Why it matters

One Colorado credit union is taking matters into its own hands after the Federal Reserve Bank of Kansas City (FRB-KC) and the National Credit Union Association (NCUA) rejected the institution's application for deposit insurance. The Fourth Corner Credit Union, based in Denver, was formed to help marijuana businesses in need of financial services. But when the entity applied for a master account after being granted a license by the state regulator, both the FRB-KC and the NCUA denied the application. In response, the credit union filed suit alleging the NCUA acted arbitrarily and capriciously in violation of Fourth Corner's due process rights. As for the FRB-KC, the plaintiff charged violations of equal access to the payments system as mandated by federal law. "A request for a master account is processed … not decided upon," according to the complaint, and the FRB-KC lacks the discretion to consider the financial institution's customers. The complaints capture the tug-of-war between conflicting federal and state law with regard to marijuana, with financial institutions forced to wait and see who wins.

Detailed discussion

How should the financial services industry address the banking needs of the marijuana industry? The question remains unanswered, even as the number of states that have legalized marijuana continues to rise, to 23, with recreational use decriminalized in four states and Washington, D.C.

As businesses have grown to take advantage of the new market, they have faced an obstacle unique to the industry: a lack of access to financial institutions. Concerned about the reaction of federal regulators to working with marijuana-related businesses, banks have been hesitant to offer accounts or encourage relationships.

Marijuana remains illegal under federal law and banks are prohibited from knowingly providing services to illegal enterprises. In February 2014 the Department of Justice (DOJ) and the Financial Crimes Enforcement Network (FinCEN) released guidance that was ostensibly intended as a primer on how to work with marijuana-related businesses. But the guidance made clear that financial institutions are still required to file Suspicious Activity Reports (SARs) on transactions involving the proceeds of marijuana sales consistent with Bank Secrecy Act (BSA) obligations.

Banks must also keep in mind the "Cole Memo," a memorandum issued by the DOJ's Deputy Attorney General James M. Cole to all U.S. Attorneys on the issue of enforcement of federal anti-marijuana laws in light of growing state acceptance. And the California Bankers Association waded into the debate earlier this month, issuing a statement in support of repealing the criminal status of marijuana. Until then, "marijuana-related businesses engage in criminal activity," the group said, and "cannot be banked."

One credit union decided to take matters into its own hands. The Fourth Corner Credit Union (TFCCU) was founded last year to provide financial services to the marijuana industry, from businesses to employees to vendors. Denver-based TFCCU organized the credit union with an anti-money laundering program in compliance with both the FinCEN guidance and the Cole memorandum and was granted a charter from the Colorado Division of Financial Services (DFS) in July 2014. In August 2014 ACCUITY issued a Routing Number to the credit union.

TFCCU then submitted an application to both NCUA and the FRB-KC for a master account, providing all of the requested documents. Although the FRB-KC notes that processing of such applications may take 5-7 business days, FRB-KC took no action on TFCCU's application for nine months.

Both the NCUA and the FRB-KC denied the applications, with the FRB-KC writing that "[i]ssuance of a master account is within the Reserve Bank's discretion and requires that the Reserve Bank be in a position to clearly identify the risk(s) posed by a financial institution and how that risk can be managed to the satisfaction of the Reserve Bank."

After being rejected, TFCCU sued both the NCUA and the FRB-KC, requesting a declaration that the defendants grant the credit union a master account. The defendants "acted in concert to unlawfully deny TFCCU access to the Federal Reserve payments system," the credit union alleged.

Section 248a(c)(2) of the Monetary Control Act of 1980 requires that "All Federal Reserve Bank services covered by the fee schedule shall be available to nonmember depository institutions and shall be priced at the same fee schedule applicable to member banks." Based on this provision, "[t]he Federal Reserve must allow all depository institutions equal access to the Federal Reserve payment system on nondiscriminatory terms," TFCCU wrote in its complaint against the FRB-KC. "[T]he law prevents FRB-KC's owners from playing a discretionary role in deciding who gets into the monopolistic payments system, and who is kept out."

In order to maintain the nation's dual banking system, all federal and state-chartered depository institutions have equal access to the Federal Reserve payments system on non-discriminatory terms, TFCCU argued, and the denial of access to the payments system violates TFCCU's right to equal access.

"TFCCU seeks to enforce in this declaratory judgment action its federal statutory right, as a fledgling state-chartered credit union, to equal access to the payments system; a right granted by Congress to all depository institutions 35 years ago," according to the complaint against the FRB-KC. "Issues of central bank design were left to Congress. TFCCU seeks to compel FRB-KC to comply with the equal access law to which it is subject. FRB-KC must respect the 153-year-old constitutionally established dual banking system—and honor the structural design of the Federal Reserve System and its various components."

The Tenth Amendment reserved the authority to charter financial institutions to the states, the credit union noted. Once Colorado issued a state charter to TFCCU, "FRB-KC must honor that official state action and allow TFCCU access to the Federal Reserve payments system so it can operate."

According to TFCCU, the processing of a master account "is a routine ministerial act" that does not require the exercise of discretion by FRB-KC, particularly not investigation into possible customers of the financial institution. The Colorado DFS is TFCCU's sole regulator and supervisor, the credit union told the court. Once it granted a charter, FRB-KC lacked the jurisdiction to do anything but approve the application for a master account.

The complaints request a declaration ordering FRB-KC and NCUA to grant TFCCU a master account.

To read the complaint in Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City, click here.

To read the complaint in Fourth Corner Credit Union v. National Credit Union Association, click here.