Posts tagged ‘marijuana banking’

Is It Legal To Transport Cannabis Cash?

This is the question raised by ongoing litigation in Southern California as a company specializing in transporting cash generated by legal state cannabis businesses is suing the federal government over allegations that its trucks are being stopped and its cash is being seized under federal asset seizure laws.  This is another example of the type of issues your credit union should consider as it weighs the cost and benefits of providing banking services to marijuana businesses that operate legally in states like New York, even as federal law continues to make cannabis businesses illegal. 

Empyreal is a Pennsylvania Limited Liability company that provides armored car services in 28 states.  Its owner, Deirdre O’Gorman, is one of the leading consultants on cannabis banking in the credit union space.  According to court papers, “Empyreal contracts only with state-legal cannabis businesses that have established banking relationships with financial institutions with anti-money laundering law programs implemented pursuant to the 2014 FinCEN Guidance Regarding Marijuana-Related Businesses (“2014 FinCEN Guidance”) and applicable state-issued guidance.” 

Nevertheless, the company alleges that its trucks have been subject to traffic stops and seizures orchestrated by the Department of Justice, the FBI and the Drug Enforcement Administration, in conjunction with local law-enforcement officials, including the San Bernardino County Sheriff.  Similar problems have arisen in Kansas.  According to the complaint, these law-enforcement agencies are targeting armored vehicles owned by Empyreal, employing tactics commonly used to stop and search drug dealers. 

The company is seeking an injunction alleging that this conduct violates, among other things, the Fourth Amendment of the U.S. Constitution and the Rohrabacher-Farr Amendment, which forbids the Justice Department from spending any money on the prosecution of any legal cannabis activity. 

Let’s pull back the lens a little.  This legal dispute highlights that if your credit union decides it is going to provide banking services to cannabis businesses, provided they are in strict compliance with state level law and federal guidance, the possibility of facing federal litigation, while remote, cannot be completely discounted, particularly if the allegations in the Empyreal complaint are substantiated.  Furthermore, the Rohrabacher-Farr Amendment is not a substitute for passage of federal laws that recognize what the majority of states have already legalized.  Conversely, we are unlikely to see federal action on this issue any time soon, and as these businesses continue to take hold, the need and financial benefit from these services will remain strong.  I frankly don’t know what decision I would make if I were on a board.  But make sure when the decision is ultimately made that all the facts are on the table.

Speaking of federal action, on Friday, the House of Representatives passed the SAFE Act, for the sixth time, which would generally permit banking services to be provided in states that have legalized cannabis.  It was included as an amendment to the America COMPETES Act. 

Also on Friday, Senator Schumer, joined by New York Representatives Nydia Velazquez and Gerald Nadler, held a press conference in support of his legislation that would remove marijuana as a Schedule I drug under federal law.  While this would also solve the banking problem, there is unlikely to be a filibuster proof majority for the more sweeping proposal any time soon.

February 7, 2022 at 9:57 am Leave a comment

Don’t forget to pay your illegal taxes

Time’s running a little short for yours truly today, but I couldn’t resist posting a blog about this column from De Jon Harris, Commissioner of the Small Business/Self Employed Examination of the IRS (that’s one heck of a title).  He reminds aspiring marijuana entrepreneurs that even businesses violating federal law must pay taxes.  Apparently the IRS is going to leave no stone unturned in its effort to help the Biden Administration gather $3.5 trillion for all its spending plans. 

Now, don’t get me wrong.  Everyone knows that it was his failure to pay taxes that landed Al Capone in Sing Sing.  But there is something truly bizarre about the IRS going all in on providing tax advice for an industry it openly concedes is illegal and as a result cannot take advantage of any of the traditional tax exemptions available to other small businesses.  The guidance is another example of how we are well past the time when the federal government should allow marijuana businesses to enter the mainstream.  As the Commissioner himself notes, “. . .these businesses are often cash intensive since many can’t use traditional banks to deposit their earnings. [the federal/state dichotomy] creates unique challenges for the IRS on how to support these new business owners and still promote tax compliance.”

Aside from its Alice in Wonderland aspects, the column has some practical utility.  For example, those credit unions considering taking the marijuana banking leap should assess the business’s tax compliance as part of its due diligence.  Credit unions should pay particularly close attention to beneficial owners.  As the Commissioner notes, a silent partner whose interest is not properly disclosed can bring down an otherwise legal marijuana business.  In addition, because these businesses are so cash intensive, proper CTR filing will always be an issue.

On that note, I hope to see some of you in cyberspace this morning as we kick off the first day of this year’s Legal and Compliance Conference.

