Court Denies Pot Credit Union Access To Banking System

January 7, 2016 at 9:31 am 5 comments

Concluding that existing federal guidance does nothing more than encourage  financial institutions to “look the other way” when it comes to complying with federal laws that make the possession and sale of marijuana illegal. a federal judge on Tuesday   dismissed a credit union’s attempt to force the federal Reserve Bank of Kansas to allow it to open up a Master Account.(THE FOURTH CORNER CREDIT UNION, a Colorado state-chartered credit union, Plaintiff, v. FEDERAL RESERVE BANK OF KANSAS CITY, Defendant., No. 15-CV-01633-RBJ, 2016 WL 54129, at *1 (D. Colo. Jan. 5, 2016)

The ruling, if upheld on appeal, raises serious questions about the legality of federal guidance allowing credit unions and banks to provide banking services  in states such as New York where marijuana possession is legal in at least some circumstances.  Any credit union or bank that provides services for Marijuana Related Businesses should be analyzing this decision today and discussing if it impacts their business practices.

In 2012 the Mile High state lived up to its moniker when it voted to amend its Constitution and enact legislation legalizing the sale and possession of marijuana.  Marijuana was then,  and remains today,  a controlled substance which is illegal to possess and sell  as a matter of federal law.  Consequently financial institutions were reluctant to provide banking services for marijuana businesses even after the state legalized it.

Frustrated by this lack of financial access, representatives from legal pot states reached out to the federal authorities.  As I explained   in more detail in previous blogs (see below),  the Justice Department’s Cole memorandum outlined the conditions under which businesses would not be prosecuted for aiding marijuana businesses and a guidance issued by FinCEN outlined how financial   institutions could both comply with BSA requirements, and service pot businesses. Nevertheless financial institutions still remained reluctant to service pot businesses. Out of frustration,  Colorado  authorized the creation of the Fourth Corner Credit Union to provide banking services for these businesses.

Remember that even state chartered credit unions need NCUA’s permission before they can provide federal share insurance to their members. In addition all credit unions and banks need access to a federal reserve bank Master Account to facilitate electronic fund transfers. Things got really hazy when NCUA refused to  authorize share insurance for the credit union and the Federal Reserve  Bank of Kansas refused to grant it a Master Account . Without this access the credit union cannot operate in any meaningful way.

It sued  in federal court.  It argued the Federal Reserve Bank  was abusing its discretion by rejecting the credit union’s access to the Federal Reserve System.  It stressed that it was ready, willing and able to comply with the Cole memorandum, FinCEN’s mandates and state law.  It wanted the court to issue an order that it be given a Master Account. The Federal Reserve Bank moved to dismiss the lawsuit and on Tuesday Judge R. Brooke Jackson firmly sided with the Federal Reserve.

He ruled in blunt and concise language that by ruling for the credit union he  would be forcing the Federal Reserve to “facilitate criminal activity” As for the argument that the Cole Memorandum and FinCEN  Guidance authorized pot businesses he concluded that they did no such thing.

“[T}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.”

Whether you agree or disagree with this decision it underscores that  this issue has festered long enough.   Either Congress  must act to legalize state drug laws  or the next president should withdraw the Cole Memorandum and FinCen Guidance .  We are a Nation of Laws not a Nation of Laws that prosecutors  and regulators  choose to enforce

Here are some previous blogs on this increasingly important subject.



Entry filed under: Compliance, Legal Watch. Tags: , , , .

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5 Comments Add your own

  • 1. Lynn Gray  |  January 7, 2016 at 10:27 am

    The last I had heard cocaine was an illegal drug, does that mean banks and credit unions should have no dealings with anyone in the pharmaceutical industry who provide these drugs on an everyday basis as pain control medications, dentists who use Novocaine on our gums so that they are numb. Not really understanding any of this, are we talking medical or not here!!

  • […] quo intact.  The next big event in the pot wars will come when the Court of Appeals 10th Circuit rules on an appeal from a state-chartered credit union in Colorado that was denied access to the Federal Reserve System […]

  • […] When I last wrote about The Fourth Corner Credit Union in Colorado it had sued both the NCUA, which had denied it share insurance and the Federal Reserve Bank of Kansas City,  which had denied it a “master account” needed to access the  federal reserve system.  A federal district Court  ruled that these  actions were entirely appropriate. The District court explained that forcing the Federal Reserve bank to provide the CU services would be forcing the bank to “facilitate criminal activity.” The CU appealed. […]

  • 4. Pot Banking Up In Smoke | new york's state of mind  |  January 5, 2018 at 9:00 am

    […] refused to provide this bank access to the system and the NCUA refused to provide share insurance. A resulting lawsuit has done nothing to clarify the confusion. An Appellate Court ruled that the Federal Reserve acted […]

  • […] for share insurance from the NCUA, the NCUA denied their request. Eventually, the Credit Union sued both NCUA and the Federal Reserve Bank of Kansas with the Credit Union settling after agreeing to […]


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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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