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.

Trump Sends Mixed Smoke Signals On Mary Jane

Bankers in states where marijuana businesses are legal (under state, but not federal, law) have been confused for the past several years about the relative risks of banking what is undeniably a cash-rich sector of the economy. When Trump appointed Jeff Sessions as his Attorney General, we thought that was not a good sign for banks that are engaged, or are planning to engage, is providing services to such businesses. A few weeks ago, the White House Press Secretary threw another wet blanket of the marijuana campfire and Dorsey & Whitney's Joe Lynyak thinks that The Spice Boy's half-a$$ed-hearted warning to state-legal marijuana business owners (and, by implication, their "co-conspirators") bodes ill for bankers.

In a client alert Joe issued last week, he explicated.

As noted above, even though there have been some informal indications that the current non-enforcement approach adopted by the Obama Administration would continue, on Thursday, February 23rd, the White House Press Secretary stated that enforcement of federal drug laws aimed at limiting the proliferation of marijuana sales may occur.

Although the Press Secretary softened this warning by stating that medical marijuana businesses would not be targeted, the fact remains that the Trump Administration appears to be reconsidering the above-referenced guidance that has been relied upon by banks when electing to offer deposit and lending services to marijuana businesses.

Joe has some potentially disturbing observations for those banks that have been following FinCEN's guidance on banking marijuana business, advice based on the so-called "Cole Memo," by filing MJ-specific suspicious activity reports (SARs), a type of SAR that Joe and others (including the hose-heads who blog at this venue) affectionately refer to as "Cheech and Chong SARs."

[B]y having filed with FinCEN one of the three new SARs (which in virtually every case would be the Marijuana Limited SAR), a bank has made an admission of probable criminal conduct on its own part if the federal government elects to initiate criminal action against the filing bank and its management. Because prosecuting criminal drug laws against individuals and small businesses is time consuming and a drain of resources, using a bank’s own statement of liability in a statement made to the federal government under penalty of perjury might be a preferred strategy. Although a list of potential penalties might be available (e.g., asset forfeiture, civil and criminal penalties and RICO actions), it is certainly possible that the federal government might pressure banks to withdraw from providing banking services to marijuana businesses. A bank should also consider the possibility that fines and penalties, including criminal penalties, might be pursued not only against the bank, but also against officers, directors and employees of the bank. (Among other things, the availability of insurance coverage to pay for legal defense costs should be verified.)

Bankers who service marijuana businesses probably want to break out the paper towels to wipe up the spewed coffee after their quite understandable "Danny Thomas Spit Takes."

That's right: by following the "guidance" of the DOJ and FinCEN, and dutifully filing Cheech and Chong SARS, banks may have teed up themselves, their officers, directors, and employees for easy-to-prove criminal charges that they violated a plethora of federal criminal laws. In response to claims that such action on the part of federal prosecutors would "unfair," I offer the immortal words of former Dancing With The Stars stoner, Tommy Chong: "Unfortunately, the American justice system is just riddled with lies and inconsistencies." I also deem insightful the lyrics of NaS: "Life's a bitch and then you die/That's why we get high."

After making the day of MJ bankers everywhere, Joe has a few other observations, which I'll quote at length, because (A) they're pithy and pertinent and (B) I'm lazy.

Second, banks wishing to continue providing banking services to marijuana businesses should revisit the current interpretative guidance and determine whether the bank’s on-going due diligence required by the guidance is commensurate with the degree of due diligence that the guidance mandates. Further, since the Administration may elect to distinguish between medical marijuana and recreational establishments, the degree of due diligence required for the two categories of marijuana businesses may be significantly disparate in nature.

Third, a bank may elect to review the banking services it provides to vendors of marijuana businesses, such as suppliers of fertilizer, irrigation, energy and similar products and services. A related issue arises in regard to banking a company that has an affiliated entity directly involved in marijuana, but the bank’s relationship is limited to non-marijuana affiliated operations. Similarly, if the vendor provides support services to both medical and recreational marijuana businesses, separating those functions may be difficult or impossible.²

Fourth, in light of what appears to be a changed enforcement posture on the part of the Trump Administration, the senior management of the bank and its board of directors should be fully briefed regarding the increased legal risk that may soon be presented.

