The question many medical marijuana business owners find challenging to answer is how are they going to pay their bills, employees, and even taxes without access to a bank or credit union account?
We’ve all read stories of dispensary owners walking into City Hall with $50,000 in cash to pay their business license fees or paying a power bill and rent with money orders purchased at a local convenience store.
But as medical and recreational marijuana business exploded in Colorado, Chris Nevitt and others believed they had an answer with Denver-based Fourth Corner Credit Union. Fourth Corner would have allowed dispensary owners and growers to access basic checking, along with lines of credit and other financial products.
The credit union asked for but never received permission from federal insurers and regulators to open. Fourth Corner is suing the Federal Reserve Bank of Kansas City and the National Credit Union Administration for denying its applications.
Although medical and recreational marijuana is legal in Colorado, it is still illegal on the federal level. That distinction has discouraged most banks and credit unions from working with marijuana businesses.
Fourth Corner’s failure is not deterring the efforts of the so-called gang of seven to get Battle Born Credit Union open in Nevada. Randi Thompson, a lobbyist and owner of Randi Thompson Consulting in Reno, told the Las Vegas Business Press she was disappointed, but Fourth Corner’s failure would not affect Battle Born’s efforts to form a credit union.
“We’ve had a couple of pre-application meetings with the Financial Institutions Division,” Thompson said. “We are still working on our application. Our focus from the ground up has been on creating a rigorous compliance strategy.”
Thompson said work on creating Battle Born Credit Union began two years ago. She said Fourth Corner struggled because Colorado doesn’t allow a private insurer option for financial institutions. Battle Born is preparing to file its applications with the Nevada Financial Institutions Division and American Share Insurance, a private depository insurance company, by early next month.
Thompson is hopeful Battle Born will open by the end of the year.
She said the credit union will “be headquartered in Las Vegas, because that’s where most of the businesses are located.” But, Battle Born will have a branch in Northern Nevada.
In a lengthy email to medical marijuana establishments in Nevada, Steve Trollope, business manager for BBCU LLC, set out the differences between Fourth Corner and Battle Born “primarily to dispel any concerns.”
Trollope said Fourth Corner was always going to have difficulty being approved by the National Credit Union Administration.
“Without depository insurance, the Federal Reserve Bank will not approve any application from a financial institution seeking access to the (Fed) system,” Trollope said.
He said other factors contributed to the demise of Fourth Corner’s application including not fully developing its compliance plans to deal with anti-money laundering laws.
Under Treasury Department guidelines from last year, financial institutions must file suspicious activity reports when a marijuana business opens or closes an account.
That report lists three classifications of concern: “limited,” “priority,” and “termination.” But the Treasury Department’s guidance left unclear whether it was legal to do business with dispensaries or growers.
According to Trollope, Battle Born’s strategy includes finalizing a workable compliance plan and software, and not approaching the Federal Reserve for a master account until the credit union has received both its state charter and private insurance proposals.
A master account gives a credit union or bank access to the Fed’s payment facilities, including its check clearing, wire transfer and Automated Clearing House facilities.
“We believe that our strategy strengthens the application process and increases the probability our applications for our state charter, private insurance and (Federal Reserve) master account will be approved,” Trollope said.
Trollope says there are “no guarantees we’ll get approved by federal regulators.” He believes the business plan “provides a lot more credibility when we approach the Fed.”
Battle Born’s business plan also includes Trollope, Thompson and others walking away once the credit union is established.
“We will have nothing to do with the operation,” Thompson said. “We’ll set up the compliance and stand up the credit union and then walk away.”
Thompson said the board of the nonprofit credit union will be made up of people who make their living from marijuana businesses statewide.
She also expressed her confidence that a Nevada-based credit union would be the first financial institution to gain federal approval to open for business.
“Where else but Nevada?” Thompson said. “We made gambling and prostitution legal. We are good at making the illegal legal.”
Meanwhile, Fourth Corner is hoping a federal judge will intervene, forcing regulators to approve the credit union. A pair of lawsuits filed this month in federal court in Denver challenge recent decisions by the National Credit Union Administration and Federal Reserve to deny their applications.
The credit union, which has the backing of Colorado’s governor, was set up to serve the state’s marijuana business but needed permission from federal insurers and regulators before opening its doors. The Federal Reserve rejected Fourth Corner’s application last month.
“We filed our suits as a regrettable last resort,” Nevitt, chairman of Fourth Corner, said in a statement. “Our mission … is to set a new bar for transparency with every regulator and regulatory process.”
Nevitt said Colorado’s Financial Services Division approved their charter, so “we are just looking for a similarly fair hearing” from the National Credit Union Administration and the Federal Reserve.
For now, Fourth Corner’s future is tangled up in lawsuits in federal court, while Battle Born completes its state and private depository insurance applications.
Neither Thompson or Trollope would discuss what comes next should Battle Born’s application for a master account be denied by the Federal Reserve
Maybe reflecting growing public support for medical marijuana, the Senate Appropriations Committee narrowly approved opening up banking services to state legal marijuana businesses. Senate Bill 1726 would prohibit the federal government from penalizing banks that work with marijuana businesses and protect them from prosecution.
“It’s encouraging to see members of the Senate stepping up and joining the House to address the banking crisis facing our industry,” said Aaron Smith, executive director of the National Cannabis Industry Association.
Smith said access to basic banking services is one of the most crucial challenges facing legal marijuana businesses. The bill is being supported by a bipartisan group of senators from Oregon, Washington and Colorado, all states with legalized medical and recreational marijuana industries.
Those senators that signed on to the bill are Jeff Merkley, D-Ore.; Ron Wyden, D-Ore.; Cory Gardner, R-Colo.; Michael Bennet, D-Colo., and Patty Murphy, D-Wash.
A similar amendment was passed by the House last year, but was stripped out during the final Senate budget negotiations. The House has not yet debated the Marijuana Businesses Access to Banking Act of 2015.