Bank Lawyer's Blog

The Ins and Outs of Bank Robbery

Over the decades I have practiced bank law, many bank executives have told me that their primary fear of theft comes not from outsiders but from insiders. Like this guy in Kentucky.

According to the U.S. Attorney’s Office for the Eastern District of Kentucky, Brent Lee was convicted last week of conspiracy to commit bank fraud, two counts of aiding and abetting bank fraud, two counts of misapplication of bank moneys by a bank employee, and four counts of making unauthorized obligations by a bank employee.

To make a long story short, Mr. Lee set up a scam involving a borrower whose real estate development loan was downgraded and the borrower's daughter. The borrower's real estate project ran into trouble, so new bogus loans were made to the daughter in order to funnel the money to the borrower, who, instead of spending the proceeds on the real estate development project, spent about half of it on casino gambling. The linked article does not detail why the bank officer abetted the scheme or what lead to its uncovering, but the bottom line is that the bank lost $248,000 and Mr. Lee faces 30 years in the slammer.

While every bank should have controls in place to catch these types of irregularities, those controls may be circumvented, especially by more senior officers (Lee was market president of BB&T in Kentucky), and/or they can take time to detect, during which time much damage can be done.

As to outsiders who also might want to take the bank's (or its customers') money, while cybercrime may be the hot button fear of attack that gets the most press, old fashioned bank robbery--the mask and gun variety--has not gone out of fashion. That may seem to be a fool's game in places like Tulsa, Oklahoma, where the local police have nabbed 100% of all bank robbers during the last two years. Apparently, you have to be a special kind of stupid (or desperate) to try to pull a bank robbery in Tulsa.

I recall an FBI agent telling me in the late 1970s, while I was babysitting a couple of bank employees who were waiting to testify in the federal district court bank robbery trial in Denver of two robbers who'd held up a branch of the bank for which I was an in-house counsel, that one thing the FBI was especially good at was catching bank robbers. Obviously, this was in the days before Vladimir Putin's minions were diverting the FBI's attention with bogus Facebook pages, but I still suspect that bank robbers are considered, among both police and the criminal classes, as bottom feeders. You know, like plaintiffs' personal injury attorneys who advertise on television.

In the State of Texas, bank robbery has another risk: being shot by an armed citizenry while inside, or during your exit from, the bank. As one of the bank robbers in the following scene from the Academy Award-nominated film "Hell or High Water" exclaims immediately following the end of this clip, "Concealed carry permits sure do complicate things!"

Gotta love Texas.

WARNING: DO NOT VIEW THE FOLLOWING SCENE IF YOU ARE OFFENDED BY F-BOMBS.!THE DIALOGUE IN THIS SCENE CONTAINS A VERITABLE CARPET F-BOMBING RUN!!!

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."

Fourth Corner Back In Court

Our fascination with the persistence of the organizers of Fourth Corner Credit Union in pursuing a master account from the Federal Reserve Bank of Kansas City so that the credit union may serve businesses in Colorado that are somehow related to the state-legal-federal-illegal business of growing, processing, selling and distributing marijuana, continues unabated. In July, we discussed a "highly unusual" set of opinions and an order by a three-judge panel of the U.S. Tenth Circuit Court of Appeals that overturned a federal district court decision that upheld the right of the FRB to deny the credit union a master account, which is necessary to process transactions through the Federal Reserve system. The panel's actions gave the credit union the opportunity to file a new application for such an account, this time with an amended business plan providing that the credit union would serve only "marijuana legalization advocacy groups," and not (as the first application provided) "marijuana related businesses," at least until serving such businesses becomes legal under federal law.

