Bank Lawyer's Blog

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.

US Justice Department to Banks: SARs May Not Be Sufficient

2015-03-17T21:44:00-05:00

Most bankers I know always love to receive a helping hand from federal law enforcement officials in making their daily lives just a little bit better. That's why I'm sure that most bankers smiled wide when an Assistant US Attorney General recently told a gathering of bankers that when it comes to reporting suspicious activity, a SAR is often not nearly enough.

“The vast majority of financial institutions file suspicious activity reports when they suspect that an account is connected to nefarious activity,” said assistant attorney general Leslie Caldwell in a Monday speech, according to prepared remarks. “But, in appropriate cases, we encourage those institutions to consider whether to take more action: specifically, to alert law enforcement authorities about the problem.”

[...]

A tip-off from a bank about a suspicious customer could lead law enforcement to seize funds or start an investigation, Ms. Caldwell said.

Sure, that makes sense. Bankers have nothing better to do than to do your job for you, right Leslie? The difference between filing a SAR and picking up the phone and reporting your suspicions to a cop is that the SAR is confidential (the subject of the report should never know one was filed) and applicable law provides for banks that file them a "safe harbor" from a lawsuit by the subject of the SAR (in all but in cases of the most egregiously bad faith filings). Those specific protections do not apply to a phone call or an email to a cop.

As a commenter to the linked article observed, "[i]f the Feds would actually do something about the millions of SARs we (financial institutions) have filed, some of these criminals would be in jail." To "do something," the Feds would have to rip those SARs from the gravitational pull of the black hole into which they're apparently dumped and read them, something that bankers have believed for years rarely happens. On the other hand, as FinCEN's head boasted last year regarding all the Cheech & Chong SARs that banks in Colorado have been filing on "legal" marijuana-related businesses, FinCEN actually read 62% of them. That left 38% to be eventually transformed into goat pellets after being consumed by FinCEN's pet goat.

My guess is that many banks will continue to believe that filing a SAR is a more than sufficient "tip off" for any law enforcement agency that actually is interested in uncovering crime.

Changing of the Guard at DOJ

2015-03-01T21:55:00-06:00

The recent confirmation of Loretta Lynch as the none-too-soon successor to the current Commissar Attorney General of the United States, engendered a lot of speculation about whether or not the exit of "Fast and Furious" Holder will also spell the end of Operation Choke Point. In a Senate hearing, Ms. Lynch was less than enlightening on this point.

In response to questions by Senator Mark Lee, a Chock Point critic, she sounded positively tepid.

Lynch told the senator that should she be confirmed, she would work with him to ensure that law-abiding Americans aren’t targeted by the initiative.

“I look forward to hearing your concerns and working with you on them,” she said.

Let's hope that when she uses the term "working with you" she doesn't really mean "working you over." Time will tell.

On another issue, however, she differs markedly from her boss, the Department of Justice, and FinCEN, which have been falling all over themselves to aid the heirs to Cheech and Chong to light up their bongs. Unlike Barack, Loretta loathes the demon weed.

A federal prosecutor in New York, Ms. Lynch told the Senate Committee on the Judiciary she disagreed with the president’s no-big-deal take on pot, saying, “I certainly don’t hold that view and don’t agree with that view of marijuana as a substance.”

“I think the president was speaking from his personal experience and personal opinion, neither of which I’m able to share,” Ms. Lynch said. “But I can tell you that not only do I not support the legalization of marijuana, it is not the position of the Department of Justice currently to support the legalization. Nor would it be the position should I become confirmed as attorney general.”

A stated opposition to "legalizing" marijuana could be read as merely opposing legalization at the federal level. In addition, personally opposing legalization, even at the state level, does not necessarily translate into abandoning the current position of the DOJ as embodied in the "Cole Memorandum" and its spawn at the DOJ and FinCEN. That position appears to be that as long as a state legal marijuana business doesn't run afoul of eight listed activities which the DOJ thinks are "really, really bad" (as opposed to being merely "really bad"), then federal law enforcement will look away. In the case of banks that service such "legal/illegal" businesses, as long as they file special super secret SARs and perform initial and ongoing due diligence with a level of detail that would confound the NSA, the Feds will cut them a break, as well.

Pot's proponents claim that we should not take Ms. Lynch seriously. They note that she was testifying before a committee chaired by the marijuana-repulsed Chuck Grassley. I guess their point might be that she was "spinning" (i.e., committing perjury).