Finally, a bank electing to continue banking marijuana businesses should consider retaining counsel with white-collar criminal experience, including AML expertise, in advance to assist should a DOJ inquiry occur. Among other things, the bank’s compliance with the current guidance should be organized, and counsel should be well-versed in the enforcement perspective and strategy employed by the DOJ when it considers bringing a criminal prosecution or investigation.

I've seen a number of service providers who tout their "solutions" to the MJ banking conundrum. Many of them claim that they've got the whole Gordian knot untied with their better-than-sex software, systems, or fairy dust. Good luck with all of that. Just make sure the color and design of your underwear go well with pinstripes and don't drop the soap in the shower of the federal prison camp you may have the privilege of gracing. Especially if the MJ-hostile Sessions follows Flynn into the wilderness for drinking too many White Russians during the campaign, and the Orange Lord appoints a really vicious MJ-hater to succeed him, like a Bridge-Too-Far Chris Christy. No matter how you try to camouflage the money trail, the fact remains that aiding and abetting the manufacture, sale, or distribution of marijuana remains an offense under federal criminal laws that can ruin your whole day. If you bank marijuana businesses (and even businesses that serve marijuana businesses), you are relying on the consistent tolerance and forbearance of the federal executive branch, and whatever other words you wish to use to describe the current crowd in charge of that branch, "tolerance" and "forbearance" are not two that immediately pop into my mind.

Warren Pursues a Non-Solution

Now that Massachusetts has joined the eight states that allow recreational marijuana sales and use, Senator Elizabeth "Trail of Tears" Warren has decided to hound FinCEN about updating its 2014 guidance to financial institutions who want to provide banking services to state-legal but federal-illegal marijuana businesses. Liz (and the eight other senators who also signed the letter) apparently believes that somehow--perhaps by waving a magic wand or reciting an incantation from the Book of Krell--FinCEN can "make it alright" for banks and credit unions to "bank" marijuana businesses. She should stop sampling the product.

Although FinCEN claims that it is "reviewing" Liz's letter, my guess is that FinCEN is reviewing it solely for the purpose of determining whether it might be better used as toilet paper or to house a joint of some smooth Colorado Blue Dream (The Mile High State having a 5-year jump on Massachusetts in perfecting smokables and edibles). Immediately following the issuance of the existing guidance in 2014, Senators Grassley and Feinstein lashed out publicly at FinCEN for their "guidance," following which coal-raking, FinCEN's director declared that the guidance had induced over 100 banks to violate federal criminal drug laws provide services to state-legal marijuana businesses, so that's it: problem solved; we're done here. I can't see FinCEN opening that can of worms, especially with the Anti-Warren about to occupy the White House and install Jeff ("Good People Don't Smoke Marijuana") Sessions as Attorney General. There is little current political upside in doing so, and much potential downside. Unless FinCEn starts scarfing down Hashies, I don't see any major change to the guidance coming as a result of Warren's request.

More important, as I discussed a couple of month's ago, the FinCEN guidance (and the US Department of Justice guidance on which it is based) states that state-legal marijuana businesses and the banks that serve them are engaged in violations of numerous federal criminal statutes. The guidance purports to provide banks "comfort" that they are no "likely" to be pursued by the federal government "at the present time" because the government has other enforcement priorities, but those priorities can change (and likely will change with the recent election results), and the guidance states that it is not a defense to prosecution. In other words, even if you follow the guidance, we reserve the right to pursue criminal action again st you and your directors, officers, and employees. Moreover, the guidance requires banks to undertake extensive and expensive (if done correctly) initial and ongoing due diligence, monitoring and reporting responsibilities that might easily be found by an unsympathetic bank regulator or US Justice Department attorney to have been breached.

Warren might have more appropriately addressed her letter to the federal bank and credit union regulators (Federal Reserve Board, FDIC, OCC, and NCUA), whose guidance might give banks a bit more comfort. Thus far, the bank regulators have mumbled about how they are "likely" to follow the FinCEN guidance. However, they've also admitted that the US Congress is the body where the solution rests. The NCUA, FRB, OCC and FDIC cannot change federal criminal laws nor (anymore than can FinCEN) give banks and credit unions any legally binding assurance that they won't be pursued criminally or through regulatory enforcement action if they choose to bank marijuana-related businesses. Thus, they cannot provide the solution.