Fourth Corner filed just such an application with the Federal Reserve. Instead of promptly granting the master account, the FRB had the temerity to request "additional information" from the credit union. The credit union  alleged that the FRB had no right to request such information, and instead of providing the information, Fourth Cornet filed suit in federal district court in Denver, once again seeking an order to compel the FRB to approve the application. We are not certain what information was sought by the FRB. Perhaps, whether the directors, officers and controlling shareholders prefer Auntie Delores or Willie's Reserve weed, or more background information on the credit union's head of physical security, a man known simply as "El Chapo." For the humor challenged among the readership, the immediately preceding sentence was not intended to be serious.

Whatever information was sought, rather than play out the string with the administrative process until the FRB issued a final decision that could then, without question, be appealed, the credit union has decided to pursue its oft-repeated claim that the granting of a master account is a mere "ministerial function." Since the organizers have been at this for years and, we assume, are more than exhausted with the FRB's foot-dragging, I understand their desire to force a decision from the Fed. At the same time, I fear that appealing the request for additional information may give the district court and/or a majority of whatever three-judge panel (or full court, if it makes it that far) hears the case, another "out" to refuse to to make a substantive ruling, and to send it back down the line again. Among the previous panel, one judge appeared to take the position that the granting of a master account was not a ministerial function, another judge appeared to take the position that it was, and the third judge was harder to pin down than Nancy Pelosi was on the subject of whether or not John Conyers should resign.

University of Alabama Law School professor Julie Hill, whose opinion carries weight with this blog on these matters (but don't hold that against her), thinks that while normally the granting of a master account is a ministerial matter, this situation is anything but "normal."

“Normally it is a ministerial action, but normally people who ask for a Federal Reserve account don’t say, ‘When we get it, our plan is to violate federal law. It’s a totally unique situation,” said the Alabama professor.

“When (Federal Reserve officials) hear Fourth Corner say, ‘No, we won’t violate federal law, even though we told you that was our plan to do that before,’ what are they supposed to do?

“It seems to me a reasonable regulator in that circumstance would say, ‘I probably need to do a little bit more investigation to make sure I believe what Fourth Corner is saying now, that they really won’t violate federal law.'”

As was obvious from the discussion of the decision in July, one of the three appeals court justices did not believe the assertions of the credit union that it would serve only advocacy groups. This was of concern because the original application with the FRB said that serving as a financial institution to marijuana related businesses was the raison d'être of the credit union's creation. One of the other justices opined that the court must accept at face value the assertions of the credit union that it won't serve illegal (under federal law) businesses in this regard. The third justice didn't reach that issue in his opinion. Therefore, it's impossible to tell at this point how the court would rule on this aspect, the need of the FRB for "additional information" under these circumstances.

If the credit union ultimately wins on this issue (and how many months down the road that might be is anyone's guess), its spokesman admits that there are other stumbling blocks with the new business plan.

Even if the court rules in Fourth Corner’s favor, it remains to be seen whether the credit union can get enough investor support, startup capital and clients to be sustainable — especially since plant-touching businesses remain off-limits.

“We’re pretty confident that we’ll win this one,” Goldfogel said. “It’s really a question of how much we can do with it once we win it.”

Unmentioned are the additional hurdles of other regulatory approvals. We discussed these in July.

One of the linked articles also notes that the NCUA denied the credit union's application for insurance of accounts and that there is ongoing litigation between the NCUA and the credit union over that denial. While the FDIC and NCUA have statutory standards that guide them in their decision to approve or deny such applications, they have traditionally been granted wide discretion by the courts in interpreting those standards. In that respect, while the spokesperson for the credit union asserts that it was always in the credit union's business plan to service marijuana legalization advocates, I suspect that that business plan weighed heavily on the side of serving marijuana related business other than merely "legalization advocates." By agreeing to serve only a limited type of marijuana related business until the "big earners" (such as licensed pot shops) are legalized under federal law, will that give the NCUA ammunition for its decision to deny insurance of accounts? I do not know the answer, I'm merely raising the issue. I'm also observing that the master account from the FRB is only one high hurdle that the credit must still jump on the path to opening its doors (which it originally planned to open a couple of years ago). Insurance of accounts is another, and the modified business plan, while potentially helping it jump one hurdle, may hinder it in jumping another.

