Bank Lawyer's Blog

Fourth Corner Painted Into A Corner

2016-01-10T21:37:00-06:00

This past week, a federal district court judge in Colorado slapped down, hard, Fourth Corner Credit Union. In the process, the judge was equally hard on the federal government that has done a half-baked job in dealing with the problem of state-legal marijuana businesses inability to to obtain access to the nation's financial system because their activities largely remain illegal under federal criminal laws.

As regular readers may recall, Fourth Corner Credit Union is a state-chartered credit union in Colorado that was formed in 2014 by (in the lofty rhetoric of the credit union's attorneys) "ten courageous citizens" to provided banking services to the "compliant, licensed cannabis and hemp businesses and to thousands of persons, businesses and organizations that supported the legalization of marijuana." In order to effectively operate, however, Fourth Corner needed a "master account" from the Federal Reserve Bank of Kansas City. The FRB-KC turned down Fourth Corner's application for such an account on several the grounds, including that federal law preempts state law and that the FRB KC won't grant a master account to a financial institution that is engaged in the facilitation of illegal activities (like the laundering of the proceeds illegal drug sales). Fourth Corner sued for a mandatory injunction by the court that would compel the FRB KC to grant the master account. The district court denied the motion, dismissed (with prejudice) the credit union's complaint, and awarded the FRB KC its reasonable costs.

That had to hurt.

Although the court declared that it did not need to reach the issue of federal preemption, it observed in a footnote that "[i]t is clear, however, that Congress has the power to prohibit cultivation, distribution and use of marijuana notwithstanding compliance with state law." In other words, even though I didn't have to decide the issue, if I had, I would have upheld federal preemption of state law.

That blasted the "Supremacy Clause" of the US Constitution (Article VI, Paragraph 2)! It's so inconvenient.

In the course of its opinion, the judge blistered the backsides of federal regulators, with special emphasis on FinCEN and the US Justice Department for their "guidance" on this issue. Fourth Corner alleged that such guidance provided federal "authorization" to serve marijuana-related businesses ("MRBs"). The judge didn't buy it (anymore than I did).

The problem is, the FinCEN guidance and Cole memorandum do nothing of the sort. On the contrary, the Cole memorandum emphatically reiterates that the manufacture and distribution of marijuana violates the Controlled Substances Act, and that the Department of Justice is committed to enforcement of that Act. It directs federal prosecutors to apply certain priorities in making enforcement decisions, but it does not change the law. The FinCEN guidance acknowledges that financial transactions involving MRBs generally involve funds derived from illegal activity, and that banks must report such transactions as “suspicious activity.” It then, hypocritically in my view, simplifies the reporting requirements.

In short, these guidance documents simply suggest that prosecutors and bank regulators might “look the other way” if financial institutions don’t mind violating the law. A federal court cannot look the other way. I regard the situation as untenable and hope that it will soon be addressed and resolved by Congress."

Since next year is a presidential election year, "soon" is not likely to be prior to 2017. Until then, to repeat ourselves, any bank that serves marijuana related businesses "is playing with fire and not wearing an asbestos suit."

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf

Clinton Promises to Fly Beyond Dodd-Frank

2015-12-13T21:52:00-06:00

Hillary Clinton, in trying to out-Warren Warren, is ensuring that many bankers, of whatever stripe, will have to take a moment to ponder what a Clinton presidency might mean for the entire banking business before pushing the lever for her in November 2016. Unlike many Republican candidates, who publicly promise to roll back Dodd-Frank's more onerous provisions (regardless of private intent), Hillary promises to take Dodd-Frank to places that even its most ardent supporters have only dreamed about.

But it’s not enough simply to protect the progress we have made," Clinton wrote. "As president, I would not only veto any legislation that would weaken financial reform, but I would also fight for tough new rules, stronger enforcement and more accountability that go well beyond Dodd-Frank."

On Clinton's wish list are the usual proposals to strengthen the Volcker Rule, reimpose Glass-Steagall, break up big banks, restrain "risky" derivative trading, put Jamie Dimon in thumb screws, and force Wall Street interns to entertain donors to the Clinton Foundation at various strip clubs, she gets into the ominous "bad bankers" proposals that threaten to turn a danger of "trickle down" of big-bank regulation onto community banks into a virtual Niagra Falls.

