System bank, such as the one located in downtown Denver. Deposits are then credited to MBank's account and further credited to the account of the marijuana business. "It's all electronic and never physically crosses state lines," Baker said. MBank has established a limit of 35 new accounts for marijuana businesses each month for the first year, which works out to be a convenient number: 420.

I had lately been thinking that Section 538 of the cromnibus act passed by Congress last month, which forbids the use of money by the Department of Justice for interfering with State laws implementing medical marijuana programs, might embolden more banks to openly move into the marijuana business sector.  I am not sure if Section 538 fully explains MBank's moves now, but I am sure more and more financial institutions will move into this space if and when it becomes clear that the feds will not go after those who provide responsible banking services to state-approved marijuana businesses.

https://lawprofessors.typepad.com/marijuana_law/2015/01/are-the-marijuana-industrys-banking-difficulties-starting-to-work-themselves-out.html

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