Stay tuned. This battle is a long way from over.

The Cry Goes Out: Give The CFPB More Power!

The recent news that Wells Fargo has uncovered at least another 1.4 million fake accounts left many commentators on the verge of stroking out. One of those commentators was Housing Wire's Not-so-Gentle Ben Lane, who seethed with the heat of a blue-white super nova.

ARE YOU F$*KING KIDDING ME????

Ummmm...No. At least, I'm not kidding you, Ben. He also used the terms "gross" and "disgusting" to describe Wells Fargo's conduct, terms my 15 year-old niece uses to describe broccoli, because, I guess, "reprehensible" was deemed beyond the educational level of Housing Wire's typical reader. Inasmuch as this blogger is a regular reader of Housing Wire, Ben's got a valid point.

Thus far, I can follow the line of logic. Then, however, Ben asserts that the scandal "proves" that the CFPB must continue to exist.

Situations like Wells Fargo show why the CFPB must exist.

It’s absolutely, critically important to have a government agency that can protect consumers from financial institutions that lie to them, steal from them, and prey on them.

[...]

Financial services companies are still screwing up, whether it’s on purpose or not. And it all happened on the CFPB’s watch. So make the bureau stronger, not weaker. Allow it to truly function how it was designed to function. Let the bureau really protect people.

The CFPB needs to be there to hold those companies responsible, and to work to prevent things like Wells Fargo from happening at all.

He then takes off on an extended, and somewhat defensive, rant, against the Republican Party, whose Congressional members are attempting to enact legislation that, according to Lane, would put the CFPB out of existence, but which those who've actually read the proposed legislation, would instead provide customary and sound constitutional checks on an a federal governmental agency which has few, if any, such checks currently in place. Ben also claims that the Wells Fargo scandal proves the need to "strengthen," not "weaken" the CFPB.

I use the term "defensive" because Ben anticipates those who disagree with him regarding the necessity of the CFPB will label him [shudder] "liberal."

Now, I’m sure people reading this will happily slap labels on me like “liberal,” “Democrat,” or “progressive” for suggesting that the CFPB needs to continue to exist and get stronger.

Heaven forbid someone disagree with one piece of the Republican Party line, lest they be branded as a “bleeding heart liberal” or whatever.

So be it.

This is more important than labels or political parties. It’s about common sense and doing what’s right.

Well, if the shoe fits...

Personally, I don't care what Lane's politics might be. I just think he's wrong. The CFPB already has more power, and is more free from restraint, than most, if not all, other federal financial regulatory bodies. As I and other critics never tire of pointing out, there's a reason that the founders built into our political system checks and balances on the exercise of governmental power, as well as enacted the Bill of Rights. Read Federalist Paper No. 9, authored by Alexander Hamilton, not exactly a shrinking violet when asserting the need for a strong central government. Human beings are flawed creatures, including those, or, perhaps, especially those, who exercise substantial governmental power over others, whether or not you think they are performing "God's work." The often inefficient workings of our federal government protect individual liberty, which many of us value more highly than living in a world where the federal government attempts to micromanage the activities of its citizens on a level designed to "ensure" that bad things never happen to nice people. Ben wants to give the CFPB even more power than it already has, apparently not believing Lord Acton's maxim that "power corrupts, and absolute power corrupts absolutely." Well, I do believe in the truth of that maxim, and on that basis alone I'd oppose any effort to give the CFPB "more power."