Assuming, however, that she was actually delivering her honest opinion to Senator Grassley, I think that Ms. Lynch's arrival on the scene may bode ill for the "three monkeys approach" to the future enforcement of federal drug laws against businesses that are engaged in state-legal-federal-illegal marijuana businesses. "Looking the other way" might prove to be a thing of the past for the DOJ, even before a Republican AG takes office in 2017 (should a Republican win the White House in 2016).

Moreover, the rogue banks in Colorado, Oregon, and elsewhere, who, in banking marijuana businesses, have been operating under the "don't-ask-don't-tell" benevolence of the FDIC and other federal banking regulators who take their cues from the head of the Executive branch (although they would deny that allegation until the end of time), may find that the examiners who have been giving them "tacit approval" to bank marijuana businesses as long as they don't make that fact public, are suddenly attacked by fits of rectitude and begin to take federal drug trafficking laws seriously again. If that happens, good luck with holding the agencies to their "tacit" approval.

Feds To Tribes: Don't Bogart That Roach, Roll Some More

2014-12-14T21:40:00-06:00

At the same time that the federal government is trying to drive Native American tribes out of the payday lending business, it is encouraging them to get into the pot business. As long as the file those Cheech & Chong SARs that were created out of whole cloth.

Indian tribes can grow and sell marijuana on their lands as long as they follow the same federal conditions laid out for states that have legalized the drug, the U.S. Justice Department said Thursday.

[...]

Oregon U.S. Attorney Amanda Marshall said that the Justice Department policy addresses questions raised by tribes about how legalization of pot in states like Oregon, Washington and Colorado would apply to Indian lands.

“That’s been the primary message tribes are getting to us as U.S. attorneys,” Marshall said from Portland. “What will the U.S. as federal partners do to assist tribes in protecting our children and families, our tribal businesses, our tribal housing? How will you help us combat marijuana abuse in Indian Country when states are no longer there to partner with us?”

How will we help you combat marijuana abuse? By telling you that it's OK to grow it? Makes sense to me.

Here's the rub: most tribes don't want anything to do with it.

But many in Indian Country are wary of compounding existing drug and alcohol problems by growing and selling pot.

The Yakama Nation in Washington state recently banned marijuana on the reservation and is trying to halt state regulated pot sales and grows on lands off the reservation where it still holds hunting and fishing rights. The Hoopa Valley Tribe in Northern California has battled illegal pot plantations on its reservation that have damaged the environment.

In South Dakota, the Oglala Sioux Tribal Council this year rejected a proposal to allow marijuana.

Oglala Sioux tribal Councilwoman Ellen Fills the Pipe, chairwoman of the council’s Law and Order Committee, said Thursday she needs to review the federal policy more thoroughly but that given her long background in law enforcement, she opposes loosening marijuana laws.

“For me, it’s a drug,” Fills the Pipe said. “My gut feeling is we’re most likely going to shoot it down.”

In Oregon, former Klamath Tribes chairman Jeff Mitchell said communities everywhere deal with drug and alcohol issues, and tribes are likely to proceed carefully.

“I have confidence in tribal government that they will deal with it appropriately and they’ll take into consideration social and legal aspects, as well as other implications that go along with bringing something like that into a community,” Mitchell said.

Obviously, the tribes have more common sense than the feds, and much more than a majority of voters in states that want to jump on board the cannabis gravy train and ride it 'til it derails in a cloud of smoke.

Moreover, as US Attorney Mitchell helpfully observes, the activities of the tribes in this respect would violate federal criminal laws. Which is why, other than for a few outliers, the banking industry in states like Colorado and Washington, continues to refuse to have anything to do with the marijuana business.

Maybe between casino gambling and pot, the tribes ultimately will have revenge on the people who took their land and put them on reservations, further weakening an already deracinated popular "culture" that seems, in many respects, to be revolving quickly, in an increasingly tight concentric circle, around the drain hole of history.

Wouldn't that be ironic?

Cheech and Chong Join The FDIC

2014-10-30T21:59:00-05:00

There was some rather surprising news this week via the American Banker (paid subscription required) regarding banking: the FDIC is following FinCEN's lead in telling banks in Colorado (and elsewhere) to "smoke 'em if you've got 'em."

The Federal Deposit Insurance Corp. has quietly aligned itself with guidelines from the Financial Crimes Enforcement Network that are meant to assuage bankers' fears about the burgeoning marijuana industry, American Banker has learned.

