Bank Lawyer's Blog

Fourth Corner's "Victory"

Credit union consultant Marvin Umholtz was kind enough to alert me to the news that our favorite marijuana-fueled credit union, Fourth Corner Credit Union, had finally received what it had for so long longed: a master account with the Federal Reserve. However, that approval came with a number of conditions, among them, according to the credit union, the following:

• Fourth Corner meet Colorado Division of Financial Services requirements, including obtaining share deposit insurance;
• Fourth Corner provide the Federal Reserve Bank of Kansas City a letter from Colorado Division of Financial Services stating those requirements were met;
• Fourth Corner provide a letter showing it received share deposit insurance from the National Credit Union Administration or a private insurer that meets Colorado guidelines;
• Fourth Corner adopt bylaws that no services will be provided to “Marijuana-Related Businesses” unless and until federal law allows for such services to be provided to those businesses.

That last bullet point is the kicker. As we discussed a couple of months ago, the credit union admits that having to back off its original business plan of serving Colorado-licensed marijuana-related businesses and, until those businesses become "legal" under federal law, serving only individuals and entities that "support" or "advocate for" the legalization of marijuana, might not generate enough capital and income to permit the credit union to make a go of it. That concern, in turn, might justify the NCUA in refusing to grant share insurance (the credit union and the NCUA are currently in litigation over the NCUA's refusal to do just that). Even the state of Colorado might decide that the change in the business plan imperils the credit union's state charter approval, although that's doubtful, since the state regulator has been a supporter of the credit union throughout its rocky birthing process.

Therefore, although the door has been opened a crack, there are strong breezes blowing that could slam it shut. Moreover, this "victory" does little to provide hope to state-legal marijuana businesses that the banking business is about to be opened to them. For the foreseeable future, except for renegades and outliers, banks and credit unions will continue to consider marijuana-related businesses as a potential legal minefield.

Speaking of outliers, you have sympathy for Fourth Corner's frustration regarding both the Federal Reserve and the NCUA when right up the highway from it in Arvada, Colorado,  where Partner Credit Union and its fearless leader, Sundie Seefried, were recently featured in a New York Times magazine article as not only openly providing financial services to marijuana-related business, but selling a "Safe Harbor" program to other financial institutions that instructs them how to do it (and, theoretically, how to comply with the now-rescinded "Cole Memo," and the related FinCEN guidance, which has not yet been rescinded but appears to some of us to be a shaky legal footing). Ms. Seefried is even selling a "how-to" instructional book on her way with the weed business. Partner Credit Union is described by the Times as pot's "biggest banker." Moreover, Ms. Seefried publicly (and you don't get more public than bragging in the New York Times) touts that when it comes to violating federal criminal statutes related to Schedule 1 narcotics, she's not losing any sleep.

She hasn’t been indicted, and she hasn’t been told to stop. Seefried has concluded that, for the moment at least, her chances of facing prosecution are small — “less than 20 percent,” she says.

Maybe it's just me, but a 19% chance of being indicted by a federal grand jury for aiding and abetting illegal drug dealing might make me lose a few hours of sleep. Ms. Seefried is obviously made of sterner stuff.

I assume that Partner is using a Federal Reserve master account to launder marijuana-related dollars through the Federal Reserve system and that the NCUA has given Partner a clean bill of health, based upon the Safe Harbor program. If Partner can laugh in the face of federal criminal drug laws and get away it, why can't Fourth Corner? The NCUA (and, I assume the Fed) will not allow Fourth Corner to launder drug money but, apparently, has no problem with Partner doing the same thing. The founders of Fourth Corner (and the rest of us) have a right to ask "why?"

Obviously, the risks taken by Partner and the other financial institutions that are engaged in this (federally) illegal activity are worth it to them because the money they are making is not small, and, as we all know, "it's all about the money." According to the New York Times article:

For each $100,000 deposited at Safe Harbor, a client pays $450 in fees in the first year and $300 thereafter. (Client companies that serve the marijuana industry but don’t actually sell the drugs, like laboratories, require much less vetting and so pay much lower fees.) Seefried says the Safe Harbor program made a modest profit in its first year — less than $200,000. It became much more lucrative for the credit union in 2016, but Seefried won’t reveal specifics. According to federal data, most of the institution’s sources of income have stayed relatively steady since 2014, but fee income has grown to a projected $5 million in 2017 from nearly $3 million.