In addition, why should we accept the proposition that a strong federal agency like the CFPB, given even more power that it was given by Dodd-Frank, will prevent future bad behavior by human beings? Wells Fargo isn't an artificial entity run by robots. It's a legal fiction, but one created, and run, by human beings, some, or many, of whom were guilty of "bad behavior" in connection with the opening of fraudulent accounts (whether your "personally evolved system of moral values" categorizes "bad" as a matter of immorality, unethical behavior, illegality, or any combination of the foregoing). I'll repeat myself, from a blog post last September on culpability for the Wells Fargo moral meltdown:

At the bottom level, however, no matter what the pressures or incentives, the fact that so many sources who contributed to the linked article and others I have read on the subject, were former Wells Fargo employees who left in disgust at the pressure to do the wrong thing, indicates that this fraud could not have been perpetrated for so long and so extensively without a character issue, from the ground floor to the roof. Every day I toiled in Big Law, the pressure was there, effectively if not expressly communicated, to "make your hours." Padding hours and churning the file pressures were always present, but it takes a failure of personal virtue to allow them to succeed. Executives who placed that pressure on subordinates, and those in authority who looked the other way, bear a greater culpability. However, no one at Wells Fargo who participated in these activities is off the hook.

No matter how much power you give the CFPB, why would we accept the proposition that the devious, the weak, the avaricious, and the just plain "bad" among the regulated will not concoct other fraudulent schemes in the future, that the incompetent, the lazy, or the equally "bad" among the internal and external watchdogs assigned to detect and squelch such behavior will not fail in their assigned tasks, and that bad things will not, once again, happen to the "innocent" among us? What specific powers that the CFPB does not currently possess should be granted it to accomplish this feat, the likes of which the world has never seen before?

[Sound Of Crickets Chirping]

No, I did not see the specific powers listed in the Housing Wire article, either.

I agree with Ben and other critics that there would be some deterrence value if actual bank employees responsible for bad behavior were punished by something more than firing. Punishing shareholders by levying heavy fines on Wells Fargo has theoretical deterrence value (shareholders can, in theory, demand that directors punish responsible officers and employees, and shareholders might remove "bad" directors and/or elect new directors who will punish wrongdoers), but for large, publicly-owned companies like Wells Fargo, that seldom seems to be the result. The bank regulatory agencies do have the power to hit directors, officers, and the institution itself with various types of sanctions. The US Department of Justice and state criminal authorities can seek to make offenders "do the perp walk." Cynics rightly note that individual officers and directors of big banks like Wells Fargo rarely seem to suffer these punishments. Except for imposing criminal penalties, the CFPB has substantial power in this regard under existing law. Is the proposal to give "more power" to the CFPB include the right to make them a "Super G-Man" (sorry, I had a politically incorrect brain freeze: I meant to state "Super-G-Self-Identified-Gender")? The right to suspend habeus corpus? The ability to confine offenders to gulags for "re-education"? The right, perhaps, to issue "execution warrants," whereby "special agents" of the CFPB could track down and shoot through the base of the skull any officer or director of a bank who takes advantage of a person over the age of reason?

A partial answer, perhaps, is not granting more power to regulate and/or punish, but the effective exercise by the responsible agencies of the US government of the power they already possess. That,certainly, occurred following the collapse of many savings and loans in the late 1980s, where officers, directors, and owners were sued by the trainload, and a number of them served time in jail. In the wake of the collapse of many community banks in the years following the Great Recession of 2008, I personally know of many officers and directors of failed banks who were slapped with lawsuits by the FDIC or regulatory sanctions by their primary federal regulator, and I've read about many more. Of course, those penalties didn't prevent the next great scandal, anymore than previous punishments of those involved in previous scandals prevented the next scandals that no one anticipated.

A radical idea might be for consumers who currently bank with a large bank that engages in "bad behavior" to take their banking relationships to a community bank or (perish the thought!) credit union. If the conduct of a "big bank" is so egregious that it drives usually responsible adults to fits of carpet-F-bombing, why does the bank still have customers who aren't family members, lunatics, denizens of organized crime families, or members of Congress? A much more effective deterrent than creating a (Dodd-)Frankenstein monster of a federal "ensurer of justice" might be the marketplace. I am not advocating a run on any bank, but I am suggesting that if the public wants a safe banking environment, then at the very least, its members should not do business with those it considers "Evildoers." 