In the end, the solution needs to come from Congress, where Senator Warren resides. Senator Warren and her cohorts might do more good for banks and credit unions who want to provide financial services to state-legal marijuana businesses by jumping on the legislative bandwagon that Colorado and Washington have been hauling for the last five years (with no success), such as co-sponsoring and helping to push in the Senate legislation like Colorado Rep. Ed Perlmutter's H.R. 2076, which has gone nowhere fast since being introduced a couple of years ago. Congress, not FinCEN, is where the solution lies. Useless publicity stunts are not going to cut it, unless your goal is to fool voters in your state into believing you are actually doing something useful, when you're just passing the buck and cleverly manipulating smoke and mirrors. If so, then you and your pals are doing a masterful job.

The Law Enforcement Entry Barrier

An article in the Yahoo News (reprinting a French newspaper article) (H/T Housingwire) describes the US as the world's bank cop when it comes to punishing the bad behavior of the world's biggest banks.

Handing out multibillion-dollar fines right and left to domestic and foreign financial giants, the United States has taken on the role of the unforgiving global cop of the business world.

In stark contrast to the relative inertia of white-collar law enforcement in Europe, Washington most recently brought the hammer down on Deutsche Bank and Credit Suisse, which sold junk-filled, mortgage-backed securities ahead of the 2008 financial meltdown.

Deutsche Bank has agreed to a payout of $7.2 billion, while Credit Suisse settled for $5.3 billion to resolve American authorities' allegations and avoid the lengthy headache of a trial.

Instead of dragging financial firms to court, the US has taken them to the cashier.

American giants have not been spared: JP Morgan Chase, Citigroup, Morgan Stanley and Bank of America collectively have shelled out $40 billion to settle cases linked to toxic, crisis-era financial products.

"There's a kind of fundamentalism to US law," said Nicolas Veron, a senior fellow at the Brussels-based think tank Bruegel and the Washington-based Peterson Institute.

"If you break the law, punishment comes down."

While the European authorities haven't been totally "dormant," according to at least one regulator European regulators lack an important ally in the fight to punish bad banks that US regulators can always count upon: bottom-feeding class action plaintiffs lawyers.

In the United States, authorities can be supported in their actions by so-called class-action lawsuits brought collectively by groups of private individuals who have been wronged, which can ratchet up pressure on companies. But this option does not exist in Europe.

Well, European nations need to reform their civil laws to unleash the dogs of class-action war, in which banks settle for sums that do little to change behavior or provide any substantial economic reward to harmed class action members (other than the lead plaintiffs recruited by the lawyers), but which enrich the living Hades out of the law firms that bring the suits. In the UK, they'll need to get rid of the nasty "English Loser-Pays Rule" that awards the prevailing party its legal fees and costs, since that might give the defendants the incentive to fight to the finish on the merits, rather than paying extortion because it will cost them less in the long run. If Europe can just be "More Like Uncle Sam," it, too, will soon find itself invaded by the only life form other than cockroaches that will survive a nuclear holocaust.

There are some interesting aspects of the hyper-activity of US regulators against "enemies" both foreign and domestic that the French didn't catch. One involves the fact that aggressive regulatory enforcement actions and the imposition of "multi-billion dollar fines" on the biggest banks might be of questionable deterrent value. Take, for example, the $7.2 billion settlement squeezed by the US out of Deutsche Bank. According to Deutsche Bank's press release on the settlement, the impact on the bank is less than heavy.

In connection with the resolution of this matter, Deutsche Bank expects to record pre-tax charges of approximately US dollar 1.17 billion in the financial results for the fourth quarter as a consequence of the civil monetary penalty. The financial consequences, if any, of the consumer relief are subject to the final terms of the settlement, and are not currently expected to have a material impact on 2016 financial results.

How much punishment has been inflicted if the bank takes the licking and keeps on ticking with "no material impact" on financial results? The giant banks take these shots routinely. The amounts of the fines may hurt, but not severely. Do they change behavior? Perhaps, but don't kid yourself that the U.S. is some global cop that meets out "justice" to big banks on a global scale in a way that consistently deters bad behavior or even inflicts serious pain upon miscreants.