Seefried says that about three-quarters of Safe Harbor’s marijuana-selling clients pay less than $1,000 a month per account, considerably less than they would pay at banks, where monthly account fees are said to start at $1,500. Many observers assume that the opportunity to assess lucrative fees is what entices small banks to take on these risky accounts. Federal data show that at Champion Bank, in suburban Denver, which began explicitly working with marijuana businesses in 2014, annual fee revenue on deposit accounts increased by a factor of 68 from 2013 to 2016, to $752,000 from $11,000, even as its main line of business, providing loans, shrank. At Colorado Bank and Trust in La Junta, fees grew elevenfold to $2.9 million.

The Colorado Department of Revenue recently reported that "last year between January and October, marijuana sales reached $1,259,861,988." There's gold in them hills, boys and girls!

If the fact that that your money is made by violating federal criminal laws and that the only reason the businesses and their bankers aren't in jail is because of the sometimes-shaky forbearance of those charged with enforcing those federal criminal laws doesn't deter you, and the myriad potential negative social impacts of such businesses (such as those in Colorado that are alleged by the studies cited in this article and in this study) don't cause your conscience any concern, then based upon the example set by Partner Credit Union, there's no reason that you, too, shouldn't get in on the action. Since it appears that the NCUA appears to be the state-legal drug dealers' regulator of choice, you might want to convert your charter to a credit union, if you're not already one.

I might have non-drug-related bail money squirreled away for a rainy day, though.

The MSM Agrees: Sessions Spooked Banks

Although I'm beginning to make even myself nod off with marijuana related business banking stories, I'll pass this one along (h/t to Prof. Julie Anderson Hill) and then pick on something or someone else until something unusual occurs (like Jeff Sessions being busted by the DEA for running bales of Colorado sweet weed to Kansas). According to CBS News, several sources have confirmed what we, obviously because we're possessed of dumb luck, also thought: Jeff Sessions' recent rescission of the Cole Memo (and of additional US Justice Department Guidance) has had, and will continue to have, a depressing effect on banks that want to provide banking services to purveyors of state-legal demon weed and edibles.

The attorney general's action "chills the banks," said Robert Hoban, head of the Hoban Law Group in Denver, a law firm that specializes in the pot business.

A number of lenders, hearing the news, "said I'm done," and planned to back out of the marijuana trade, said Sundie Seefried, chief executive of Partner Colorado, a Denver-area credit union that has cannabis clients. She insisted that her institution would continue on.

With Sessions rescinding the Obama approach, small banks that "were interested in marijuana in states where it's legal have put that on hold," said Aaron Stetter, executive vice-president for policy and political operations at the Independent Community Bankers of America.

[...]

The scrapping of Barack Obama's lenient rules will remain as a disincentive for banks to get involved with the industry, said Robert McVay, an attorney in Seattle with the Harris Bricken firm, who specializes in the industry. Without the Obama policy, McVay added, "lenders will have less of a leg to stand on."

Before Sessions' action, that leg was pegged and eaten almost through by termites. Now, it's paper thin and unable to support the weight of even a lone marijuana-crazed marmoset, much less an entire commercial bank.

While some speculate that the current conundrum provides an incentive to finally take action to solve the marijuana banking riddle at the federal level, and politicians from MJ-friendly states like Colorado, Oregon, Washington, and California are pushing measures in Congress: (1) the need for such action has been urgent for the last four years with very little progress being made (outside of periodically defunding federal enforcement of federal prohibitions against medical marijuana in states where its distribution is legal under state law), and (2) Democrats (and many Republicans) in Congress and Donald Trump can't seem to find common ground on any controversial subject (can you say "DACA"?) for more than five minutes without some volcano of hate erupting. Therefore, I simply don't see the current problem being resolved any time soon. While outliers will still take the risks (and violate federal criminal laws), most banks won't touch marijuana related businesses with a ten-foot pole (or czech).