[...]

Back in February, when Fincen released its guidance, the FDIC declined to comment on the document. But on Monday, FDIC spokesman Greg Hernandez confirmed that the agency is currently using the Fincen guidance.

The FDIC's decision to use the guidance is significant because federal banking agencies had previously refused to say whether they'd align themselves with the document, which is part of a broader Obama administration push to foster state-level experiments with marijuana legalization.

[...]

During one recent bank examination, an FDIC official told the bank's directors that the agency is in alignment with Fincen's marijuana guidance, according to Lance Ott, a consultant to the bank who heard the discussion. At the same time, the FDIC employee made clear that the agency is neither encouraging nor discouraging banks from serving pot merchants, Ott said.

The FDIC official told the bank that marijuana is a higher-risk business because of its dependence on cash and the increased chance of robbery, but that pot businesses do not hold a reputational risk for banks in states such as Colorado and Washington that have legalized the drug, Ott recalled.

One commenter to that article put one ironic aspect of this recent news very well.

Lemme see if I understand this. Two federal agencies, the FDIC and FinCEN, are knocking themselves out to have banks provide services to pot businesses which are legal in only a handful of states, while being illegal under federal law. Yet the FDIC, until just recently, actively participated in overt (Operation Chokepoint) and still participates in covert efforts to pressure banks to discontinue providing services to so-called alternative financial service providers, such as check cashers, money remitters and payday advance companies, that are legal in most states and are registered (legal) with FinCEN as Money Service Businesses. Where is the logic??

Logic? You want logic? Silly boy!

At the same time that the FDIC is inhaling deeply, its counterpart in the credit union arena is apparently blowing cold.

A New Mexico credit union closed its marijuana business accounts after a negative reaction by a NCUA field examiner, according to Paul Stull, president/CEO of the Credit Union Association of New Mexico in Albuquerque.

“From what I was told, the field examiner's reaction was quite over the top,” said Stull, who declined to name the specific credit union involved in the alleged incident. “The examiner said there was no way this could be done legally.”

The credit union closed the accounts after an examiner threatened to issue a letter of understanding and agreement if it didn't do so, Stull said. To his knowledge, there are no credit unions currently offering banking services to New Mexico's licensed medical marijuana businesses.

I spoke with the chief compliance officer of a Colorado Fed-member state bank that a Federal Reserve examiner made comments to her bank to the effect "You know, other banks in Colorado are banking marijuana businesses," but when she tasked if that meant that the Fed was taking the position that as long as the bank complied with the FinCEN guidance, the Fed would not object, the examiner backed off and said that he didn't mean to imply that such activity was OK or not OK, but that each bank needed to make an individual risk decision. Whatever the hell that means.

In other words, the federal regulators are all over the board on this issue.

The head of the Washington Bankers Association spoke for all but a tiny minority of banks in both Colorado and Washington (and elsewhere).

James Pishue, president of the Washington Bankers Association, said that the vast majority of banks are still staying away from marijuana because the drug remains illegal under federal law. "There really needs to be a federal solution to this," he said.

Yes, here's the basic risk for a bank that knowingly provides banking services to a marijuana business: The...Bank...Is...Violating...Federal...Criminal...Laws. The bank has to depend on the forbearance of federal government regulators and prosecutors to continue to get away with that law-breaking activity. If that's how you want to roll, go for it. You'll look great in pinstripes once John Ashcroft's doppelganger takes over as Attorney General in January 2017.

On the other hand, you are going to need to smoke dope to comprehend the current regulatory landscape of banking dope.

FinCEN: All's Well With Marijuana Banking

2014-08-12T21:42:00-05:00

Apparently, FinCEN chief Jennifer Shasky Calvery has surveyed the battleground that is marijuana banking, decided that the battle has been won, and is telling the world to "move along now, nothing to see here" (paid subscription required).

There are 105 U.S. financial institutions providing banking services to marijuana dispensaries and other pot businesses, a top federal official is expected to reveal in a speech Tuesday.

[...]

Marijuana shops, which generate large amounts of cash and can be targets of thieves, have been lobbying for more access to the mainstream financial system. The guidelines were meant to encourage financial institutions to do business with the industry provided they met certain criteria, and Fincen Director Jennifer Shasky Calvery is expected to declare that the agency's goal has been achieved.

"From our perspective the guidance is having the intended effect," Shasky will say, according to a copy of her prepared remarks that Fincen provided to American Banker. "It is facilitating access to financial services, while ensuring that this activity is transparent and the funds are going into regulated financial institutions."