Extend the statute of limitations for major financial crimes to 10 years
Require financial firms to admit wrongdoing as part of settlements
Increase transparency about terms of settlement and fines actually paid to the government
Penalize executives when their firm pays a fine

She also wants the SEC and CFTC to be "independently funded," just like the CFPB. That way, behavioral psychologist and utopian intellectuals can team up to remove any checks-and-balances on the social engineering agendas of the Progressives that Hillary is courting in her bid to grab the grass crown. As King Richard and his minions have been attempting to do with the CFPB.

Her desire to insert "strong regulators" into bank regulatory agencies also bodes ill for community banks. If you love the way that for the last eight years, bank regulators have second-guessed executive decision making on a continuous basis, used regulatory power to attempt to choke off bank access to legal but politically and/or "morally" disfavored businesses, and pushed the envelope of theories like "disparate impact" to find discrimination where no one has ever found it before in order to reward favored constituencies, you'll love another eight years under the current president's "logical successor." At least she's giving you a "heads up" and not hiding the ball. Don't say you weren't warned.

Now, if the opposing party could only nominate something other than the south end of a horse traveling north to run against her. If they can find one, that is.

Funnel Accounts: Be Very Afraid

2015-11-22T21:45:00-06:00

While slaving away for "The Man," alert reader John Thomas warned me that FinCEN's black ops storm troopers are hot on my trail and to run for cover before they scooped me up and waterboarded me, not for any useful information I might cough up but just for the sheer pleasure of watching me drown.

Funnel account activity was the standout trend in Suspicious Activity Report (SAR) filings in 2014, according to the latest report from the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

FinCEN’s second annual SAR Stats, published Wednesday, highlights how FinCEN uses SARs to track down criminals through their use of the financial system. It was based on SARs filed from March 1, 2012, through Dec. 31, 2014.

FinCEN defines a funnel account as an account that receives multiple cash deposits, often in amounts below the cash-reporting threshold, and from which funds are withdrawn in a different geographic area with little time between deposits and withdrawals.

According to FinCEN, funnel account activity was mentioned almost 10,000 times in SARs in 2014.The same references occurred no more than 123 times in 2012 and 2013.

While it eventually occurred to John that FinCEN had misspelled my name, I doubt that would have deterred them for long. Upon receiving that warning, I stopped the practice of making multiple cash deposits, and now make a cash deposit only when checks received total $9,999.99, which given my astoundingly low billable hourly rate and dearth of clients will mean that I am making deposits only twice a year. In addition, I have bribed FinCEN's pet goat, Elizabeth Maxine Waters-Warren, with a family concoction: funnel cake. I have thereby assured myself that any SAR with the name "funnel," "funnell," or "kevin" eventually will go the way of most SARs: into a compost heap.

Thanks for the heads up, John. You saved my bacon, or at least, my cabrito.

Dude (Does Not) Look Like A Lady

2015-11-01T21:53:00-06:00

Our crack field correspondents have alerted us to a phenomenon that we hope is nipped in the bud: male bank robbers dressed as hideously ugly women.

The bank heist tactic known among criminal elements as "Dude Looks Like A Lady" (aka "The Caitlyn Jenner Option") attempts to throw witnesses off their game (and, in some cases, off their feed) by disguising the perpetrators as members of the feminine persuasion when, as a matter of nature-over-nurture, fact-based scientific theory, the criminals actually performing the robbery lean decidedly to the masculine end of the gender spectrum. Apparently, the intent of this charade is to simultaneously strike within a witness's Orbitofrontal Cortex both his or her "Gloria Steinem" and "Norman Mailer" regions, igniting a Patriarchal vs. Matriarchal War of the Neurons that renders accurate observation, much less coherent articulation, impossible.