Sessions Stirs The Pot

Apparently, US Attorney General Jeff Sessions was bored last Thursday, so he decided to liven up his day by flushing a lit cherry bomb down Mary Jane's toilet and...ya' know...seeing what happens.

His tersely worded memorandum that rescinded a number of memorandums that had been issued by the Justice Department during his predecessor's tenure, including the commonly called "Cole Memorandum" that forms the basis for Fincen's 2014 guidance to financial institutions on how to address money laundering and BSA risks when they violate federal criminal laws by providing banking services to marijuana related businesses in states where such services are legal under applicable state law. Operators of such marijuana related business were heard to utter, when being informed of this nefarious pronouncement by Darth Sessions, "Huh? Whaaat? Uhhh..Yeah. Right. Whaaaat?"

More sober, albeit, in some cases, more hysterical, reaction, came from advocates for such businesses who had not partaken of their wares and from others who take an interest in the such businesses. Among the hysterical, US Senator Cory Gardner of Colorado needed a jiffy mop to absorb the flop sweat flying from his brow.

U.S. Sen. Cory Gardner, a Republican, was among those who lashed out at Sessions, saying the nation’s top law enforcement officer had “trampled on the will of the voters.”

In an impassioned speech on the Senate floor, Gardner said thousands of jobs and millions of dollars in revenue were at risk.

“Before I voted to confirm Attorney General Sessions, he assured me that marijuana would not be a priority for this administration,” Gardner said in a statement. “Today’s action directly contradicts what I was told, and I am prepared to take all steps necessary, including holding (Justice Department) nominees, until the attorney general lives up to the commitment he made to me prior to his confirmation.”

Maybe it's just me, but I think trying to bully the Trump administration with threats will gain you traction only if your ultimate goal is to wage a "Tweet jihad." In addition, if Gardner wants to stray from his Tea Party roots and make common cause with the likes of Gavin Newsom, good luck with that strange bedfellows cohabitation. Although, as another politician noted, Colorado is "a purple state with a libertarian streak," so maybe Gardner's threats will play well in that rarefied atmosphere. I do not think that they will move Sessions to back down.

Cooler heads seemed to think that, for the time being, at least, the Sessions memo was a non-event.

“I would encourage people not to freak out,” Colorado Attorney General Cynthia Coffman told reporters, adding that she called the state’s interim U.S. Attorney Bob Troyer after Sessions made his announcement.

She was reassured by their conversation, she said, believing that Troyer and the federal prosecutors he oversees would remain focused on the black and gray markets — and not shift to a crackdown on legal recreational or medical marijuana sales in Colorado. A statement from Troyer also said he anticipated no major change in his office’s enforcement priorities.

I thought Troyer's statement could have been read in a number of different ways. One of the "principles" that the Sessions memo requires US Attorneys to consider is "federal law enforcement priorities set by the Attorney General." That guy is Jeff Sessions, so his priorities will now take precedence, and we know from previous statements by the AG, he doesn't like marijuana or the people who use it, and he opposes its legalization. However, until we see some actual changes in the types of cases brought against state-legal/federal-illegal marijuana related business in states like Colorado and California, you have to assume that it still does not make sense from either a financial or political standpoint for US Attorneys to begin to spend money pursuing, for example, a medical marijuana dispensary that is operating in compliance with state regulations and not running drugs to Kansas or selling product out behind a middle school.

US Rep. Mike Coffman of Colorado, on the other hand, noted that the Sessions memo is of concern to those credit unions and banks that are banking pot businesses, and to those that might be considering doing so. According to Fincen, 400 banks and credit unions were doing so by the end of September 2017.

U.S. Rep. Mike Coffman, R-Aurora, was similarly angry, telling The Denver Post in an interview that Sessions’ move amounted to a “reversal of the progress we’ve been making to get the federal government to respect decisions that states have made.” He added: “I just think this is federal overreach.”

“Even without this decision we still had a long ways to go, particularly in financial regulation — federal banking regulation,” Coffman said, referring to marijuana businesses’ inability to open accounts because of federal laws. He added: “I think we’re back at square one. I think it makes it a lot harder.”