Reporter Kevin Wack points out what Ms. Calvery does not: 105 financial institutions is less that 1% of the total number of financial institutions, which means that 99% of all financial institutions won't do business with marijuana businesses that are legal under state law as long as dealing in marijuana is illegal under federal law. Most financial institutions in states like Colorado and Washington, where recreational marijuana sales and use are legal under state law, will simply not do business with purveyors of flammable and/or edible hemp-related products.

So, if the "intended effect" of the FinCEN guidance was to encourage financial institutions to bank marijuana businesses, it's difficult to see how she can make that statement with a straight face. In fact, our inside sources tell us that upon leaving the venue of her speech, Ms. Calvery was kidnapped by "Black Ops" storm troopers of the OCC and waterboarded until she coughed up the names of the Gang of 105.

There will be blood...

On another positive note, Ms. Calvery assured bankers that all those SARs they've been filing, including those "Cheech & Chong SARs" that related solely to the weed-related, are not being eaten by FinCEN's pet goat.

Between January and March 2014, teams across the country reviewed more than 180,000 of the more than 290,000 suspicious activity reports that were filed, according to the speech, which also details how the reports have been used to catch various kinds of criminals.

"So, as you can see, BSA reporting does not go into a 'black hole' as suggested by some in the financial industry," Shasky will say.

Well, knowing that 38% of the SARs filed are not reviewed doesn't exactly fill me with anything other than inertia. How about you? Are you all fired up, ready to go (file a SAR)? As to the 62% of SARs that were actually "reviewed," Ms. Calvery does not tell us with what kind of detail those reviews were performed. A cadre of anal-retentive Einsteins parsing the nuances with electron microscopes is one thing. A crew of high school students getting their community service credits in the bag while sitting in a SAR-filled bullpen sipping Red Bull and giving each other wedgies is another thing.

I'm still betting that there's a goat involved.

We Won't Tell What To Do Until After We Punish You For Not Doing It

2014-07-29T21:44:00-05:00

The CFPB isn't the only federal government agency that is promulgating new "regulations" by enforcement action. According to yesterday's American Banker (paid subscription required), the OCC's been playing the same game, especially with the BSA.

Few dare talk about their concerns publicly, for fear of alienating regulators. Privately, they say that BSA exams have become more rigorous and focused in recent years, digging deeper into the weeds of processes, systems and controls. Foot-dragging and shortcomings are being met with stiffer monetary penalties and lengthy lists of demands for systems improvements and additional personnel.

Yet it's not clear that even the regulators know exactly what they want from bank BSA programs. Instead, critics say, they're looking to the private sector for the latest in best practices and then seeking to transmit those ideas to the rest of the industry through regulatory decree.

BSA officers report combing through consent orders and regulatory pronouncements with urgency, looking for clues of subtle changes and what's coming next. "We are now in an era of 'regulation by enforcement action,'" says Teresa Pesce, head of the Americas AML practice at consulting firm KPMG.

"Banks feel that they can no longer look at the statutes and regulations to know what to do," Pesce says. "They have to look at the most-recent regulatory guidance or enforcement action against their peers, and then try to plug those holes, as opposed to creating more thoughtful and sustainable programs."

"Thoughtful and sustainable programs?" What's that got to do with covering your backside, avoiding second-guessing from your "superiors" and your "peers," and protecting your government retirement benefits? Let's get with the program here, Teresa.

According to the American Banker's sources, the causes for the uptick in scrutiny on BSA is open to debate.

Some point to the lingering anger of Congress and the public over Wall Street's role in the financial crisis, and the failure of regulators to catch it. Others note that with banks having largely cleaned up their credit problems, quieting the safety and soundness risks that had dominated regulators' concerns in recent years, all those examiners hired at the peak of the crisis now have more time on their hands.

Idle hands are the devil's workshop.

One former OCC official even said much of this may have to do with career advancement by small bank examiners who want to earn notches in their gun by taking down some too-small-to-fight-me community banks, and thereby be promoted to examining the plutocrats of commercial banking. I guess it's every examiner's dream to make yourself such a pest to Bank of America that it hires you just to get you out of harm's way.