The game was played in connection with a particularly violent kidnapping of a young man and the subsequent robbery of a credit union in upstate New York using that man's car, in which two of the male robbers dressed as women and all of the gang was apprehended. It appears that gender confusion was not effective. Either that, or one "man" was caught and ratted out the rest. Regardless, you'd think that failure might have been enough to discourage copycats. If you did, you'd be wrong.

Police in Anne Arundel County, Maryland, say that a man “seemingly disguised as a female” was arrested for robbing a local bank.

Just before noon on October 29, police were told that the Hamilton Bank in Pasadena, MD was being robbed by an Asian woman with a knife.

During the investigation, police learned that the robber displayed the knife and demanded money. But instead of a woman, police identified the suspect as a man named Dixon Kuon Henderson, 59, of Baltimore. Henderson appeared to be dressed as a woman during the crime, police reported.

The suspect’s car was quickly located and Henderson was found inside.

Henderson was arrested and charged with armed robbery. He was being held Friday on $500,000 bail.

Dixon looks as much like a woman as the rodent who lives atop Donald Trump's noggin looks like a head of actual human hair. Whatever he is, he is not going to pass for female, ever, even in Moldova.

Was that last sentence politically incorrect? For that matter, was this entire post politically incorrect? If so, then "Mission Accomplished."

The Fed On MJ Banking: Nyet

2015-10-25T21:57:00-05:00

Over the summer, while I was downing cold beers by the barrel rather than blogging, the Federal Reserve Bank of Kansas City and the NCUA finally acted on the applications of Fourth Corner Credit Union for, respectively, a "master account" for access to the Federal Reserve System and for insurance of share accounts. In both cases, the answer was not only "No," but "Hell, No!" Fourth Corner sued both the NCUA and the Fed. last week, the Fed filed a Motion to Dismiss Fourth Corner's complaint that ought to send a chill down the spine of every bank in Colorado, Washington, Oregon and Alaska that thinks it can "work around" the federal banking regulators on the Supremacy Clause when it comes to banking a state-legal, federal-illegal marijuana business.

In broad strokes, the Fed alleges that federal law, in this case the Controlled Substances act, trumps state law on marijuana use by virtue of the Supremacy Clause of the US Constitution. This should be "Hornbook Law" to any bank regulatory attorney. The manufacture, sale, and distribution of marijuana is prohibited by the Controlled Substances Act. Therefore, "any affirmative action that Colorado has taken to facilitate the distribution of marijuana is preempted by federal law."

In the present case, Colorado attempted to grant TFCCU a charter that would, in effect, intentionally allow TFCCU to aid and abet violations of federal law by offering banking services to businesses engaged in the manufacture and/or distribution of marijuana. Such an act is preempted by federal law and is void and without effect...The Court would not aid other such attempts--such as if Colorado enacted a scheme to allow trade in endangered species or trade with north Korea in derogation of federal laws, and then chartered a credit union to handle finances for companies conducting such illegal trade...TFCCU is not an entity that can be recognized under federal law" and the credit union's complaint must be dismissed.

Beyond the "master account" and insurance of accounts applications at issue here, the Motion to Dismiss contains a broad condemnation for any existing financial institution--credit union or bank--that thinks that it is somehow safely avoiding federal criminal law prosecution and/or bank regulatory agency enforcement action because it follows the "FinCEN Guidance" issued in early 2014 that, in turn, followed the "Cole Memorandum" guidance provided to US Attorneys on prosecutorial discretion in the area state-legal marijuana businesses. The Fed contends that such "guidance" is not a protection from criminal prosecution (which the guidance itself states, if read carefully). Even if it affords such protection, the Fed makes clear that the Fed would not be bound by it.

The Fed also makes clear that it considers any financial institution that engages in providing financial services to a state-legal marijuana business to be engaging in aiding and abetting a criminal activity under federal law, and that federal law controls. Under that analysis, the Fed should, if it is consistent, take enforcement action against any Fed-member bank that is so engaged. I fail to see why the OCC, FDIC, or NCUA would take a contrary position.