Indeed, the 2014 Fincen guidance, which was the genesis for those Cheech and Chong SARs that banks have been filing over the past three years when they bank an MJ related business, was a thin reed on which to hang your hat for any financial institution. As we've discussed many times here and elsewhere, the guidance does not protect the bank from the fact that it is engaged in the violation of multiple federal criminal statutes. Now that the Cole Memorandum, which formed the basis for the Fincen guidance, has been rescinded, is even this plywood flak jacket ground to dust? Inquiries last Friday to Fincen as to whether its 2014 guidance is still effective received the non-helpful reply "We will provide information as soon as it becomes available." That leads the objective observer to conclude that perhaps Fincen was caught just as flatfooted by the action of the AG as was the rest of the country.

University of Alabama Law School professor Julie Hill, a close observer of this area of the law, thinks that without the Cole memo, it doesn't matter much what guidance Fincen issues. The risk to financial institutions just went up.

Julie Hill, a professor at University of Alabama School of Law, said Financial Crimes Enforcement Network guidance "can't really hold up," since it was largely built around the Cole Memo. It also requires financial institutions to file marijuana-specific Suspicious Activity Reports for any accounts related to marijuana businesses.

"I expect [the Financial Crimes Enforcement Network] will come out and say something," Hill said in an interview. "But regardless of what they say, without the certainty provided by the Department of Justice on the actual offenses themselves, it seems to me it's going to be even more risky for banks to handle marijuana money. Already, most banks thought that it was too risky."

She said Sessions' memo likely leaves it to the individual prosecutor to decide whether they will go after banks. She said she expects some banks that are currently handling marijuana money to pull back from the business.

"It seems sort of weird that you would go and prosecute the secondary act, the bankers and money processors, before you attack the people that are openly violating the law," she said. "But that doesn't mean that some prosecutor somewhere couldn't just decide that's the best course of action."

As one bank lawyer said to me late Friday, "This is a hell of a way to run a government."

We're Actually Nice To Them!

When we last checked in on Vernon Hill almost two years ago, he had taken the millions he'd made in community banking in the U.S. and launched an effort to replicate his previous success on the mother ship: the U.K. He said he was done with the U.S. because Dodd-Frank, CRA, BSA, AML, and other regulations on the federal, state, and local levels were grinding down community banks to the nub while making the biggest banks even bigger. He saw the U.K. as a land ripe for the picking by offering customers what they weren't getting from their big banks: customer service.

It seems that for Mr. Hill, so far, so good.

...Metro Bank now has 1.1million customers and almost 50 branches.

More stores are opening outside of the South East, with 10 to 15 to opened in the Midlands over the next two year - by 2020 Metro Bank aims to have more than 100 outlets.

Mr Hill said: "If we're not in your town - we will be soon."

Hill insists that his bank does not compete with Britain's big banks on price, but solely on service. 

His "stores" "are designed to be open and transparent, with glass fronts that are more like supermarkets than traditional bank branches."

Opening hours are until 8pm on weekdays, staff are not kept behind glass fronts - and dogs are welcome.

Mr Hill said: "The banks won't let you bring your dogs in, for some unknown reason. We want your dogs in - the customers take that to mean: if you love my dog, you must love me."

Hill claims that the big banks in the U.K. "take you for granted."

"Metro Bank is completely the reverse of that, it's about service, it's about convenience, it's about killing every stupid bank rule you can find."

"Killing every stupid bank rule you can find." That sounds pretty much like the Core Principles announced by the Trump administration (and expanded upon in the Treasury Department report issued a few months ago), and also embodied in the the Financial Choice Act passed by the House. How ironic, and sad, that in a country that appears to outsiders to be home to a lot more of the apparatus of the Nanny State than inhabits even the fevered utopian dreams of Bernie Sanders and Elizabeth Warren, a free-market-besotted Yank is making money and growing a super-community banking organization by replicating what used to work in this country: putting the customer first and cutting red tape wherever possible.

Speaking of the Trump administration, Hill thinks that the "banking revolution" he's trying to foster is part and parcel of the Trump and Brexit phenomena.

The Brexit vote and election of Donald Trump were part of the same phenomenon against the engrained, according to the American businessman.