FinCEN's Director Jennifer Shasky Calvery claims it's because FinCEN is getting better at using the billions of bits of information that banks feed into its maw every day via various reporting avenues. She even talks about a bank that included a phone number in a SAR that matched a number found in Osama Bin Laden's file cabinet found by Seal Team Six in the follow-up to ventilating the former terrorist-in-chief. Jennifer won't tell us what the people who parse these nuances did with the number. Maybe the NSA used it to order a truck load of peperoni and italian sausage pizzas to be delivered to a kabob house in Kandahar, demoralizing a phalanx of jihadists. Whatever, she wants banks to know that she and her fellow "sheriffs" are cracking down on banks because all of those SARs they're defensively filing are no longer fed to FinCEN's pet goat.

So, bankers, buckle up and get ready for more _regulating-by-enforcement. What's good for FinCEN's good for the country, and the bad guys are moving too fast to bother with that irksome Administrative Procedures Act. The regulators will tell you what you did wrong after you've done it, not before. If you don't like that, well, that's tough nuggies. In this brave new world, the ends justify the means.

Porn Stars Held To Be "Un-accountable"

2014-05-14T22:03:00-05:00

Operation Choke Point, and the general attitude of the federal banking regulators toward businesses that they've picked (for reasons best known to themselves) as worthy of being branded with a Scarlet Letter, are causing cautious banks to drop customers who might be engaged in perfectly legal activities. Apparently, the latest victims are porn stars (paid subscription required).

A new war is brewing between banks and their customers, and the fight is going public.

PR black eyes of the past would have come from ATM surcharges or foreclosure injustices. Now, news reports are stacking up about angry customers — payday lenders, check cashers, telemarketers, gun dealers and even adult entertainers — who are complaining that their accounts have been, or could be, unfairly terminated.

[...]

The pornography sweep in particular only strengthens bankers' suspicions that regulators are forcing them to play the role of morality police. And it raises more practical questions for bankers: How do they balance public perception and compliance? What industry will they feel compelled to shut out next?

Look, porn stars ought to be banned from access to money due primarily to their utter lack of acting chops.

"Hi, I'm Eva. I'm from the maid service. I'm here to clean your house."

"Hey, Eva, would you start with cleaning...THIS?!?"

"Oh, baby! Yeah...yeah...oh...oh..uhh..uhhhh...OHHHHHHHHHHH!!!"

Yet, in this great country we call "The Land of the Free and the Home of the Horny," the "adult entertainment business" is legal. As is payday lending (in many states), check cashing, renting-to-own, deposit advances, tax anticipation refund lending, and being a "Pawn Star." However, all of those businesses have a "common taint": the DOJ and federal bank regulators don't like them. While the ostensible rationale for that dislike may be that they pose higher risks of money laundering or other illegal activities by some of their members than do other business (like insidre trading investment advisers to members of Congress), I've not seen the evidence that Teagen Presley is a crook, albeit you might argue, with some support, that she's a "bad actor."

Reporter Andy Peters points to a problematic FDIC report from 2011 that listed the current crop of the disfavored, and that may be a guide to "who's next."

Pornography is one of several potentially problematic industries listed in an FDIC report in June 2011 that warns banks about managing third-party payment processor relationships. Ties between banks and processors that handle transactions for the problematic industry sectors can expose banks to "greater strategic, credit, compliance, transaction, legal and reputation risk," the FDIC said.

[...]

In addition to pornography, the other high-risk industries the FDIC identified included ammunition and firearms sales, credit-repair services, drug paraphernalia, fireworks sales, dating services, racist materials and tobacco sales.

Dating services?

Peters quotes Bill Isaacs, the former FDIC Chairman who's been a fierce critic of Operation Choke Point: "Banks are left to guess who deserves access to the banking system and who doesn’t."

I'd say "deserve" has nothing to do with it. "Whim" appears to be the criteria being applied.

Cooperation on Canabis Co-Ops

2014-05-01T21:40:00-05:00

Colorado lawmakers are anxious to find a way to get the cannabis biz into the banking system, so anxious that, before they lost their train of thought and ran out to gorge on a crate of Cheetos, two of them introduced a bill in the Colorado House the "Marijuana Financial Services Cooperatives Act." The act would create "cannabis co-operatives" that, somehow, would operate in a manner that banks do not in order to provide financial services to Mary Jane businesses. As we've discussed, banks won't do that sort hazy business.

The proposed "cannabis co-ops" under the bill could not call themselves a bank or a credit union, wouldn’t need to get deposit insurance like a regular bank, and must provide written evidence to the state commissioner of financial services that they have “approval by the Federal Reserve bank for access by the co-op to the Federal Reserve system."