Preventing such scandals in the future is a pipe dream as long as human nature is what it is. That doesn't mean we don't try, but it also means that we should be realistic and wise about the measures we put in place to try to prevent them. In my opinion, giving the CFPB "more power" in order to "prevent" such scandals is neither realistic nor wise. Ben's opinion of what's "common sense and doing what's right" obviously leads him to a different conclusion. We'll agree to disagree, without, I trust, labeling the other as anything so heinous as either "liberal" or "conservative."

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 marvin.umholtz@comcast.net 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.

A Ruling That Raises As Many Questions As It Answers

For those readers who've been following the saga of Colorado's Fourth Corner Credit Union, a state-chartered credit union that was formed to serve marijuana businesses operating "legally" under Colorado law (albeit illegally under federal criminal law), we commented last year on the dismissal with prejudice by a federal district court in Denver of the credit union's petition for an injunction that would overturn a decision by the Federal Reserve Bank of Kansas City to deny the credit union a "master account" with the Federal Reserve Bank, an account that is necessary for the credit union to have access to the federal reserve's banking system and services. The acquisition of a master account is a condition of state approval of the credit union's charter. The FRB had denied the application for the master account for a number of reasons, but the most prominent was the fact that the credit union's business plan involved violating federal laws that prohibit participation in or facilitating the manufacture, sale, or distribution of marijuana. The district court refused to compel the FRB to take an action that would authorize the violation of federal law.

The credit union appealed the district court's ruling to the 10th Circuit US Court of Appeals, and recently, a three judge panel issued three separate opinions and one order that prompted one (anonymous) attorney to question whether I thought the appeals court justices might have been affected by either primary or secondary smoke inhalation. I'm sure that question was rhetorical and on that basis, I refuse to answer it. Nevertheless, the outcome was unusual, to say the least.

The primary fact that seems to split the three is that during the proceedings at the district court level, the credit union amended its complaint filed with the court (but not its application for the master account filed with the FRB) to state that it would serve marijuana related businesses "only if authorized by state and federal law." Otherwise, it would only serve members who engaged in the advocacy of legalization of marijuana. The application filed with the FRB and the original complaint stated that the credit union would serve only those marijuana related business authorized by Colorado law. Two justices determined that serving marijuana related businesses would be illegal under current federal law. One of those justices, agreeing with the district court judge, didn't believe the credit union's assertion that it would not serve federally-illegal marijuana related businesses and one of the other justices did believe the credit union's assertion (in fact, he stated that the court was obligated to accept at face value those assertions in this respect that were set forth in the amended complaint). The justice who believed the credit union voted to overturn the district court's decision and grant the credit union's request for injunctive relief (in other words, order the FRB to grant it a master account). The "unbeliever" voted to affirm the district court's determination that the credit union's complaint should be dismissed "with prejudice."  The third justice thought that the credit union's claims were not yet "ripe" for judicial review because the FRB had not had an opportunity to consider an amended application for a master account from the credit union that contained the modified position of the credit union regarding its serving only those marijuana related businesses that are legal under state and federal law. The third justice voted to dismiss the credit union's complaint "without prejudice," so that the credit union could file an amended application with the FRB that contained such a modified position and, if the FRB once again denied the application, to seek relief again in the federal court system. The other two justices thought that there were enough facts to make the credit union's claim "ripe," and that sending it back down for another try with the FRB was a waste of time.