September 28, 2021 at 10:01 am Leave a comment

New York Goes To Pot, What It Means For Your CU

With yesterday’s announcement that the Legislature reached agreement on legalizing the recreational use of marijuana in New York State, it is time for all credit unions to hurry up and wait when it comes to deciding how aggressively they are going to engage in this emerging field.  The hurry up part applies to all credit unions that, within months, will have to adjust HR policies, review BSA frameworks and generally engage their Boards so that everyone is in agreement on how to operate in this brave new world.  The wait part comes from the need to recognize that even as New York State goes forward with its plans, the stubborn fact remains that the sale and distribution of marijuana remains illegal as a matter of federal law, and that credit unions that ignore this reality are putting themselves at risk of serious legal, reputational and operational consequences.

There is no need to take my word for it.  Just the other day, the American Banker reported that Live Life Federal Credit Union was subject to this administrative order for its non-compliance in relation to its marijuana banking practices.  Among the deficiencies cited by NCUA was the credit union’s lack of automated systems to comply with its requirements to monitor red flags regarding Marijuana-Related Businesses as detailed by FinCEN. 

NCUA’s action is a well-timed cautionary tale to any New York credit union that rushes into the space.  No matter how legal marijuana is made on the State level, there are still numerous additional safeguards that must be put in place such as enhanced due diligence requirements and being able to periodically file up to three different types of Suspicious Activity Reports (SARs) on an ongoing basis.  And remember, you are dealing with a highly specialized business for which your credit union will have to have demonstrable expertise.  Last, but not least, certain Federal Reserve Banks have signaled an uneasiness to provide access to the Federal Reserve System to credit unions that engage in banking marijuana.  Clearly, this system needs to clarify where it stands on this issue.

But even with all these legitimate concerns, it is also time for your credit union to hurry up and start preparing for this new reality.  Even if your credit union decides it wants no part of marijuana banking, it will still have to determine its risk tolerance for banking individuals associated with this industry.  For example, if your credit union decides not to provide banking services to Marijuana-Related Businesses, will it extend this prohibition to employees of these businesses who come to the credit union for a mortgage loan? 

Then, of course, there are a multitude of HR issues.  Is your credit union prepared for the employee who claims that she needs to take marijuana during the day because of a medical condition?  And just how hard a line are you going to take against employees who appear to be working under the influence?  Will your stance change if there is no related diminution in their work product?  These are the type of issues that you can thoughtfully consider in the coming months or be forced to confront for the first time when they occur once recreational marijuana is legal.

March 25, 2021 at 8:59 am Leave a comment

Pot Banking Goes on Trial

Even as New York debates legalizing recreational cannabis, a case commenced in federal district court in Manhattan underscores the complexities of providing banking services and engaging in a business which remains very much illegal as a matter of federal law.  The case has been extensively reported by the Law360 Blog.

In U.S. v. Weigand and Akhavan, the defendants stand accused of facilitating marijuana purchasing by providing an App, Eaze ,referred as the “Uber of pot sales” that allowed users to buy marijuana in California and Oregon with their credit and debit cards.  What’s gotten Messrs. Weigand and Akhavan in trouble is not that they sold Cannabis in Oregon and California, but that they deceived financial institutions into processing these purchases by establishing dummy merchant corporations.  Judge Rakoff, in rejecting a motion to dismiss the case, noted the defendants used fictitious companies selling dog products, diving gear, carbonated beverages and face creams to deceive banks about the actual merchandize they were selling.  According to the prosecution, more than $100 million in debit and credit card transactions were attributed to the business between 2016 and 2019.

In unsuccessfully moving to dismiss the indictment, the defendants argued, among other things, that the deception could not be considered bank fraud because it wasn’t material to the banks’ operation.  As the defense stated in its opening argument yesterday, “[t]he banks just didn’t care so long as the credit card holders got what they paid for … and the fees associated with the transactions went to the banks and to the credit card companies.”  The problem is the fact that some of the banks would have willingly processed these transactions doesn’t change the fact that others were deceived into taking actions they would not have otherwise chosen. 

No matter who wins or loses the case, it does underscore how important it is going to properly document a credit union or bank’s relationship with businesses that offer marijuana related products in New York State, assuming that a law is passed by the end of this session.  What got the business in trouble in this case was its willingness to deceive.  Furthermore, while there are reasons both for and against engaging in cannabis related banking, this decision should be made knowingly following thorough due diligence.

March 2, 2021 at 9:03 am Leave a comment

What Chairman Hood’s Pot Pronouncement Means to Your Credit Union

In an August 5, 2019 interview with the CU Times, Chairman Rodney Hood added another wrinkle to the legal/regulatory framework encasing marijuana banking when he proclaimed that Credit Unions were free to make a business decision about whether or not to offer cannabis banking services. He further explained that NCUA would not penalize these Credit Unions so long as they follow the appropriate BSA requirements along with adequately addressing safety and soundness concerns. While, the Chairman statements are welcomed, there is still much, much more that needs to be clarified when it comes to providing marijuana banking services.