Don Childears, head of the Colorado Bankers Association immediately threw a wet blanket on this lit roach.

“We don’t think it will work because they can’t get access to the Fed’s payments system,” he said. “No one gets access to the payments system without being under a federal regulatory agency.”

But it could be a way for Colorado lawmakers to go to Congress and tell them they need to deal with the issue, Childears said.

"If it doesn’t work, this says to Congress, 'Get off the dime. You need to address this,'" Childears said.

It's an election year. What is the upside for any legislator outside of Colorado (and Washington, will be selling "recreational marijuana" in the near future) to make it easy to avoid the Controlled Substances Act and other federal drug trafficking laws? It is my understanding that there has been some bi-partisan pushback against FinCen's recent guidance on marijuana money laundering and BSA compliance issues from Senators Grassley and Feinstein, who are joiniing hands across the aisle to smack FinCen up the side of the head for attempting to state it would look the other way on enforcement of federal drug laws. Even if Congress realizes it needs to get of the dime, I doubt it will do it.

No, this bill is not likely to accomplish much of anything.

"It's a complicated case, Maude. Lotta ins, lotta outs, lotta what have yous. Fortunately I've been adhering to a pretty strict, uh, drug regimen to keep my mind, you know, limber."
---The Dude

The Unbankable Turn To The Non-Banks

2014-04-08T20:24:27-05:00

The marijuana banking conundrum in Colorado may be driving banks to distraction, but it's opening up the funding business to high-cost, low-publicity private money sources.

From hard-money lenders — investors who offer short-term, high-interest loans — to publicly traded real estate investment trusts focused on marijuana clients as tenants, the lack of conventional financing has created a sector that's gaining steam and drawing stares.

They are investors with an appetite for high risk and high returns, all of it hinged on an industry that's been around for a few years — retail sale of medical marijuana has been legal since 2009, but the business began to boom Jan. 1, when recreational retail sales began.

What the new breed of lender is doing is focusing on real estate as collateral for the loans it makes to the marijuana business, which theoretically lowers the risk if the marijuana business goes up in smoke. Of course, that assumes that the business operates in accordance with state law and that the federales never exercise their legal right to seize the assets of a drug business that violates federal law. Heightened risk justifies high interest rates.

The higher-risk-higher-rates-and-fees rationale makes sense unless you're in the payday lending, deposit advance, or tax anticipation refund loan businesses where the borrower is a consumer. In that case, the regulators will be all over you for taking advantage of the fog-brained poor consumer. Taking advantage of a smoke-brained Mary-Jane business is just fine, than you very much.

Obviously, there's so much money being made in the state-legal marijuana business that businesses that need the funds can foot the higher bills. On the other hand, what choice do they have? The high-cost private money lenders are the only game in town.

It would be extremely helpful to banks in Colorado if the federal banking regulators would rouse themselves from their torpor and give soem guidance on this business. They've issued guidance in the past on such high-risk, disfavored business as subprime lending, payday lending, third-party payment processors, money services businesses, etc. All we've seen thus far is the extremely problematic FinCen Guidance that raises more issues than it resolves.

The critical risk for bankers at the moment isn't in banking "direct" marijuana businesses. It's in banking the "indirect" marijuana businesses, those that service businesses that are directly involved in the marijuana business. The business that installs and services the drying and heating units. The landscaping business that installs and services the irrigation system. The trucking company that hauls the product. The alarm company that monitors the premises. And on and on.

The FinCen Guidance, in addition to dealing only with BSA issues, mentions "indirect" banking of a marijuana-related business only in a footnote:

FinCEN recognizes that a financial institution filing a SAR on a marijuana-related business may not always be well-positioned to determine whether the business implicates one of the Cole Memo priorities or violates state law,and thus which terms would be most appropriate to include (i.e., “Marijuana Limited” or “Marijuana Priority”). For example, a financial institution could be providing services to another domestic financial institution that, in turn, provides financial services to a marijuana-related business. Similarly, a financial institution could be providingservices to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.” Whether the financial institutiondecides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances. In making this decision, the institution should consider the Cole Memo priorities, to the extent applicable.

Yeah, that clears it up. All any bank needs to do is to determine "the number of factors specific to that institution and the relevant circumstances," then go for it. No problem!

Banks in Colorado need just a wee bit more than that from regulators. Until they get it, any business that even touches a marijuana business is potentially problematic.