Like the FDIC, the NCUA focuses its examination of insured credit unions on risk, including reputational risk. (121) However, the NCUA has not identified "high-risk" industries. Moreover, the NCUA does not pursue enforcement actions based solely on reputational risk. (122) Indeed, some reports suggest that the NCUA may welcome credit union participation in the payday lending market--a market that the FDIC believes warrants extra scrutiny. (123) Thus, it is possible that the NCUA would take a more favorable view of state-legal marijuana business than the FDIC.
Even if the NCUA views the marijuana industry favorably, credit unions may not be able to service the entire state-legal marijuana industry. Insured credit unions may generally only provide services to "members." (124) Members of nationally chartered credit unions must have a "common bond." (125) Many states also place limitations on credit union membership. (126) In addition, federally insured credit unions face restrictions on business lending. (127) These limitations may prevent some marijuana-related businesses from accessing credit union services.
Of course, state-chartered credit unions with private insurance escape NCUA regulation. The NCUA does not examine these institutions, and NCUA regulations are not binding on them. (128) However, only nine states currently have privately insured credit unions, (129) and there are only about 150 non-federally insured state-chartered credit unions total. (130) Of the states allowing some marijuana use, only California, Illinois, Maryland, and Nevada have privately insured state-chartered credit unions. Even in these states, it is not clear that a private insurer would be willing to insure an institution with marijuana business. Providing insurance might subject the insurer to punishment under the Controlled Substances Act or anti-money laundering laws.
Nevertheless, one group of financial institution organizers is betting that a credit union charter is the path to marijuana financial services. In November 2014, organizers convinced Colorado regulators to grant Fourth Corner Credit Union a state charter. (131) Marijuana businesses are specifically included as part of Fourth Corner's field of membership. (132) Fourth Corner Credit Union has also applied to the NCUA for share insurance. If the NCUA refuses to issue share insurance, Fourth Corner's organizers plan to request that Colorado consider chartering a credit union with private share insurance. (133) Assuming Fourth Corner can clear other regulatory hurdles, (134) Colorado might even allow the credit union to open before it gets insurance. (135)
At any rate, Fourth Corner's NCUA share insurance application may be a bellwether: if it succeeds in getting federal share insurance, that may be a reliable sign that share and deposit insurance regulators will not punish financial institutions who serve the marijuana industry. For now though, the vast majority of financial institutions are governed by federal deposit or share insurance regulations that discourage service to the marijuana industry.
Federal Reserve Regulation of Member Banks
Just as state-chartered financial institutions subject themselves to federal regulation by using federal deposit or share insurance, state banks subject themselves to federal regulation if they choose to become members of the Federal Reserve System. All state-chartered banks (but not credit unions) are eligible to apply for Federal Reserve membership. (136) In order to become a member of the Federal Reserve System, a state-chartered bank must make an application (137) and must purchase stock in its regional Federal Reserve Bank. (138) There are currently 850 state member banks. (139)
Once a state bank becomes a member of the Federal Reserve, it must comply with federal laws governing member banks and regulations established by the Federal Reserve. (140) A Federal Reserve member bank must "at all times conduct its business and exercise its powers with due regard to safety and soundness." (141) In order to meet this safety and soundness requirement, a member bank must monitor " [compliance with applicable laws and regulations." (142)
The Federal Reserve regularly examines state member banks. (143) Among other things, the examination evaluates a bank's risk management practices and compliance with the Bank Secrecy Act. (144) The Federal Reserve's Commercial Bank Examination Manual instructs examiners to evaluate each state member bank's operations to ensure that the bank does not provide deposit or loan services to illegal enterprises. The Manual explains that a bank "should perform its due diligence by adequately and reasonably ascertaining and documenting that the funds of its... customers were derived from legitimate means." (145) It further explains that "if accounts at U.S. banking entities are used for illegal purposes, the entities could be exposed to reputational risk and risk of financial loss as a result of asset seizures and forfeitures." (146) In addition, banks are warned that loans should only be provided "for legitimate purposes" and that loan collateral "derived from illegal activities... is subject to forfeiture through the seizure of assets by a government agency." (147)
Unsurprisingly, the Federal Reserve's Commercial Bank Manual does not specifically address customer activities that are illegal under federal law but allowed under state law. Yet it is clear that the Federal Reserve, under its duty to enforce the Bank Secrecy Act and regulate member bank risk, has ample authority to impose civil penalties on state member banks that do business with the marijuana industry.
Federal Bank Holding Company Regulation
Next, the federal government regulates all bank holding companies. A bank holding company is simply a corporation that controls at least one bank. (148) Banks of all sizes choose a holding company structure for a variety of business and tax reasons. (149) Today about 80 percent of banks are controlled by holding companies. (150) At the end of 2013, banks controlled by holding companies "held approximately 99 percent of all insured commercial bank assets in the United States." (151)
The federal government began regulating bank holding companies in earnest with the Bank Holding Company Act of 1956. (152) Under the Act as amended, the Federal Reserve has broad regulatory authority over bank holding companies and their non-bank subsidiaries. (153) As it does with member banks, the Federal Reserve scrutinizes bank holding company risk management. (154) "Organizations supervised by the Federal Reserve, regardless of size and complexity, should have effective compliance risk-management programs that are appropriately tailored to the organizations' risk profiles." (155) The Federal Reserve warns that "larger, more complex banking organizations" require "firmwide compliance risk management" that includes comprehensive anti-money laundering policies. (156) The Federal Reserve also has authority to take enforcement actions and assess civil penalties against bank holding companies and related parties. (157) Thus, the Federal Reserve has the power to shut off the marijuana industry's access to not only member banks but also to other non-bank financial companies owned by a bank holding company.
Federal Payment Systems Administration
The federal government also wields significant control over payment systems. The Federal Reserve provides four important payment services: (1) a centralized check collection system, (2) the Automated Clearinghouse (ACH) network for processing batched electronic small dollar payments, (3) the Fedwire system for larger electronic payments, and (4) coin and currency services. (158)
Financial institutions use each of these systems to provide customers payment services. The Monetary Control Act of 1980 requires that the Federal Reserve offer payment system services to all "depository institutions," regardless of whether the institution is a member of the Federal Reserve System. (159) Thus, the Federal Reserve currently provides services to banks and credit unions alike. (160) By establishing regulations and policies governing access to its payment systems, the Federal Reserve has the ability to impact practices at all financial institutions using these systems.
Accessing the Federal Reserve's payment systems is not administratively difficult. It requires only a resolution from the financial institution's board of directions and the completion of forms designating individuals authorized to initiate transactions and identifying the types of services wanted. (161) Under normal circumstances, once a financial institution receives a charter, the Federal Reserve grants the institution a "master account" and access to payment services. (162) This process makes sense because the prospective financial institution has already been vetted by the chartering authority, and usually by the deposit or share insurer as well.
Of course, nothing prevents the Federal Reserve from adjusting the terms and conditions for use of the Federal Reserve's payment systems. It is possible that future terms and conditions could cut off access to financial institutions that provide services to the marijuana industry. (163)
One group of credit union organizers is learning firsthand that the Federal Reserve can prevent marijuana banking by limiting access to payment systems. As explained in Part I.C, Colorado has granted Fourth Corner Credit Union a charter to open a credit union focused on the marijuana industry. (164) Fourth Corner, however, is not currently operating because it has been unable to get access to the Federal Reserve's payment systems. (165) Fourth Corner requested a master account in 2014. (166) Rather than access, "the credit union organizers got a letter from Esther George, president of the Federal Reserve Bank of Kansas City. The letter stated that issuance of a master account was 'within...