Cannabis Banking and Fourth Corner Credit Union’s Cannabis Account Case

Federal Reserve Bank and Marijuana Banking
The Federal Reserve does not want to see a cannabis bank.

Oral argument is set for today in the federal district court case Fourth Corner Credit Union is bringing against the U.S. Federal Reserve. Here are some quick thoughts on what we see happening in this case and what that will mean for cannabis business access to financial institutions going forward.

What’s the case really about? In November 2014, Colorado approved Fourth Corner Credit Union’s charter. To act as a bank or credit union, a business needs to receive a charter from either state or federal financial regulatory agencies. Fourth Corner got this from the state of Colorado, so that step was out of the way. The next two big roadblocks for Fourth Corner were getting deposit insurance and getting a master account established with the Federal Reserve. Fourth Corner applied for both of these, and then it began a long process of waiting. Neither the National Credit Union Administration (the insurance provider) nor the Federal Reserve were timely in responding. Finally, in July 2015, Fourth Corner heard bad news on both fronts. It had been denied both insurance and the master account. So, Fourth Corner sued both agencies to force them to provide their services to Fourth Corner.

Can Fourth Corner Survive Without Insurance or a Master Account? Though Fourth Corner would no doubt have loved to get both federal deposit insurance and the master account, only the master account is really necessary. The vast majority of chartered financial institutions carry federally guaranteed deposit insurance, issued either by the NCUA or the FDIC, but private deposit insurance is possible. But the master account maintained with the Federal Reserve really is necessary to provide standard financial services. The master account is where Fourth Corner would keep its assets, and all electronic bank to bank transfers take place through the master account. Access to ACH and wire transfer services requires access to that master account. As Fourth Corner puts it in its complaint, without a master account, “a depository institution is nothing more than a vault.”

Who is going to win the case? Though we are rooting for Fourth Corner to prevail, it would be a major upset if Fourth Corner were to win. At its heart, the case is about one thing: does the Federal Reserve have discretion as to whom it issues master accounts, or does it have to issue master accounts to any financial institution that receives state or federal charters? In its arguments, Fourth Corner points to 12 U.S.C. § 248a (c)(2), which states that “All Federal Reserve bank services covered by the fee schedule shall be available to nonmember depository institutions and such services shall be priced at the same fee schedule applicable to member banks . . . .” The Federal Reserve counters by saying that Fourth Corner is taking this section out of context and that this does not a mandate that the Federal Reserve provide services to all institutions; it just requires it not discriminate in its pricing. A 1920s Supreme Court case held that the Federal Reserve does not need to provide its services to all comers. And even though the pricing discrimination section wasn’t passed until the 1980s, Congress usually will not be found to have intended to overturn Supreme Court precedent in such an indirect way. That said, Fourth Corner’s arguments are not completely unreasonable since this statutory language arguably does appear to require the Federal Reserve offer all services to non-member financial institutions. Still, context matters, and context in this case is not helpful to Fourth Corner.

Will the case have any broader impacts on the cannabis industry? It is interesting to note that the Federal Reserve does not put its best, most narrowly tailored argument first in its brief. Instead, it goes for the jugular, stating that Colorado’s legal marijuana system is federally preempted. If the judge got into this matter, it would be huge news since no federal court has yet ruled on whether the Federal Controlled Substances Act preempts state laws legalizing marijuana. I won’t get into preemption arguments here, but suffice it to say that it would be an unmitigated disaster if courts ruled that federal drug laws preempt (essentially, override) state marijuana legalization. Colorado’s law has a severability clause, which means that if preemption were to occur, all of its business regulations would go away, but state decriminalization would stay. There are a bunch of reasons why the judge will not follow the Federal Reserve down that argument path. In general, judges seek to rule on cases on the narrowest grounds possible; they don’t generally make sweeping decisions when they can toss something out on a technicality. The other factor is that these aren’t the right plaintiffs to make that determination. The Kansas City branch of the Federal Reserve and a private credit union are not the parties that should be driving constitutional decisions with broad impacts on states’ rights.

Takeaways? The big takeaway from this case so far that federal agencies continue to throw up road blocks that will not go until marijuana ceases to be a Schedule 1 controlled substance. That said, credit unions that already have master accounts and already have deposit insurance have a much, much easier time offering services to marijuana businesses than do new institutions like Fourth Corner. We have worked credit unions that offer marijuana services pass their NCUA examinations with flying colors. Once you have the account or have the insurance, it’s a lot more work for the federal agencies to take that away, so they are much more willing to be open-minded. It’s apparently sometimes better to beg for forgiveness than it is to ask for permission.