An anonymous (naturally) critic from Dogpatch, U.S.A., attempted to leave a comment on the blog a few months ago that criticized my support of (the critic's phrase) "federal infallibility" regarding state marijuana laws. The poor soul apparently conflated "Papal Infallibility," a theological doctrine of the Roman Catholic Church, with the constitutional principle of "Federal Supremacy. The issue at stake is not who is "right" or "wrong" regarding whether the manufacture and distribution of marijuana for recreational use should or should not be illegal, it is whose law prevails when state and federal law conflict on this matter. My view is that federal law prevails and that any financial institution (and its directors, officers, and employees) that "banks" a state-legal marijuana business is running a serious risk of being hammered by different federal agencies for violating federal criminal laws.

If your credit union's or bank's business plan is "I feel lucky today," more power to you. I think that you're playing with fire and not wearing an asbestos suit.

Operation Choke Point Lawsuit: The Plaintiffs Are Still In The Game

2015-10-04T21:25:00-05:00

While some pundits think that Operation Choke Point is a dead issue, as evidenced by the FDIC's recent guidance that claimed that they were only kidding when they labeled entire lines of business as "high risk," the folks at Ballard Spahr note that the lawsuit filed by the payday loan industry against the bank regulatory agencies continues to forge forward. On September 25, the federal judge hearing the case "rejected most of the arguments in the agencies’ motion to dismiss," allowing the lawsuit proceed.

The agencies first challenged plaintiffs’ standing to sue. While acknowledging that the denial of banking services establishes one necessary element of standing (an “injury in fact”), defendants argued that the plaintiffs do not satisfy the two remaining elements, namely causation, a link between the defendants’ actions and the plaintiffs’ injuries, and redressability, evidence that a favorable ruling will redress the plaintiffs’ alleged injuries.

According to the defendants, the plaintiffs’ injuries resulted from independent decisions by their banks rather than the agencies’ guidance documents. Judge Kessler notes that the plaintiffs’ burden of eventually proving their “third party” causation theory−that the defendants’ conduct compelled the banks to deny them service−will be substantial. However, taking as true all of the plaintiffs’ factual allegations, as is required when deciding a motion to dismiss, she determined that the claims satisfy both the causation and redressability requirements.

The judge also found that the agencies' subsequent "guidance" that "urged" banks to take a risk-based approach on a client-by-client, rather than industry-by-industry basis, does not render the controversy "moot."

Although she agreed that the agencies’ subsequent pronouncements have largely superseded earlier Choke Point guidance, Judge Kessler rejected the defendants’ contention that this alone renders moot all of the plaintiffs’ claims. In particular, she notes that the plaintiffs claim they have been stigmatized and deprived of their ability to engage in a legally permitted business, all without constitutionally required notice and opportunity to be heard.

The judge dismissed claims based upon alleged violation of the Administrative Procedures Act, ruling that agency "guidance" is not final agency action. That is technically correct. However, as those of us who see the consequences of failing to follow agency "guidance," including the inclusion on examination reports of MRAs (matters requiring attention) for "violation" of "guidance," the way the agencies use guidance might be considered by a cynic as an end-around the APA. Luckily, I'm an optimist and would never suggest such a thing.

As I've previously assert, I think that the only thing that will ultimately drive a stake through the heart of Operation Choke Point will be a change in the White House in 2016. Until then, I hope that the plaintiffs continue to keep fighting the good fight.

No Mystery Why CUs Not Filing More SARs

2015-09-27T21:57:00-05:00

A recent post on the allegations by FinCEN director Jennifer Shasky Calvery that credit unions are lackadaisical about filing suspicious activity reports led not only to noisy "un-subscriptions" to this blog by some apparently offended credit union readers (usually, only a post bashing Elizabeth Warren causes that reaction), but an actual thoughtful and civil response from long-time credit union attorney Hal Scoggins. Mr. Scoggins failure to adopt the usual "shoot-the-messenger" approach to blog reading marks him as a man of taste and discrimination, as does, obviously, his interest in reading the deep thoughts of Jack Handy this blog's author, a man who a once received an email from a New York-based think tank that advised him that he could be a "thought leader" if only he weren't so flippant. Dream on!

