Pubdate: Fri, 31 Jul 2015
Source: New York Times (NY)
Copyright: 2015 The New York Times Company
Contact: http://www.nytimes.com/ref/membercenter/help/lettertoeditor.html
Website: http://www.nytimes.com/
Details: http://www.mapinc.org/media/298
Author: Nathaniel Popper

FED DENIES CREDIT UNION FOR CANNABIS

Banking regulators just said no to a financial institution that aims 
to be the first to serve the expanding marijuana industry in Colorado.

The Fourth Corner Credit Union in Denver applied in November to the 
Federal Reserve for a "master account," which would allow it to 
interact with other financial institutions and open its doors to some 
of the hundreds of state-licensed marijuana businesses in Colorado.

Although recreational marijuana has been legalized in Colorado, it is 
still illegal on the federal level, discouraging most traditional 
banks from working with pot businesses.

The Fed's branch in Kansas City, which has been reviewing the 
application, privately informed the Fourth Corner Credit Union 
earlier in July that it had not been approved for a master account, 
the credit union said on Thursday.

The credit union, which has the backing of Colorado's governor, fired 
back on Thursday night by filing a lawsuit in federal court in Denver 
against the Fed, demanding "equal access" to the financial system.

Mark Mason, who has been leading the credit union's creation, said 
that after months of answering the Federal Reserve's queries, he was 
unsurprised by the answer he received.

"I felt all along like they were trying to figure out a way to deny 
our application," said Mr. Mason, who also runs a law firm in South 
Carolina. Now, he said, "a federal judge who is only concerned in 
applying the law can make the decision."

Nearly all banks have refused to open accounts for the hundreds of 
marijuana businesses in Colorado and other states with similar laws, 
leaving the businesses to operate in an all-cash economy with the 
significant dangers that can bring. Many small-business owners in the 
state have had to improvise with safes, armored cars and other 
alternatives to banking.

Colorado's state government has said that the lack of access to banks 
is a public safety issue, as well as a deterrent in the state's 
effort to collect taxes. Mr. Mason won the state's backing for his 
venture after he brought on money-laundering experts to build its 
policies. The credit union was granted a state license last year, on 
the condition that it still had to receive approval from the Fed 
before opening for business.

Andrew Freedman, Colorado's director of marijuana coordination, said 
he was disappointed by the Fed's decision.

"We thought it was a good solution to the problem," he said. "Here 
was a place willing to take on the risk of banking this underbanked 
group - and that could do rigorous compliance."

The credit union's lawsuit could push the courts to resolve the 
continuing conflict between the federal laws against marijuana and 
the dozens of states that have legalized it in some form.

Peter Conti-Brown, a professor of legal studies at the University of 
Pennsylvania's Wharton School, said there was little precedent to 
guide the courts in such a case. Still, he said, it will be an uphill 
battle for the credit union to prove that the Fed does not have the 
power to turn down the institution.

"Most of the cards are in the Fed's hand," he said.

This year, the president of the Kansas City Fed, Esther George, wrote 
that the Fed had "discretion" in deciding which master accounts to 
open. She also said the Fed would consider the decision made by the 
National Credit Union Administration on whether to grant the Denver 
credit union deposit insurance, similar to the $250,000 coverage that 
the Federal Deposit Insurance Corporation provides for standard bank accounts.

Shortly before the Fed made its decision this month, the credit union 
administration, an independent federal agency, privately informed the 
Fourth Corner Credit Union that it was not eligible for insurance, 
partly because it had not proved how it would "mitigate the risk 
associated with serving a single industry that does not have an 
established track record of success and remains illegal at the federal level."

Mr. Mason filed a separate suit against the credit union 
administration on Thursday night, claiming that the agency had 
violated his credit union's constitutional right to due process.

But his bigger issue is with the Fed. He says that even without 
insurance from the credit union administration, he could secure 
private deposit insurance and open if he could obtain a master 
account with the Fed. Such accounts make it possible to take credit 
and debit card payments and move money electronically.

In the lawsuit, Mr. Mason contends that the Fed's own rules give it 
little discretion in deciding who should and should not be able to 
have a master account, and do not allow it to rely on other agencies, 
like the credit union administration.

"We weren't treated fairly," he said. "We weren't treated according 
to procedure."

For now, Mr. Mason continues to run his five-person law firm in South 
Carolina and pay many of the costs for the credit union out of his 
own pocket, backed by a board that includes three marijuana 
entrepreneurs in Colorado. The credit union has a handful of 
executives and a building in Denver waiting to open for business.

Under the federal guidelines issued by a division of the Treasury 
Department last year, financial institutions are pressed to file 
"suspicious activity reports" when a new pot business opens or closes 
an account. But that guidance left unclear whether it was legal to 
deal with such businesses.

Colorado politicians have sponsored bills in the House and Senate 
that aim to dispel the confusion.

In the meantime, Mr. Conti-Brown said that Mr. Mason's credit union - 
and the businesses that want to use it - may be stuck using cash.

"They are going to face the longest of odds until there is a clear 
and permanent change to federal policy," he said.
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MAP posted-by: Jay Bergstrom