Another interesting aspect involves the comments from a European observer that its regulators "'do not dare' punish their national flagship companies" to such an extent. Regarding banks, one likely reason has to do with the fact that there are comparatively few banks in any one European country, all or most of them extremely large. Six years ago, we discussed such banking systems, in connection with an opinion piece by a talking head who wanted the US to become more like Canada, with only five banks. As we alleged then, and as we continue to allege, "regulatory capture" is a logical consequence of a limited number of large banks. We think "do not dare" will also become the mantra of the US regulatory regime, the more concentrated its base of regulated banks becomes.

One final thought: while regulations themselves can be a barrier to entry, so can enforcement actions. While Deutsche Bank, Credit Suisse, Chase, Wells Fargo, and Bank of America can afford to pay for legions of compliance personnel to attempt to keep the bank out of trouble in the first place and for big-brained lawyers with boxcar loads of minions to throw paper blizzards at government enforcers when they bring the hammer down (albeit with a ball peen hammer rather than a sledge hammer), community banks cannot do so (although they might hire expensive lawyers to save their bacon in bet-the-bank litigation). Also, they generally cannot afford substantial fines nor the loss of customers due to unfavorable publicity to the extent that big banks can. Witness Wells Fargo. While lax regulatory enforcement benefits no one but those destined to run aground, aggressive enforcement can become just one more entry barrier to the banking business, as if community banks needed another.

If, indeed, the U.S. is becoming the world's bank cop, I hope that it gets a lot more judicious about how it goes about dispensing "justice."

Will Jeff Jolt The Pot Biz?

With this month's elections having doubled the number of states that permit recreational marijuana use (the grand total stands at eight, plus the District of Columbia), the choice of the new US Attorney General is important to those businesses that manufacture and sell "legal" marijuana and to the banks and credit unions that serve (and want to serve) those businesses. This week's news that President-Elect Trump has selected Senator Jeff Sessions as his nominee for that position has been cited by the "pot luck" crowd as a bad omen. The Denver Post's "Cannabist" column elaborates.

The Senator nominated to serve as the next U.S. attorney general is on record saying cannabis is “dangerous” and that “good people don’t smoke marijuana.”

President-elect Donald Trump’s reported pick of Alabama Sen. Jeff Sessions as the nation’s top law enforcement officer should “scare the hell out of the marijuana industry,” drug policy expert John Hudak told The Cannabist on Friday.

Sessions might have qualified his comment about "good people" by changing "don't smoke" to "no longer smoke," but the former tokers who bang out this blog won't hold that judgment against him. It is amusing that he doesn't seem to understand that smoking is only one method of getting a mile high. Many prefer feeding the munchies by chomping on "edibles."

I had expected for some time that Chris Christie would be first in line for the AG slot. However, recent convictions of his former aides in a blocking-a-bridge-too-far scandal, or, perhaps, Christie's always pleasing personality, might have alienated The Donald, who only allows one bloviating gas bag on the bus at any one time, that gas bag being himself. At any rate, while Christie was outspoken in threatening state-legal recreational marijuana businesses with the Fist of Doom, I don't think Sessions will be a cool breeze in comparison for our friends in the land where Mary Jane reigns.

Thus, relying on continued forbearance of the US Justice Department from enforcing federal drug laws seems to me to be even more dicey than it did before the election. A Jeff Sessions-piloted US Justice Department could sweep into Colorado in early February 2017 and indict not only the pot business owners, but the banks and bankers who bank them. Even closing the bank accounts and lines of credit now aren't technically going to save any bank (or, again, the bank's directors, officers, and employees) from being charged with past criminal behavior, because of those pesky statues of limitations. I can see a guy like Sessions picking on some businesses and banks or credit unions that serve them in Colorado (which, being first out of the gate, has become the poster child for state-legal, federal-illegal marijuana businesses and users) and crushing them like overripe grapes, just to send a message like "Hurts, don't it? Tell your friends!" I can also see him taking a more subtle approach, but one that would be just as painful in the long run. As a legalized marijuana opponent puts it, "[T]here are many things you can do with a letter and a stamp that would stop marijuana businesses from flourishing."