First the Chairman’s comments should be followed up with a Letter to Credit Unions clarifying precisely what NCUA’s stance is. This is necessary because NCUA stance on marijuana banking has been somewhat inconsistent. For example, in 2014 it explained to Credit Unions that they would be permitted to engage in marijuana banking in states where marijuana is legal provided they followed FINCEN’s guidance on marijuana banking. But when Fourth Corner Credit Union in Colorado, a state chartered institution created specifically to provide marijuana banking services, applied 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 very restrictive terms.

And let’s remember some core issues remain to be resolved regardless of what stance NCUA takes on the issue. Most importantly, even though Congress voted to block federal prosecutors from bringing enforcement actions against institutions providing marijuana services in states where it is legal, marijuana possession remains unequivocally illegal as a matter of Federal law. This would be true even without Jeff Sessions’ decision to revoke the Cole Memorandum, which laid out the conditions under which financial institutions would not be prosecuted for providing banking services to Marijuana related businesses.  This means we are a new Treasury Secretary away from having no Federal guidance as to how marijuana services can be “legally” provided.

Where does this leave your Credit Union? Pretty much in the same place it was a couple of weeks ago. To be sure SAR reports show that many Credit Unions have already decided that the benefits of marijuana banking outweigh the risks. But for those of you who are still gun shy Hood’s announcement, in my ever so humble opinion, without more, should not change your calculus.

August 12, 2019 at 9:50 am 1 comment

Three Quick Hits For A Thursday Morning

Don’t look now but common sense might be breaking out in at least one small corner of the nation’s capital. Yesterday, the House Financial Sub Committee on Consumer Protection and Financial Institutions held a hearing laying out why it makes sense for marijuana related businesses to be legalized as a matter of federal law if the goal is to provide safe, affordable banking services to these legal businesses.

Speaking on behalf of CUNA was Rachel Pross, the Chief Risk Officer of Maps Credit Union based in Oregon. Maps is a particularly noteworthy institution when it comes to the issue of financial services for marijuana related businesses because it has been providing these services since 2014 making it one of the most experienced financial institutions in this space. She explained that her Board of Directors ultimately decided to provide banking services despite the legal uncertainty because it concluded that doing so was consistent with the credit union’s mission to serve the underserved and to enhance the safety of the local community.

The Independent Community Bankers offered the testimony of a $145 million asset state chartered community bank based in Spokane, Washington which has so far declined to offer banking services to marijuana related businesses. Its board of directors has concluded that the “legal stakes are simply too high” for the board to tolerate. He explained that a wrong decision on marijuana banking services could put the survival of his bank at risk.

The solution to this uncertainty is “the Secure and Fair Enforcement Banking Act of 2019.” The bill would legalize the provision of banking services as a matter of federal law in those states that choose to legalize marijuana.

I continue to be optimistic that this is one of the few issues you may see resolved by Congress over the next two years. Whether you are in favor or opposed to marijuana legalization, having an industry dependent on unprotected cash transactions risks for the public as a whole; if you are a republican who believes in state’s rights then this legislation makes sense because you are letting states effectively regulate the choices that their legislatures make and if you are from the progressive wing of the party, this compromise will act as a catalyst for making sure that marijuana businesses will have access to the money they need to grow.

NCUA Board Nomination Hearings Today

Later today the Senate Banking Committee will be holding hearings on the nominations of Todd Harper and Rodney Hood to join the NCUA board.

Where’s the beef? Here’s the beef.

Wendy’s has reached a $3.4 million settlement with consumers impacted by the 2016 data breach of the chain. Specifically the settlement authorizes consumers to receive up to $5,000 to individuals who attended one of the impacted Wendy’s between October 25, 2015 and June 28, 2016.

February 14, 2019 at 9:00 am Leave a comment

Five Things You Should Know By The End of Next Week

Image result for aha momentGood morning folks. Yours truly is off for his yearly vacation to Baltimore. Yes, I live an exciting life. But first there are a few things I need you to ponder while I go off the grid for a week.

Shameless Plug

If you are reading this blog and I know you are, then you should sign up for this year’s Association Legal & Compliance Conference on September 11th and 12th. In addition to the summary of new regulations, we will discuss several emerging issues dealing with cybersecurity, the implications of marijuana banking and insurance law just to name a few. You can sign up right here.

Wells Fargo Shuns Pot Politician

What would I do without Wells Fargo to provide me an almost daily supply of blog content? This time the bank is getting a lot of heat after shutting down the campaign account of a pro-pot legalization candidate in Florida after asking her whether she would be taking money from marijuana interests. The bank explained that “As a national bank that is federally regulated, Wells Fargo must comply with federal law on the topic of marijuana, even in instances where state laws may differ. Since federal law prohibits the sale and use of marijuana, national banks like Wells Fargo may not knowingly bank or provide services to marijuana businesses or for related activities.”