And Metro Bank is also a "disruptor" taking on Britain's biggest bank providers - Barclays, Lloyds, HSBC, RBS and Santander, Mr Hill said.

His challenge to the established banks started in 2010 with a slogan that calls on Britons to "join the revolution" and an aim to put customers at the heart of everything the bank does - or in Mr Hill's words create "fans" of the company.

He told Express.co.uk: "This clearly a different model and the customers have responded to it - we're actually nice to them!"

I have no idea whether Hill's success, Trump's election, and the Brexit vote are tied by even the slightest tether, but I do know that I burst out laughing when I read that last line. What a revolutionary marketing concept: "We're actually nice to them!"

I wish Vernon Hill well. I'll be keeping my eye on him to see how all this "revolutionary niceness" pays off.

Regulatory Relief: Some Bad News And Some Good News

Odds and ends as I attempt to get back into the mix of banking law after some time off to deal with actual life:

CU Consultant and newsletter publisher Marvin Umholtz recently reminded community banks and small credit unions that when it comes to all the hype (and, thus far, little action) about "regulatory relief," especially regulations being "tailored" for smaller institutions, "relief" won't include AML obligations. From Marvin's most recent newsletter (email [email protected] to subscribe) this tidbit concerning a July 28, 2017 House Committee on Financial Services hearing that featured Treasury Secretary Munichin:

This correspondent’s ears perked up when at 3 hours, 9 minutes, and 20 seconds into the July 28^th hearing, Representative Scott Tipton (R-CO), who represented the western slope of Colorado, remarked that he had heard a lot about BSA/AML and anti-terrorist compliance challenges from community bankers in his district. Specifically, Representative Tipton inquired whether the compliance requirements should be tailored differently for small community banks and internationally-active banks. In response, Treasury Secretary Mnuchin said [insert drumroll here], “Again, I think that the BSA/AML process should be reviewed. I think that it should be the same standards for small banks as big banks. Because when people are money laundering, whether they go through a big bank or a small bank, they should be standard.” It would appear that when it comes to stopping terrorist financing, the U.S. Treasury Department under the Trump administration will be setting high standards. Although the Trump administration, as well as the Treasury Department support tailoring regulations generally as articulated in its comprehensive June 2017 report entitled, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,“ file:///G:/Documents/U.S.%20Treaury%20Report%20#1%202017%20A%20Financial%20System.pdf, that doesn’t appear to apply to anti-money laundering and anti-terrorist situations.

In other words, if a small financial institution thinks that it needs to reduce regulatory compliance costs, don't include AML compliance. And when it comes to "relief," AML will continue to be a pain. Just sayin'... 

Having recently discussed Missouri's Rep. Blaine Luetkemeyer's ongoing legislative attempts to drive a stake through the heart of the notorious "Operation Choke Point," we were interested to learn (h/t Banking Law Journal Editor Evan Sparks via Twitter) that a few days ago, Bob Goodlatte, Chairman of the House Judiciary Committee, received a letter from US Assistant Attorney General Stephen F. Boyd that assures Rep. Goodlatte and others on the committee that the bad old days of choking banks in order to choke disfavored businesses they banked are over. At least, they're over until a new administration sweeps into the White House and appoints a new Attorney General. Interestingly, the letter admits that the policy to choke the life out of the "unclean" actually existed. Under Eric Holder, the US Justice Department acted as if those who alleged that there was such a policy in effect must be sampling the products of "legal" marijuana dispensaries in Denver. Confessing your sins is the first step to redemption.

Although Mr. Boyd claims that all Choke Point investigations are concluded, all initiatives under the program have ceased, and that none of those initiatives will ever, ever again be revivified, he does not, and cannot, as a representative of the US Attorney General, speak for the federal bank regulatory agencies. While he notes that the FDIC withdrew its "high risk businesses hit list," his office doesn't control the OCC, the FDIC or the Federal Reserve. The letter from Mr. Boyd is encouraging, but does not eliminate the need for Luetkemeyer's legislation to be enacted. We hope that Luetkemeyer and like-minded legislators in both houses continue to push that piece of sausage through the grinder.