The linked article notes that the Cole Memorandum (and the FinCEN guidance that followed it), upon which marijuana-banking financial institutions are hanging their hats, are "non-binding guidelines" that "could quickly be rescinded." They could be, but the guidance itself states that it does not provide a defense to prosecution. Instead, it merely provides "guidance" as to what the then-current (2013-14) enforcement priorities of the US Justice Department were. Priorities change without notice. It also admits that the businesses and banks engaged in the business are violating a number of federal criminal laws, including money laundering.

The Cannabist also correctly observes that The Donald has "wavered" on the legalized marijuana issue and the states rights issues involved. On the campaign trail, he seemed in one breath to claim it was a "state-by-state" decision, but in the next breath to claim that we should first look at Colorado because it was having problems, then in the next breath to claim he was talking about medical marijuana. He never addressed specifically the conflict between federal and state criminal laws or the effect of the Supremacy Clause of the US Constitution (a concept that might have caused his "do" to sprout wings and fly to Morocco). He also promoted the fact that he is a "law-and-order" kind of guy. We assume he was not addresseing his television viewing preferences. While drug enforcement does not seem to be a previously articulated policy priority for him, he apparently (depending on the day of the week and the current mood of Melania) feels strongly both ways. While he's focused during the early days of his administration on more important matters, like building The Wall With a Door, tearing up NAFTA, crushing the dreams of The Dreamers, and knocking back Stoli Kamikazes with Vlad, he's likely to leave issues of lesser importance, like persecuting state-legal, federal-illegal pot businesses and their banks, to his Attorney General. If Sessions is that A.G., then those dark clouds hanging over the summit of Pikes Peak could become more ominous.

Drug policy expert John Hudak of the Brookings Institution sums up my thoughts about the future nicely.

"I think there is a chance that, a year from now, the marijuana industry looks exactly like it does today," he said. "I think there’s a pretty big chance that the marijuana industry looks very different and finds itself in the throes of battling an activist attorney general."

Paying For The Great Wall: Let The Banks Do It

Customarily, you'd have to work harder than El Chapo's Narc-Anon sponsor to find common ground between me and the Golfer-in-Chief on any issue, but leave it to The Candidate with the Cockatoo Do to move that Sisyphean boulder up the slope and on to level ground. For all of you who've been wondering like me (and most other Americans, as well as many Mexicans) how The Orange Man plans to get Mexico to pay for The Great Wall along the Rio, he's made it clear: American financial institutions will carry his heavy water.

Under the proposal detailed on Trump’s campaign website, the Republican would rely on a section of the Patriot Act to effectively force banks and money transfer companies to determine whether a person trying to send money abroad is a legal resident of the U.S.

That section of the law was written to crack down on terrorist financing and requires banks and other financial institutions to verify the identities of people opening accounts and doing business with them.

Trump has vowed on his first day in office, he would expand that requirement to include wire transfers and require that no foreign person living in the U.S. can send money outside the country without first proving their legal status.

The businessman predicts that Mexico will agree to pay for a border wall within a matter of days to keep money flowing over the border. 

The Trump campaign has also floated increasing visa fees, cancelling visas, and establishing trade tariffs against Mexico as ways to pay for a border wall, but cutting off remittances is the centerpiece of his plan. 

Usually, the words "centerpiece" and "Trump" are used to refer to the living blonde-furred creature he wears on his cranium, the one that sometimes rears back on its hind legs and bays at the moon, Megan Kelly, or any other thing or person who displeases the the former lead singer for Devo. In this case, it refers to banks and other financial institutions, as well as other money transmitters like Western Union, doing what all federal government agencies otherwise responsible for keeping the word "legal" in "legal immigration" have failed to do since the 1930s: ferret out who's here legally and who is here on the down-low.

Naturally, banks are doing back-flips in anticipation of the expense and liability of that job, not to mention the back-breaking prospect of adding a ton or two to the already crushing compliance burden it will entail.

But banks and other financial companies say they do not want to get involved on the front lines in a contentious immigration battle, arguing there are questions about how effectively such a policy could be implemented.

“It should not be for the banking system to be the police or the immigration task force,” said one banking lobbyist. “I don’t think it should be left to banks to report that someone has come in to remit money to whatever country, and it may or may not be legal. That’s not our role.”

[...]