Because of the diversity of opinions, and the fact that two of the three justices, in essence, voted to let the credit union "proceed with its claims," the only way to effectuate that majority result was to reverse the district court's dismissal of the credit union's complaint with prejudice and remand the decision with instructions to the district court to dismiss the amended complaint "without prejudice." The credit union can file an amended application with the FRB and, if the FRB denies the amended application, the credit union can start the slow slog through the court system again. According to one subsequent press report, the credit union intends to do just that "sooner than later." I have not read reports as to whether the FRB intends to petition for a hearing by the full court of appeals. One Colorado attorney opined that this is not the type of case that is likely to be taken up by the US Supreme Court, and I agree with him. Nevertheless, pursuing a full court review would be an effective tactic if your goal is to wage a war of attrition and to hope that you outlast your opponent.

A spokesperson for the credit union told a Denver reporter that "[t]he ruling doesn’t just establish that the Federal Reserve Bank of Kansas City does not have the discretion to deny issuance of a master account as long as the applicant meets its standards, ... [i]t also frees Fourth Corner to pursue its business plan serving the burgeoning marijuana industry." As to the first point, only one of the three justices reached that conclusion. The other two did not address the issue at all, so that interpretation of relevant federal law regarding the FRB's discretion in granting mater accounts, and whether a master account is or is not a "right," was not settled by the decision. As to the latter point, the spokesperson later backtracks by admitting that currently, "the burgeoning marijuana industry" it is permitted to service "would be limited to marijuana industry supporters such as nonprofits and advocates as long as marijuana remained illegal on the federal level." Moreover, "[i]t’s not yet clear as to whether the business restriction could extend to ancillary businesses — those that provide services and products to the marijuana industry but don’t directly handle the plants..."

One of the justice's opinions indicates that the FRB stated a number of reasons, in addition to illegality, upon which iit based its decision to deny the credit union's application for a master account. As the next phase of this litigation parade slogs on, I expect the courts to have another crack at construing whether any of those reasons may be used by the FRB to deny a master account, or what otherwise is the extent of the FRB's discretion on this matter. I would expect them also to give further guidance on the issue of "obstacle preemption" of federal law in this area. The one 10th Circuit Court of Appeals judge to rule on these issues clipped the FRB's wings, but since the three judges varied widely on so many issues, and two of them did not address these issues at all, I would not cite that opinion as binding precedent or an indication of which way the wind would blow in the future.

One of the linked articles also notes that the NCUA denied the credit union's application for insurance of accounts and that there is ongoing litigation between the NCUA and the credit union over that denial. While the FDIC and NCUA have statutory standards that guide them in their decision to approve or deny such applications, they have traditionally been granted wide discretion by the courts in interpreting those standards. In that respect, while the spokesperson for the credit union asserts that it was always in the credit union's business plan to service marijuana legalization advocates, I suspect that that business plan weighed heavily on the side of serving marijuana related business other than merely "legalization advocates." By agreeing to serve only a limited type of marijuana related business until the "big earners" (such as licensed pot shops) are legalized under federal law, will that give the NCUA ammunition for its decision to deny insurance of accounts? I do not know the answer, I'm merely raising the issue. I'm also observing that the master account from the FRB is only one high hurdle that the credit must still jump on the path to opening its doors (which it originally planned to open a couple of years ago). Insurance of accounts is another, and the modified business plan, while potentially helping it jump one hurdle, may hinder it in jumping another.

You have to hand it to the organizers of Fourth Corner. They certainly possess persistence. However, they're going to need to continue to possess that quality, as well as the financial resources to continue to pursue litigation, because to me, this battle doesn't seem like it's anywhere close to being over. 

Luetkemeyer Still After Operation Choke Point

Notwithstanding the departure of Eric Holder and his merry band of miscreants in the Justice Department who concocted the infamous "Operation Choke Point" (with the willing, if covert, cooperation of the federal bank regulatory agencies) and their replacement by a raft of new characters personally selected and/or blessed by he who occupies the White House (aka "The Swamp Drainer"), Republican representative Blaine Luetkemeyer of Missouri has, in 20017, has again attempted to plant his perennial Choke Point-killing piece of legislation known popularly as the "Choke The Chicken Choker Act." The last time we checked on this effort a couple of years ago, it failed to move very far in Congress, perhaps because at that time, the Republicans did not control both houses of Congress and the White House. Last year it passed in the House but went nowhere in the Senate. Now that the Republicans control all three branches, Luetkemeyer apparently believes that the time to drive a stake through the heart of Operation Choke Point for eternity (or until the Democrats regain control of Congress and the White House, which ever comes first) has finally arrived.