This is one of those times where the law clashes with common sense and the law wins. Is Wells’ position defensible? Absolutely. Marijuana is illegal as a matter of federal law. Let’s say we found out that the candidate was taking money from Columbian drug lords, would we still be mocking the bank for its decision? Now for commonsense. Are banks and credits unions really going to interpret the law so strictly as to effectively punish candidates who advocate for drug realization and get money from supporters as a result? These are the type of decisions that must drive the bank’s PR department nuts.

CFPB Nominee Advances

Kathy Kraninger, an aid to Mick Mulvaney at the Office of Management and Budget, and President Trump’s nominee to lead the CFPB recently renamed the Bureau of Consumer Financial Protection has been voted out of the Senate Banking Committee. The vote was 13-12 but as we say in baseball, it’s still a win in the box score. It will be interesting to see what direction she takes the Bureau in. By the way, just like most people still call Myanmar Burma. I will be continuing to refer to the Bureau of Consumer Financial Protection as the CFPB.

Mortgage Slide Continues

Is this the canary in the economic coal mine or just an understandable reaction to rising interest rates? My money says it is the latter but time will tell. On Wednesday, the National Association of Realtors reported that existing home sales fell for the fourth straight month. On the bright side, unless you’re looking to buy a house, the median price of houses continued to rise to $269,000. In addition, the Mortgage Bankers Association reported that mortgage applications were up this past week. Stay tuned.

Speaking Out For RBC Reform

Finally, with all the extra time you have not reading my blog next week, you should consider writing a letter to the NCUA in support of its proposed regulation to push back the effective date of the risk based capital rule and to exempt more than 1,000 additional credit unions from its requirements by raising the compliance threshold from $100 to $500 million. This is an important policy shift and credit unions should signal to the board that they appreciate what it is doing.

On that note, I will see you a week from Monday to begin yet another year of blogging. I’m sure you can’t wait.

August 24, 2018 at 9:22 am 1 comment

NYS Takes Strong Stand In Favor Of Marijuana Banking

On July 3rd, New York State’s Department of Financial Services issued a strong statement encouraging both credit unions and banks to consider providing banking services to marijuana and hemp businesses legally operating under state law.  Full disclosure: the Association advocated for the Department to come out with just such guidance.

“The Department of Financial Services is aware…, that the unsettled legal environment at the Federal level has discouraged institutions from providing financial services to companies with medical marijuana or industrial hemp operations. This guidance is intended to clarify the regulatory landscape and encourage New York State-chartered banks and credit unions to offer banking services to these New York businesses. Institutions prepared to apply sound practices of customer due diligence and transaction monitoring. . .should consider to commence providing financial services.”

In addition, the Department stressed in an accompanying statement that it is ready to “work with chartering institutions to assist them in moving forward towards commencing operation [in a] very safe and sound manner” Industrial Hemp refers to products produced from cannabis plants that don’t have high levels of  Tetrahydrocannabinol (THC). Both the federal government and New York State have authorized the limited growth of this product in recent years, hoping that its wide variety of uses will spur economic growth in areas such as New York’s Southern Tier, but financial institutions remain reluctant to provide banking services.

Even with the guidance and its strong endorsement of banking services, there’s no getting around the fact that marijuana banking remains illegal as a matter of federal law.  In addition, the Federal Reserve has so far been unwilling to provide access to institutions providing banking services: So, what value is there in the guidance?

First, there are cracks, or at least fissures, in the federal government’s opposition. For example, the Treasury Department has not rescinded its guidance explaining how credit unions and Banks can provide banking services consistent BSA obligations; Congress passed legislation prohibiting the Justice Department from spending money on the prosecution of marijuana in states where it is where it is legal; and we know there are approximately 400 financial institutions currently providing banking services to marijuana businesses.

HMDA Guidance Released

In case you missed it, on July 5th NCUA joined other financial regulators in providing some initial guidance on how the implementation of S.2155 will impact credit unions exempt from certain, but not all, reporting requirements under the Home Mortgage Disclosure Act changes that were approved by Congress in May. S. 2155 increased the reporting exemption threshold for some HMDA data to exempt credit unions that originate fewer than 500 closed-end mortgages in each of the preceding two calendar years and credit unions that originate 500 open-end lines of credit in each of the last two years. Specifically, the reporting requirements are mandated by 12 USC 2803 B(5)(6). This statement informs us that the changes will not affect the format of the loan application register for data collected in 2018 as a result: https://www.ncua.gov/regulation-supervision/Documents/recent-changes-hmda-july-2018.pdf https://www.dfs.ny.gov/about/press/pr1807031.htm

July 9, 2018 at 10:08 am 1 comment


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.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 772 other followers

Archives