Hal gave me permission to post his response here, so here it is (edited to remove an favorable comments about me, since I am currently positioning myself as the "Anti-Trump" foretold in the Book of Revelations):

A quick comment on your 9/17 post about Jennifer Shasky Calvery’s comments on CUs that haven’t filed SARs or CTRs. I read her comments and initially thought, “Wow, that’s scary." A “statistically significant” number of credit unions have not filed any SARs or CTRs.” But it’s a little less scary when one considers a couple of points about credit unions:

* The NCUA’s call report data for June 2013 shows that there are 6284 credit unions in the United States.

* The same call report data shows that 1892 of those credit unions have total assets under $10 million. (30% - that’s statistically significant.)

* Average asset size of those 1892 credit unions is just over $4 million.

* Average number of members: 826

* Average number of employees: 1.4 FT and 1.2 PT

I could not pull pure cash data from the NCUA data, but I looked at a couple of random CU’s call reports; one $2.5 million and one $1.5 million. They had cash on hand of $26,000 (yes, thousand) and $15,000, respectively. I would guess that a statistically significant number of those credit unions do not offer checking accounts. Only 287 offer credit cards, and I was shocked the number was that high.

When the CU has only $4 million in total assets, 800 members with an average account balance of about $5000, and there is probably only $40,000 in cash in the entire CU, there are probably not going to be any times where someone is bringing in or taking out $10,000 in cash (no CTRs). Plus, you don’t offer enough services to be that useful for criminal activity, and there are probably not many times where the member is doing a transaction that the credit union doesn’t have enough knowledge about to take it out of the realm of suspicious activity (no SARs). If 30 percent of CUs in the country fit that profile (and it appears they do), it is a lot easier to see how a “statistically significant” number haven’t filed any SARs or CTRs for a couple of years.

Valid points, and they ought to be considered by all fair minded folks without an axe to grind, which, I think, leaves out 99% of commercial bankers and at least one bank law blogger who is more interested in eliciting a drive-by guffaw than being a "thought leader" (whatever the hell that is).

In a later email, Hal made the following additional point, which is also telling.

My reaction now (after doing that tiny bit of research) is – you’re the director of FinCEN, and you can’t have one of your flunkies do 10 minutes of research to provide some context before you make a speech like that? Or better yet, require the flunkie to do 10 minutes of research to provide some context at the time they actually provide you with the info for your little sound bite?

Research? We don't need no stinkin' research! We're the federal "guhment" and we've just been making it up as we go along since 1789.

Besides, Calvery needs food for FinCEN's pet goat and she wants all financial institutions, taxable and tax-free, to get on the stick and start winnowing the forests. SARs: it's what for dinner!

No SARs? No Worries!

2015-09-17T22:01:00-05:00

Banks and credit unions have been gnawing on one another like Donald Trump on Carly Fiorina's face since before The Donald's dad gifted him with his first blow dryer (which, I believe, was some time before Cro-Magnon Man out-bred Donald's Neanderthal ancestors). Credit unions want to make business loans like banks and banks want to be tax exempt, too. Or, something like that.

Amidst all the "Am Not-Are Too" finger-pointing engaged in by both segments of the financial industry, there is clearly one area of business where banks are beating credit unions to the punch, time after time: SAR-filing (paid subscription required).

Speaking Tuesday to the National Association of Federal Credit Unions, Financial Crimes Enforcement Network Director Jennifer Shasky Calvery said that an unusually large number of credit unions have not filed suspicious activity reports or currency transaction reports for nearly two years.

"Some early research we are looking at suggests that we have a surprisingly larger … statistically relevant and unusual number of credit unions that over a seven-quarter period — so almost a two-year period — filed neither a SAR or CTR," she told the trade group's congressional conference.

She acknowledged that "there could be problems with the data," but added that "the number is surprising, so we are trying to understand that."

Now, this is the same Jennifer Shasky Calvery who last year declared that the battle to pry open the banking business for state-legal recreational marijuana businesses had been won, so a healthy dose of skepticism might be warranted as to the reliability of these statistics. Still, no SARs or CTRs at all?

I guess its safe to say that many credit unions are not overspending on their anti-money laundering compliance staff. Which, I suppose, is just fine until, you know, it isn't.

