Last month witnessed a marijuana banking explosion.

Spanning 29 states and generating $7.2 billion in 2016, the United States’ legalized marijuana industry’s greatest obstacle—banking—was significantly reduced by the Department of the Treasury’s (Treasury) Financial Crimes Enforcement Network’s (FinCEN) June 6, 2017, “marijuana banking update,” The Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City, No. 16-1016 — F.3d —- (10th Circuit, June 27) landmark opinion, and rise of the interbanking systems alternative to the barred use of credit cards in marijuana sales.

While still only a fraction of nation’s 11,954 regulated banks and credit unions provide marijuana-related businesses (MRBs) with financial services, this recent 22 percent increase in financial institutions reflects a staggering growth and proof that a cost-effective solution exists to dealing with bankings’ thorniest issue: profitability in light of compliance and suspicious activity reports (SARs) requirements.

Marijuana banking law and regulation

Because the Comprehensive Drug Abuse Prevention and Control Act, 21 U.S.C. Sections 801, Et. Seq (1970) (CSA) prohibits “manufacture, distribution and dispensation” and any transfer or deposit of monies yielded from cannabis sale may be deemed “money laundering” in violation of the Currency and Foreign Transactions Reporting Act, 31 U.S.C. Section 5311-5330 (BSA), most banks, credit unions and credit card companies (hereafter, collectively referred to as financial institutions) refuse to provide marijuana growers, processors or dispensers with financial services.

Although several Department of Justice “policy clarifying” memoranda restrain enforcing the CSA in legalized marijuana states (including Aug. 29, 2013’s Cole Memorandum [Cole Memo] which lists eight enforcement priorities), any transfer or deposit of monies yielded from cannabis’ sale may deemed “money laundering” in violation of 18 U.S.C. Section 1956 for the “seller” and a BSA violation by the financial institution.

In its February 14, 2014, dated guidance, FinCEN clarified that through adhering to institution specific factors (e.g., particular business objectives, evaluation of risks associated with offering particular product or service and capacity to effectively manage risks), banks may provide financial services to MRBs consistent with BSA obligations by: obtaining and reviewing MRB’s information from licensing and enforcement authorities including application, license and registration documentation; developing an understanding of business’ normal and expected activity including types of to-be-sold product and to-be-served customers (e.g., medical versus adult use); monitoring publicly available sources for adverse information about business and related parties; monitoring for suspicious activity, including guidance’s specified red flags; and routinely updating customer due diligence information commensurate with risk (FinCEN guidance).

These “FinCEN guidance ‘red flags’ indicating state law or Cole Memo priority violations” include MRBs appearing to use license as a pretext to launder “criminal activity derived funds;” inability to demonstrate a licensed business operating consistently under state law or a legitimate source of significant outside investments; concealing or disguising cannabis involvement; are, or have been, subject to a marijuana-related law or regulation enforcement action; engaging in international or interstate activity including making/receiving out-of-state cash deposits or interstate transfers; or purporting to be a “nonprofit” while engaged in commercial activity inconsistent with classification.

Massive Increase in Marijuana Related Business Banks

For the period ending March 31, FinCEN’s Marijuana Banking Update reports that 368 banks provided financial services to MRBs reflecting a 22 percent increase over the span of 18 months. FinCEN measures the number of banks serving MRBs based on “guidance required SARs filing” triggered by “red flags” when a bank providing financial services to an MRB knows, suspects or has reason to suspect that a conducted or attempted transaction involves—or is an attempt to disguise—funds derived from illegal activity; is designed to evade BSA regulations; or lacks a business or apparent lawful purpose. Because all MRB financial transactions involve funds derived from illegal activity, banks must file a “limited,” “priority” or “termination” SAR with every deposit, withdrawal or transfer.

First, if providing financial services to a business not violating state law or any Cole Memo priority, a bank must file “marijuana limited SAR.” Second, if reasonably believing that a MRB violates state law or Cole Memo priority, financial institution must file “marijuana priority SAR.” Third, if “facilitating effective anti-money laundering compliance” requires terminating a “marijuana-related business” relationship, a bank must file a “marijuana termination SAR.”

Due to the enormous BSA and FinCEN guidance compliance costs, most banks are incapable of profitably provided financial services to MRBs. Presently before the House Financial Services Committee, the Secure and Fair Enforcement Banking Act, 114 HR 2076, proposes amending the BSA through issuing “modified SARs reporting regulations” that do not “inhibit” providing financial services to MRBs.

‘Fourth Corner’ Opinion

A “master account” is a bank account for banks which provides depository institutions with access to Federal Reserve services (including electronically processing customer payment transactions via an automated clearinghouse system). Without a master account, a bank is nothing more than a vault.

Although Colorado issued a charter to The Fourth Corner Credit Union (credit union), whose mission is providing financial services to hemp and cannabis industries, the Federal Reserve Bank of Kansas City (FRB) denied the credit union’s master account application.

After the credit union sought an injunction and declaratory judgment that the FRB provide a master account, the U.S. District Court for the District of Colorado affirmed the master account denial, dismissed the proceeding and held that the FRB cannot be compelled to provide a master account to violate federal drug laws, The Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City,Civil Action No. 15-cv-01633-RBJ (D. Colo. Jan 5, 2016).

In its June 27, dated opinion, the U.S. Court of Appeals for the 10th Circuit vacated the district court’s ruling, holding, in part, that because the lower court should have presumed the credit union would follow the law, no basis existed to deny its application and instructed the Fourth Corner to re-apply for a master account.

According to the credit union’s vice president, Mark Goldfogel, the Fourth Corner opinion is a critical legal milestone of universal application, because it demonstrates that the Federal Reserve bank does not have discretion to select who can participate in the banking system, and the federal courts cannot make rulings based on who they deem may break the law in the future.