As a quick refresher course for readers who've been hibernating in a cave for the last few years, Operation Choke Point was a scheme by Holder and certain senior federal regulators to deny access to the banking system to certain businesses deemed "unsavory" according to the tenets of a moral code based, we have determined after serious investigation and discussion and theologians, on the teachings of a defrocked Hobbesian-Malthusian-Venusian monk named "Bob." Bob taught that those who engaged in such activities as payday lending, tobacco chewing (unless the chewer swallows and does not expectorate), firearms sales, prono purveying, online Christian dating, and collecting fossilized insect exoskeletons, should be denied the right of access to oxygen. Based upon these strict value judgments, the creators of Choke Point did whatever they could to "encourage" financial institutions not to provide financial services to business that engaged in these activities, or others that Bob from time to time might, out of the clear blue of a midday sky, after a dozen Jello Shots, decide were "anathema." The encouragement might take the form of a behind-the-scenes severe talking to, a beating with rubber hoses that left no tell-tale marks, or a regulatory enforcement or other civil action that intimidated the victim into terminating, with extreme prejudice, the poisonous business as a customer of the insitution. Denied access to the nation's financial system, the nefarious business would be choked off from the money they needed to remain in business.

Of course, the perpetrators of this scheme initially publicly denied that any such scheme existed. Instead, the federal government was merely concerned by the risk to the nation's financial institutions posed by banking "risky business." Since the regulators included "reputational risk" as being one of the principal risks, and defined "reputational risk" as anything the regulators said it was, well, the whole program was merely focused on the safety and soundness of financial institutions, not on the regulators' views of "good" and "bad" in terms of business models.

Luetkemeyer believed the banks who complained, not the Obama administration officials and the bank regulators who explained, and his legislation was the result. Recently, one of the creators of the scheme admitted not only his participation, but that the scheme might just have had unintended consequences. Of course, that individual is now cashing out of government service and heading to big law, where he may get paid by some of the same businesses he tried to kill. That's the D.C. way.

Luetkemeyer's legislation would require regulators to have a material reason for requiring a bank to terminate a business relationship with a customer, and such a reason could not be based solely on "reputational risk." The act is part of the Financial Choice Act passed by the House recently but currently squatting immobile like Jabba the Hut in the Senate. To hedge his bets while he's got the votes, Luetkemeyer has also reintroduced the bill as a separate bill, in case the version of whatever version (if any) of the Financial Choice Act that emerges from the Senate does not contain it. This time around, the prospect of sending Operation Choke Point to dustbin of history looks promising.

Small Enough To Jail

At a time when many of both the over- and under-educated among the chattering class have repeatedly bemoaned the lack of banks and bankers who have done the "perp walk" as a result of the high crimes and misdemeanors that allegedly caused the 2008 mortgage meltdown, you would think that the case of the only bank that was indicted by federal or state criminal authorities (in this case, by the never-publicity-shy prosecutors in New York county) would have led the glitterati in the entertainment biz to fall all over themselves to document the story of how at least one bad bank got what was coming to it. Instead, when the owners of the indicted bank (a family full of lawyers, according to the preview embedded below) told state prosecutors to take their indictment, fold it five ways, and stick where the moon don't shine, they got an Emmy award-winning, Academy award-nominated documentary film maker to tell their story in a film recently released and appropriately entitled "Abacus: Small Enough to Jail."