Banks contend that they do not have a method of establishing the legal status of a person in the U.S. A person can open an account or send money abroad simply by showing an Individual Taxpayer Identification Number, which is given out by the government to people lacking a Social Security number, including people who are in the U.S. illegally.

The banking lobbyist said Trump’s proposal is not yet being taken seriously by the industry because it is still several steps away from even beginning to look like a reality.

I assume that same lobbyist a year ago scoffed at the notion that a bloviating clown prince like The Donald could ever beat a well-funded, well-connected, "heavyweight" like The Jebster for the Republican Party's presidential nomination. Underestimating this carnival barker is a common blind spot this election season. He's like a nightmare from which you can't wake up no matter how loudly you scream. Let's take him seriously, no matter how many knots that ties in your nether regions, and make sure that he understands that any banker, even those who live in Colorado and consume mass quantities of EdiPure Raspberry Jellies, who was thinking of holding their nose and voting for him are going to vote for the Wicked Witch of the Chappaqua, or otherwise "Go Green," "Libertarian," or even "Liberace," unless he drops this harebrained scheme to build The Great wall on the backs of America's banks. In fact, bankers could get some assistance in making this point from their MSB brethren, as The Change We Were Waiting For recently noted.

“The notion that we are going to track every Western Union bit of money that is being sent to Mexico, good luck with that,” Obama told reporters. 

I amaze myself when I say this, but "Right On, Mr. President."

As the linked article points out, there are so many ways to circumvent the money transmission barrier that Trump proposes that banks, despite the money and labor it would cost them, would be about as effective in stopping money flowing from Mexican illegal immigrants in the U.S back home to Mexico as the US Border Patrol is at keeping out undocumented immigrants in the first place. In other words, it wouldn't work.

Not that reality ever stopped a megalomaniac.

Banking Blues On The Border

In a world filled with unintended consequences, a perfect storm of unintended consequences for the banking business is sweeping the US-Mexico border.

Nearly half the bank branches in San Ysidro have closed in the last two years, mirroring a trend along the entire Mexican border that’s creating headaches for small businesses and forcing some residents to go without bank accounts.

Bank officials say branch closures along the border are the result of a recent federal crackdown on drug-related money-laundering and an inevitable reduction in brick-and-mortar locations as more banking gets conducted online.

No one disputes that those are factors, but some question whether the banks are using such things as excuses for closing less lucrative branches in relatively low-income border areas.

Whatever the cause, politicians and community leaders say the closures are stifling business along the border, where cash remains crucial to commerce, and threatening long-term prosperity by leaving a trail of empty storefronts and making loans harder to secure.

Another factor cited is the paucity of new bank charters since the collapse of 2008. No new community banks are being formed by local business leaders to meet the needs of the border communities not being met by big banks.

"Most communities along borders like San Ysidro don’t have community banks — we’re at the mercy of the national chains," [San Ysidro Chamber of Commerce CEO Jason] Wells said.

The national chains are closing, not opening, branches, not only in San Ysidro, but all along the Mexican border.

As of Oct. 1, 80 percent of bank branches had closed in Calexico, 29 percent had closed in Nogales, Ariz., and in Texas 13 percent had closed in El Paso and 17 percent in Laredo.

In San Ysidro, six of the community’s 13 branches have closed.

"Derisking" a bank can be bad for business, obviously.

Among the proposed solutions being urged by business leaders are a softening of money-laundering penalties. The $1.9 billion hit that HSBC took not long ago is cited in the article as a prime motivator for the acceleration of border branch closings. Don't hold your breath on that happening. The US Justice Department and federal regulators are too busy pursuing "hate speech," payday lenders, and online dating services to seriously consider lifting its jackboot off the neck of banks in the area of BSA/AML compliance, unless your a bank that services a state-legal, federally-illegal recreational pot business, in which case, as long as you file a Cheech-and-Chong SAR, you'll likely get a wink-wink/nudge-nudge from General Lynch.

Frankly, I don't see any short-term reversal of the trend. Perhaps, if and when de novo bank charter approvals become more common, a few local banks eventually might be created to serve some of these areas. Or, Princess Fauxcohontas may eventually exhale her pipe dream of a US Post Office "Bank of the People's Republic" and morph border post office branches into border bank branches that specialize in turning cash deposits into money orders. Otherwise, I don't see an end to the trend.