Credit Union Executives: New Targets of Opportunity?

2015-04-29T21:57:00-05:00

Kidnapping a bank executive's family and holding them until the executive brings the crooks money from the bank is a time-honored tradition in the Wild Wild West, as this 1987 newspaper article demonstrates. According to reader John Thomas, Senior Vice President of Regulatory Compliance with the Missouri Credit Union Association, crooks in Tennessee have used the gambit in an attempt to rob a credit union.

The CEO of the credit union apparently took longer than the crooks had anticipated. Growing nervous, they released the executive's family and fled. If they'd been particularly vicious, I suppose that they could have harmed the family members, to send a message or simply out pure meanness, so there's that to be thankful for. On the other hand, credit unions, generally being smaller in size on average than banks, would not seem to be the normal targets for these kinds of crooks, so that raises a concern as to whether or not this will become a trend for the credit union industry.

According to John, this may be a sign of of bad times to come. From his email to me that accompanied a link to the article from the Credit Union Times:

Perhaps everything can be explained by the perps being, well, “stupider than usual.” Given the stunning lack of success of the criminal enterprise, we can assume planning wasn’t their area of expertise.

Nevertheless, people desperate enough to attempt kidnapping are desperate enough to try it again elsewhere and try it again, this time, with a rational plan. Eventually, somebody will get the formula right.

As the article regarding the Texas bank from 1987 indicates, somebody in the past has gotten it "right." On the other hand, we also have the recent example of fake kidnappers strapping fake bomb vests to an assistant bank branch manager/fake kidnapping victim in an epic fail of a robbery. Thus, while somebody occasionally gets it "right," it appears that they also frequently get it all wrong.

Nevertheless, being a branch manager or senior bank or credit union executive may now be legitimately considered a "high risk" occupation. Keep your eyes peeled, and never answer the door to a stranger unless you've got a Glock in your hand with a round chambered and the safety off.

Don't Ask, Don't Tell

2015-04-26T21:33:00-05:00

You may recall last year's pronouncement by the head of FinCEN, Jennifer Shasky Calvery, that 105 financial institutions were, thanks to the amazing guidance provided in February 2014 by FinCEN, servicing state-legal, federal-illegal marijuana businesses. Apparently, less than 10% of those are in Colorado, land of the free and home of the dazed, because according Colorado Rep. Jared Polis, only eight commercial banks and two credit unions in that state are banking the pot biz, and none of them want to be publicly named.

I assume that they don't want to happen to them what happened to publicity-challenged MBank out of Oregon. As recently related in published reports, that Oregon bank announced in January that it was open for (marijuana) business not only in Oregon, but in Colorado, and that it had the "tacit approval" of the FDIC to bank the unbankable. Within less than a week, because it was supposedly "overwhelmed" by the response from Colorado marijuana businesses, it pulled entirely out Colorful Colorado. Now, it's announced that it has pulled out of the entire marijuana business nationally, even in its home state of Oregon, apparently haven satisfied the munchies and gotten a good night's sleep. Like the Colorado exit, the industry-wide exit is supposedly due to the unexpected response of unbanked pot sellers and the bank's determination that "the bank is not big enough to provide and support all of the compliance components required."

It may be pure coincidence, but it appears that any time a bank is publicly "outed" as a banker to the stoned, the bank pulls out of the business. None of the 105 institutions cited by Ms. Calvery or the ten cited by Mr. Polis was named. Had they been, how many of them would have "pulled an MBank"? Most, if not all, is my guess.

Unlike banking payday lending, a perfectly legal business that the regulators are trying to eradicate, banking marijuana selling, a blatantly illegal business (under federal criminal laws), is just fine with the federal banking regulators as long as the bank flies under the radar screen. It's OK to service an illegal drug business as long as you (A) file the right kind of Cheech & Chong SAR or SARs, and (B) don't ever, ever, let anyone but the illegal business owners and bank officials know about it. Do you think that this state of affairs breeds cynicism and contempt for the rule of law? Me, too.

"Don't Ask, Don't Tell." It was bad policy for the US military and it's no better for the US banking business.