Banks, marijuana, and federalism.

• Author: Hill, Julie Andersen
• Position: Introduction into I. Dual Banking and Marijuana C. Federal Deposit and Share Insurance, p. 6597-621 - Western Reserve University School of Law Interdisciplinary Conference on Marijuana, Federal Power & the States

CONTENTS INTRODUCTION I. DUAL BANKING AND MARIJUANA A. Federal Controlled Substances Act B. Federal Anti-Money Laundering Statuses C. Federal Deposit and Share Insurance D. Federal Reserve Regulation of Member Banks E. Federal Bank Holding Company Regulation F. Federal Payment Systems Administration II. ATTEMPTS TO BANK THE MARIJUANA INDUSTRY A. Federal Guidance B. State-Chartered Financial Cooperatives III. THE PATH TO BANKING SERVICE A. Congressional Action B. Reasonable Federal Banking Regulation CONCLUSION ABSTRACT

Although marijuana is illegal under federal law, twenty-three states have legalized some marijuana use. The state-legal marijuana industry is flourishing, but marijuana-related businesses report difficulty accessing banking services. Because financial institutions will not allow marijuana-related businesses to open accounts, the marijuana industry largely operates on a cash-only basis--a situation that attracts thieves and tax cheats.

This Article explores the root of the marijuana banking problem as well as possible solutions. It explains that although the United States' dual banking system comprises both federal-and state-chartered institutions, when it comes to marijuana banking, federal regulation is pervasive and controlling. Marijuana banking access cannot be solved by the states acting alone for two reasons. First, marijuana is illegal under federal law. Second, federal law enforcement and federal financial regulators have significant power to punish institutions that do not comply with federal law. Unless Congress acts to remove one or both of these barriers, most financial institutions will not provide services to the marijuana industry. But marijuana banking requires more than just congressional action. It requires that federal financial regulators set clear and achievable due diligence requirements for institutions with marijuana-business customers. As long as financial institutions risk federal punishment for any marijuana business customer's misstep, institutions will not provide marijuana banking.

INTRODUCTION

Marijuana is illegal under federal criminal law. (1) Notwithstanding the federal ban, twenty-three states and the District of Columbia have legalized medical marijuana use. (2) Some states have moved beyond medical marijuana to recreational marijuana. Colorado and Washington first allowed recreational marijuana use. (3) Alaska, Oregon, and the District of Columbia now also allow recreational marijuana. (4) Whether for medicinal or recreational use, state legalization of marijuana conflicts with the federal ban. This tension has been called "one of the most important federalism disputes in a generation." (5)

Yet many are willing to declare that, at least for practical purposes, the marijuana federalism battle has been won by the states. They conclude that "[t]he reality on the ground today is that the federal ban on marijuana is largely toothless." (6) Because the federal government lacks (or refuses to deploy) law enforcement resources, people are largely free to grow, sell, and use marijuana so long as they act consistently with state law. (7) But this narrative largely overlooks the federal government's substantial power to conscript private parties into its law enforcement efforts. Perhaps nowhere is the federal government's indirect law enforcement power greater than in the area of banking. (8)

It is well documented that marijuana-related entities in states where marijuana is legal have difficulty obtaining banking services. (9) The banking drought extends beyond businesses that directly handle marijuana. For example, Wells Fargo Bank closed the account of Marijuana Ventures, a magazine aimed at cannabis growers and retailers. (10) When the marijuana industry asks federal and state financial institutions why they will not provide banking services, the institutions point to federal law. (11)

Lack of banking services stands as a formidable barrier to growth of the state-legal marijuana industry. Without access to banking services, marijuana businesses must conduct transactions in cash and

spend an inordinate amount of time and resources on cash management. From vaults, to cameras, to security personnel, to finding suppliers that accept cash payment, managing cash can quickly become a logistical and security nightmare. (12) In Colorado, the controller of one recreational marijuana retailer described cash management as "a fulltime job." (13) Stories abound concerning marijuana retailers attempting to surreptitiously drive large quantities of concealed cash across town just to pay tax bills. (14)

At the same time, lack of banking services equates to a lack of capital for the marijuana industry. Banks are the traditional backbone of small business financing, (15) but banks will not lend to marijuana-related businesses. (16) The state-legal marijuana industry must instead "rely on short-term loans from individuals, usually with higher interest rates." (17) Even if a marijuana-related business finds financing, there is still the problem of not having a bank account. As a marijuana retailer hoping to finance the one-million-dollar purchase of a new building explains, "What do you say?... I want it in cash, guys?" (18)

The banking problem also raises hurdles for states seeking to allow but regulate marijuana use. Notwithstanding the security efforts of marijuana businesses themselves, the combination of marijuana and cash raises local law enforcement concerns. (19) Even federal officials re cognize the "public safety" concern caused by "[substantial amounts of cash, just kind of lying around with no place for it to be appropriately deposited." (20) So far media reports of successful robberies and related violence are limited but chilling. (21)

Perhaps more importantly from a public policy standpoint, (22) when marijuana-related businesses are outside the banking system, those businesses are harder to tax and regulate. (23) Colorado and Washington allow recreational marijuana use but regulate marijuana similarly to alcohol. They prohibit the sale of marijuana to minors, (24) require that businesses be registered, (25) and take other regulatory measures designed to keep the marijuana industry separate from other illegal drugs. (26) Both states plan to fund the monitoring and registration of growers, distributors, retailers, and medical users by taxing the marijuana industry itself. (27) But cash businesses have opportunities and incentives to underreport taxes. (28) Without anticipated tax revenues, states could potentially have trouble...