The long-awaited Tenth Circuit Court of Appeals decision in the case of Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City was issued this week. In short: the would-be credit union, formed to serve participants in the state-legal marijuana sector, lives to fight another day—but minus its original purpose for existing.
Fourth Corner Credit Union was originally formed to solve an acute problem for marijuana-related businesses (MRBs) and individuals associated with MRBs: the inability to obtain mainstream banking services. Without access to bank or credit union accounts, MRBs remain chiefly cash-based businesses, left to their own devices to figure out how to store money and move it around, including how to pay employees and vendors, and to keep cash safe from theft.
Despite many state laws allowing marijuana activity, the possession, cultivation, and sale of marijuana all are patently illegal under the federal Controlled Substances Act (CSA). The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has issued guidance as to how financial institutions may meet their Bank Secrecy Act/anti-money-laundering (BSA/AML) compliance obligations while serving MRBs, incorporating guidance from the U.S. Department of Justice (DOJ) to U.S. Attorney’s Offices regarding situations in which federal law enforcement resources should or should not be focused on state-legal marijuana activity. But none of these issuances have the power to change the CSA or other laws, or to authorize financial institutions to serve MRBs in the first place (even if BSA/AML obligations are met to FinCEN’s satisfaction). And so, to date, the vast majority of financial institutions remain unwilling to deal with MRBs.
Fourth Corner’s organizers saw an opportunity to leverage state law to solve this problem. They could obtain a state credit union charter in Colorado, a state friendly to MRBs, rather than a federal charter. (While state-chartered entities are still subject to federal law, it could be possible that state regulators might be more open to allowing their state-chartered institutions to work with MRBs operating legally under their state laws.) Colorado offers the additional benefit of being among the few states to provide a mechanism for allowing state-chartered credit unions to obtain share insurance (comparable to FDIC deposit insurance for banks) from a private insurer rather than from the National Credit Union Administration (NCUA). That would eliminate the involvement of one more federal regulator, and perhaps keep the credit union’s activity as much as possible within the friendlier confines of state regulation.
But at least one federal authority could not be circumvented. The Federal Reserve controls a major payment system that banks and credit unions use to move money around. Without a “master account” on that system, the Fourth Corner Credit Union would likely not be able to do business, as it would be limited in its ability to move funds.
The Federal Reserve Bank of Kansas City, the entity handling Fourth Corner’s application for a master account, denied the application, due in part to the fact that the credit union’s business model centered on serving members whose activity is illegal under federal law.
Fourth Corner sued in federal district court in Colorado, seeking injunctive relief forcing the Kansas City Fed to give the credit union a master account. In January 2016, the court declined to grant this relief and dismissed the case with prejudice, citing the illegality of marijuana activity under the federal CSA.
Fourth Corner appealed to the U.S. Court of Appeals for the Tenth Circuit, which heard oral argument in November 2016.
The Tenth Circuit’s Opinion
On June 27, a divided three-judge panel of the Tenth Circuit issued three separate opinions in the case, overlapping in some issues and in direct conflict in others, inviting the need for a Venn diagram to sort out the interplay among the three. But in short, the court vacated the district court’s order and directed that court to dismiss the amended complaint without prejudice. This allows Fourth Corner to have the case heard again.
While this seems like a victory for Fourth Corner, in practice the purpose of the credit union is now watered down. This is because Fourth Corner had amended its complaint to provide that it would comply with any applicable law, and thus presumably not serve MRBs that violate federal law, only persons operating legally such as non-MRB supporters of legal marijuana. Since the district court did not directly rule on that amended complaint, the Tenth Circuit said, it can be reconsidered. Thus, Fourth Corner is now free to pursue its case, and/or its master account application, premised on serving only those who are not operating in violation of the CSA or other law.
On those terms, is it worth pursuing?
To proceed, Fourth Corner must essentially abandon the business model that was its reason for existing—the ability to serve MRBs and persons affiliated with MRBs that operate in violation of the CSA, and who for that reason have been shut out of mainstream banking channels. Now, it appears that Fourth Corner is now free to pursue the ability to operate a credit union that can only serve persons that could already be served by existing banks and credit unions.
If the credit union were to open, given the credit union’s original stated purpose—to serve MRBs, which, by their nature, violate federal law—it is also reasonable to expect that it would be subject to some additional regulatory scrutiny. In particular, regulators would likely be focused on confirming that only legal transactions were flowing through the credit union, and that MRBs were not obtaining services from the credit union under false pretenses. For instance, regulators could require that the credit union establish account opening and monitoring policies and procedures that are more detailed and intensive than would ordinarily be required. This scrutiny could come from state regulators as well, since all bank and credit union regulators have an interest in having their supervised institutions maintain compliance with applicable laws and appropriately mitigate risks. That is not only the province of federal regulators.
In theory, the credit union might be able to open for business to serve a more general population of members operating legally, then later decide to also serve MRBs, as a small number of other financial institutions are doing. However, this would carry a number of risks. It could be halted at any time by regulators or law enforcement, as, again, MRBs’ activity inherently violates federal law. And if the master account approval were premised on not serving such businesses, the Fed could withdraw account access, to name one possible consequence. And, through publicity from this legal action, the credit union could attract some heightened level of attention from federal authorities.
Takeaways for Marijuana Banking
Does this opinion advance the ball for marijuana banking?
In short, no. The judges, though divided on certain issues, did not give credence to any argument that state marijuana law somehow trumps or abridges the conflicting federal CSA.
Fourth Corner is now free to pursue the ability to open for business to serve persons and businesses that are already operating legally—not in violation of the CSA or other law. This is something it did not have to go to court in order to do.
The experience of Fourth Corner so far is an important case study. It shows the power that federal law—particularly the CSA—continues to have to encumber the operations of businesses that operate in full compliance with state laws. It shows that there is no way to craft a magic solution to the marijuana banking problem by using only state chartering and licensing regimes. And it shows that the underlying federal statutory law must change in order for the marijuana banking issue to truly become unstuck.