Marijuana Banking Compliance Update: U.S. District Court for Colorado Dismisses Suit by Colorado Credit Union against Federal Reserve; Reveals Gap between Federal “Guidance” and Federal “Law”

Jan 11, 2016   

On January 5, 2016, the United States District Court for the District of Colorado issued its order dismissing the complaint filed by The Fourth Corner Credit Union (“Fourth Corner”), a Colorado state-chartered credit union seeking to become the first credit union in the state designed for and catering to marijuana-related businesses against the Federal Reserve Bank of Kansas City (“FRKC”). The complaint sought a declaratory judgment that the Fourth Corner is entitled to “master account” with FRKC, which for all practical purposes is essential for a bank or credit union to operate. While the practical and immediate effect of the Court’s decision is to further frustrate the marijuana-related financial services industry, the Court’s rationale in deciding the case makes clear, despite federal guidance from FinCEN, that providing financial services to marijuana-related businesses facilitates an activity prohibited by federal law. This is true regardless of whether the Department of Justice exercises its prosecutorial discretion in enforcing the Control Substances Act (“CSA”). A copy of the Court’s Order can be read here.

I. A Primer on Banking for Marijuana-Related Businesses and the Formation of Fourth Corner.

Although 23 states and the District of Columbia have legalized marijuana in various forms and to various degrees, federal law still lists marijuana as a Schedule I controlled substance under the CSA 21 U.S.C. § 801 et seq. As a result, the possession, use, and distribution of marijuana remain crimes under federal law. In addition, as described in a February 14, 2014 Department of Justice (“DOJ”) Memorandum by Deputy Attorney General James Cole entitled, Guidance Regarding Marijuana Related Financial Crimes: “The provisions of the money laundering statutes, 18 U.S.C. §§ 1956, 1957 the unlicensed money remitter statute, 18 U.S.C. § 1960, and the Bank Secrecy Act (“BSA”), 31 U.S.C. §§ 5311-5330, remain in effect with respect to marijuana-related conduct.” A copy of the February 14, 2014 DOJ Memo can be read here. Thus, because the sale of marijuana remains prohibited under federal law, banks are placed in a position where they would be required to report any banking transactions involving proceeds from marijuana dispensaries.

In an effort clarify the obligations under the BSA of financial institutions seeking to provide services to marijuana-related businesses, on February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued its guidance, “BSA Expectations Regarding Marijuana-Related Businesses”. This guidance is more fully explained in our prior posts found here, here, and here. However despite this guidance, banks still technically face the possibility of criminal penalties for assisting in money laundering should they knowingly accept and process funds from dispensaries. As explained by the Colorado Bankers Association, the FinCEN Guidance “at best . . . amounts to serve these customers at your own risk.” As a result of these risks, the banking options for marijuana-related businesses remain limited.

In response to these limited avenues for banking, in March 2014, Fourth Corner Credit Union was organized as “a Colorado state-chartered credit union to develop a robust anti-money laundering . . . program to comply with the newly issued FinCEN guidance and the Cole Memorandum and thereby provide much needed banking services to compliant, licensed cannabis and hemp businesses and to thousands of persons, businesses, and organizations that supported the legalization of marijuana.” Order at p. 4.

As part of the chartering process, Fourth Corner applied for a “master account” with the FRKC. A “master account” is the only way a financial institution can obtain access to the Federal Reserve’s payment systems. As described by Fourth Corner in its complaint, these payment systems include: 1) cash services: the federal reserve provides banks with currency to meet public demand; 2) electronic payments: the federal reserve moves money electronically between banks; 3) check processing: the federal reserve operates a nationwide check clearing system; and 4) the federal reserve acts as the fiscal agent for the United States Government; more specifically, it maintains the United States Department of the Treasury’s checking account and processes electronic payments for numerous government programs such as Social Security. In short, as described by the District Court, “without this access[,] The Fourth Corner Credit Union is out of business.” Order at p. 5.

Ultimately, Fourth Corner was denied a master account and its lawsuit for declaratory relief against the FRKC followed.

II. The Court’s Decision.

In its complaint, Fourth Corner sought a declaratory judgment from the District Court for Colorado declaring that Fourth Corner was entitled to a master account at the FRKC pursuant to the Banking Act of 1935, as amended by § 107 of the Monetary Control Act of 1980. See generally, 12 U.S.C. § 248a(c)(2). The FRKC countered that 12 U.S.C. § 248a(c)(2) did not obligate it to provide a master account and that the denial was well within its discretion. Further, the FRKC argued that because aiding and abetting the distribution of marijuana violates federal law, the Court should not use its equitable powers to facilitate such unlawful conduct. It was this latter argument that the District Court seized upon in its Order.

In granting FRKC’s motion to dismiss, the District Court stated simply: “courts cannot use equitable powers to issue an order that would facilitate criminal activity.” Order at p. 6. In so holding, the District Court rejected Fourth Corner’s argument that the Cole Memo and the recent FinCEN Guidance provide federal authorization to financial institutions to serve marijuana-related businesses. As explained by the District Court, prosecutorial discretion does not equate to legal authorization to engage in conduct prohibited by federal law. “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.” Order at pp. 8-9.

The District Court analogized this situation to the one recently before the Tenth Circuit Bankruptcy Appellate Court in In re Arenas, 535 B.R. 845, 849-850 (10th Cir. BAP 2015) in which the Tenth Circuit affirmed the dismissal of the Chapter 7 Bankruptcy petition filed by a debtor who was engaged in the production and distribution of marijuana pursuant to Colorado law. There, the Arenas Court noted, “[i]n this case, the debtors are unfortunately caught between pursuing a business that the people of Colorado have declared to be legal and beneficial, but which the laws of the United States–laws that every United States Judge swears to uphold—proscribe and subject to criminal sanction.” (More information regarding the implications of Arenas can be read in our previous report here.)

III. Analysis and Conclusion.

This case underscores the fundamental challenge that faces the marijuana industry and those in the financial services sector looking to serve them: possession or distribution of marijuana violates federal law, and financial institutions that provide support for those activities face the risk of prosecution and assorted sanctions.

As we previously explained, although well intentioned, the FinCEN Guidance is not a regulation, does not amend existing law, and does not have the force and effect of law. Instead, financial institutions which choose to provide services to marijuana-related businesses do so based solely on the words of FinCEN and the Department of Justice that they will exercise prosecutorial discretion and not indict institutions for money laundering violations. Such practical realities can be potentially disastrous to the legal marijuana industry. In the words of Judge R. Brooke Jackson, who presided over the Fourth Corner case, “I regard the situation as untenable and hope that it will soon be addressed and resolved by Congress.” Order at p. 9.

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments in the regulation of financial services and the marijuana industry. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, food & drug law, tax law and litigation, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution or marijuana-related business, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at or by calling us at 305.350.5690.