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Are Credit Unions the Answer to the Marijuana Banking Question?

By Christopher Coble, Esq. | Last updated on

The large cash deposits smell like marijuana, so some of the businesses are spraying the cash with room freshener or perfume to hide the marijuana smell. ... The banks are even more suspicious when they have a person trying to deposit a large cash deposit that smells like perfume.

That's Colorado State Senator David Balmer, describing how the state was ill-prepared for a booming recreational marijuana industry. For all the talk about a tax windfall from legalized and regulated pot sales, one not-so-minor detail had been left out: How will marijuana businesses bank their money?

As one of the first states to legalize recreational marijuana sales, Colorado is a valuable test case for pot banking -- both in terms of early missteps and possible ways forward for a burgeoning but legally tenuous economy.

The Wild Weed West

You'd think that in all the logistical wrangling about taxing legalized weed, the issue of how pot-related businesses receive their income, report their profits, and remit their tax obligation would be front and center. As it turns out, pot banking was one of Colorado's last concerns.

But as the tax revenue started coming due, the state realized it had a procedural and security nightmare on its hands. Without access to bank accounts and records, Colorado's new weed economy existed solely in cash, which meant an untold number of unreported sales and honest retailers resorting to armored trucks just to pay their taxes.

It's no wonder national banks didn't step in: Marijuana was, and still is, criminalized on the federal level, and major banks are federally regulated. If they were to pool marijuana business money, they could be subject to federal RICO statutes.

While the need for legitimate banking services (deposit accounts, credit cards, lines of credit, small business loans, ATM services at point of sale, etc.) existed, no one was too eager to fill it, for fear of federal enforcement.

The Federal Plan: Not Exactly a Green Light

In February 2014, the Justice and Treasury Departments issued guidelines for banks doing business with marijuana retailers in states where it was legalized. For dispensaries, and the banks that wanted their business, the new rules were supposed to open the door to financial legitimacy. Instead, the feds just delineated the door and demonstrated the locking mechanism.

As Don Childears, president of the Colorado Bankers Association, told Talking Points Memo: "After a series of red lights, we expected this guidance to be a yellow one. ... At best, this amounts to 'serve these customers at your own risk' and it emphasizes all of the risks. This light is red."

The problem with the federal guidelines were the investigating and reporting requirements placed on banks:

In a seven-page document explaining the guidelines, FinCEN called for "due diligence" by financial institutions in monitoring their marijuana customers, including reviewing their applications for state licenses and understanding their "normal and expected activity," such as the types of products they sell and whether they have medical or recreational customers.

The guidelines also required that banks file "suspicious activity reports" on their marijuana clients.

Needless to say, this plan did little to encourage banks to open their doors to legal dispensaries, or inspire dispensaries to seek their business. The banks themselves would become a de facto investigatory arm of the federal government, adding cost and possible criminal liability to their bottom line, while marijuana retailers, already wary of federal interference in state-legalized commercial activity, were loathe to subject their business to that level of scrutiny.

The State Plan: Cannabis Co-Ops, Credit Unions

One month after the DOJ had their say, Colorado floated its own pot banking plan. A state bill authorized "cannabis cooperatives" that would be able to receive deposits from members, make their own deposits into state and national banks, provide loans to members, and purchase real estate and other assets.

The co-op plan is currently bogged down in uncertainty over access to the federal banking system.

Most recently, Colorado banking regulators granted a state charter to the Fourth Corner Credit Union in December 2014. The credit union is hoping to cater to the state's legal weed retailers, and would be open to anyone with an "interest" in the marijuana industry.

Fourth Corner needs federal approval to obtain a master account number and access to the nationwide electronic banking system, thus removing the need for clients to deal solely in cash. The process is normally automatic for organizations that already have a state charter, but as of now, Fourth Corner is still waiting on approval from the Federal Reserve System .

High Hopes

The DOJ wants to make sure cartels aren't laundering money. Colorado wants accurate sales data and tax revenue. Marijuana retailers want financial security and access to the same banking and financial services as other legitimate businesses.

By keeping a watchful eye on transactions and limiting itself to intrastate operations, a credit union might just be the system that shepherds the marijuana banking industry from its feral, cash-soaked infancy into its clean-cut, checkbook-toting adulthood.

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