Business Insider's Jason Guerrascio reviews the movie by Steve James ("Hoop Dreams," "Life Itself"), which tells the tale of not only " how thin the case against Abacus really was," but how the indictment and persecution of the bank "was a miscarriage of justice." Adding to the irony of the miscarriage, the state decided, of all the financial institutions in New York that sold mortgage loans to Fannie Mae from 2005 to 2010, to go after "a small, family-owned bank tucked inside Chinatown in New York City...a reliable institution for thousands of Chinese immigrants that is run by Thomas Sung, who's considered the George Bailey of Chinatown."

The Sungs (one of whom worked for the New York DA's office at the time of the indictment) fought back, and after five years of what what Guerrascio describes as a "David-versus-Goliath court battle," the charges were dismissed in 2015. Another review (see below) indicates that the battle cost the Sungs $10 million. In this country, battling a criminal indictment never comes cheap.

Guerrascio's review also states that the film reveals, through accounts of the defendants and interviews with members of the DA's office (the film maker was not allowed to film in court), that the DA's case unraveled as the testimony of the prosecution's star witness, the bank's former loan manager (fired after the bank's senior management learned of his activities), showed him "practically admitting how he pulled off his illegal acts behind the backs of everyone at Abacus while on the stand." James claims that he tried to give an account of the prosecutors' case against the bank as clearly as possible, "because my feeling is by really laying out the case against them you also not just hear the case — you see how weak the case against them was."

A more extensive, and nuanced, review, of the movie was written by Variety's chief film critic, Owen Gleiberman, which attempts to throw cold water on the heat one might feel when thinking about the injustice served up by the state criminal authorities. He notes that 19 employees, in addition to the bank itself, were indicted, and that eight pleaded guilty to falsifying bank records, including inflating income and assets of borrowers. Does that sound familiar? However, the fact remains that the government, after five years and millions of dollars, could not present enough evidence against the Sungs to avoid a dismissal of charges, which is a pretty low bar to be unable to hurdle. Moreover, James gave the prosecutors a post-trail opportunity to make their case in the court of public opinion, and they fell flat on their faces.

Cyrus Vance Jr., the New York County District Attorney, sits down for an interview and says nothing of substance, and the whole arena of evidence — what the prosecution thought it had and why — remains frustratingly vague.

Gleiberman then makes an observation that shows a critical lack of understanding of how our system of justice is supposed to work.

Was the Abacus Federal Savings Bank dragged through a legal morass for five years because it was being treated, in effect, as a surrogate for the bigger banks that got bailed out? The movie wants us to raise our fists and shout, "Yes, that’s what happened. And it’s an outrage!" Instead, you may feel like raising your hand and asking "Is that really what happened? If so, it’s an outrage! Now please show us some evidence."

Abacus does not have to be a "surrogate" for unindicted big banks for a viewer to feel outraged at the way the bank and its owners were treated. Whether or not the DA's office had that intent, the bank does not have an obligation to prove its innocence. That's presumed by law. Instead, it's an outrage that the bank was indicted at all, regardless of the existence or nonexistence "scapegoating" motivations, unless the DA's office had evidence in hand, prior to filing the indictment, to prove, beyond a reasonable doubt, that the bank's senior management was guilty of the crimes for which the bank was indicted. As I've asserted many times, criminal prosecutors have enormous power to destroy people's lives. Before they set out to do so, they need to be damned sure they've got the facts on their side. The court ultimately decided that they did not, and, according to James (and the two reviewers quoted in this article), the prosecutors were not able to make their case to the public on camera.

Obviously, the best way to make up your own mind is to actually see the film, which was released a couple of weeks ago. That might be tough to do, since it appears from the film's web site that screenings are limited. Perhaps many of us will have to wait to see if it eventually shows up on cable television, Netflix, or Amazon Prime. James admitted that the subject matter of the film was not be one that seizes the imagination of the average move viewer. To those of us who live in the world the Sungs inhabit, however, it sounds like gripping fare.