Underbanked: cooperative banking as a potential solution to the marijuana-banking problem.

Author:Tighe, Patrick A.

Numerous states have recently legalized recreational marijuana, which has created a burgeoning marijuana industry needing and demanding access to a variety of banking and financial services. Due, however, to the interplay between the federal criminalization of marijuana and federal anti-money laundering laws, U.S. financial institutions cannot handle legally the proceeds from marijuana activity. As a result, most financial institutions are unwilling to flout federal anti-money laundering laws, and so too few marijuana-related businesses can access banking services. This Note argues that the most viable policy option for resolving this "underbanking" problem is a financial cooperative approach such as a cannabis-only financial cooperative. Even in light of federal anti-money laundering laws, this Note contends that the Federal Reserve is legally authorized to grant some cannabis-only financial cooperatives access to its payment system services under the Monetary Control Act of 1980.

Table of Contents Introduction I. The Failure of Federal Efforts to Remedy the Underbanking Problem A. A Robust and Growing Marijuana Industry B. Federal Law Has Created the Underbanking Problem C. Federal Regulators Have Not Resolved the Problem II. Current Policy Proposals Miss the Mark A. Instituting a Cooperative Federalism Approach B. Amending the CSA C. Using Decentralized Virtual Currency III. Financial Cooperatives Provide a Viable Path Forward A. The Financial Cooperative Approach. B. The Federal Reserve's Legal Authorization 1. Interpretation of the Monetary Control Act of 1980 2. Money Laundering Complicity Conclusion Introduction

A recent New York Times article illustrates the current landscape of marijuana legalization as follows:

In his second-floor office above a hair salon in north Seattle, Ryan Kunkel is seated on a couch placing $1,000 bricks of cash--dozens of them--in a rumpled brown paper bag. When he finishes, he stashes the money in the trunk of his BMW and sets off on an adrenalized drive downtown, darting through traffic and nervously checking to see if anyone is following him. (1) The scene in Ryan Kunkel's office and his subsequent drive evoke thoughts of a Hollywood action movie, complete with furtive conduct, high-speed chases, and money. But in this brave new world of state-led initiatives to decriminalize marijuana, Kunkel's experience is far from exceptional. Under Washington law, Kunkel legally co-owns and operates five medical-marijuana dispensaries. (2) Although states are free to decriminalize marijuana, (3) and the marijuana industry is booming in the twenty-three states that have done so, marijuana is still illegal under federal law. Due to the ongoing federal prohibition, marijuana-related business owners such as Kunkel struggle to access banking services, making it difficult to open bank accounts and deposit the proceeds from their businesses.

The federal government regulates almost all banks in the United States. Since federally regulated financial institutions cannot legally accept the proceeds from marijuana activity due to federal anti-money laundering laws, (4) most financial institutions prohibit marijuana business owners from opening accounts and receiving other types of financial services. Despite the legal consequences, a minority of financial institutions provide banking services to marijuana-related businesses. But without access to the vast majority of financial institutions, state-legalized marijuana businesses effectively operate only in cash. From the state's perspective, a cash-only industry increases concerns about public safety and regulatory oversight. Struggling to access banking accounts, loans, and credit, marijuana-related businesses resort to elaborate schemes to protect their money--hiring private security, using private vaults, or taking alternating transportation routes. Due to the ongoing federal prohibition, this marijuana industry problem is properly characterized as "underbanking"--too many marijuana businesses are demanding access to banking and financial services without success.

Federal efforts to address the underbanking problem have been unsuccessful. Guidance from federal financial regulators--and efforts by state officials to clarify the federal guidelines--have not induced more banks to enter the market. Furthermore, although many proposals to solve this problem abound, most either require federal legislative action or will not actually resolve the problem. Even though a majority of Americans now favor legalization, (5) congressional action to resolve this problem is unlikely given the current political environment in Washington, D.C.

Since congressional action is unlikely, states such as Colorado have taken action into their own hands. In 2014, Colorado passed legislation authorizing cannabis-only co-ops and granted a state charter to a cannabis-only credit union. (6) While still requiring the Federal Reserve's approval, these co-ops and credit unions, once approved, will enable marijuana businesses to access basic banking services currently denied to them.

When Colorado passed this legislation, commentators called the initiative a "charade" and unrealistic, (7) in large part because many critics believe that the Federal Reserve is unlikely to approve these ventures. (8) Approval from the Federal Reserve, however, may not be as unlikely as critics suggest. Not only have federal regulators already demonstrated a willingness to assuage this problem, (9) but the Federal Reserve is legally authorized to allow a cannabis-only credit union to access its payment system services.

This Note argues that the financial cooperative approach, especially a cannabis-only credit union, is the most viable option to resolve the underbanking problem, despite commentators' doubts. Part I explores how federal regulatory efforts have failed to induce banks to provide services to marijuana-related businesses. Part II argues that many of the commonly touted policy solutions to the underbanking problem would not sufficiently remedy the problem. Part III contends that a financial cooperative approach is not an unrealistic solution, as some critics suggest, because the Federal Reserve is legally authorized to grant some cannabis-only financial cooperatives access to the Federal Reserve's payment system services under the Monetary Control Act of 1980.

  1. The Failure of Federal Efforts to Remedy the Underbanking Problem

    Section I.A explores how shifting public opinion and state laws decriminalizing marijuana have engendered a robust legal marijuana industry. Section I.B discusses how financial institutions are reluctant to provide services to many marijuana-related businesses because of federal anti-money laundering laws. Section I.C explains that, despite federal efforts clarifying how financial institutions can provide banking services to marijuana-related businesses, banks have not done so because the legal risks remain high. Collectively, Part I demonstrates that states that have legalized marijuana are left in a quagmire about how to provide banking services and get cash off the street.

    1. A Robust and Growing Marijuana Industry

      In 1970, only 12 percent of Americans supported legalizing the possession and use of marijuana. (10) But in 2013, for the first time in this century, a majority (52 percent) of Americans supported legalizing marijuana. (11) With this shift in public opinion, state laws have changed accordingly. Despite the continuing federal prohibition on marijuana, twenty-three states and the District of Columbia have legalized medical marijuana. (12) In 2012, Colorado and Washington became the first two states in the country to legalize recreational marijuana. (13) Colorado and Washington also became the first jurisdictions not only in the United States, but the world, to legalize the cultivation and distribution of marijuana. (14) Following Colorado and Washington's lead, in 2014 Alaska, Oregon, and the District of Columbia legalized recreational marijuana. (15)

      Unsurprisingly, this tide of state-led legalization has created a large and growing marijuana industry. The national marijuana market was valued around $1.5 billion in 2013. (16) By 2019, the industry is expected to grow to around $10.2 billion. (17) Additionally, states benefit by taxing this burgeoning market. For example, while substantially downgrading its initial tax estimates, Colorado collected nearly $44 million in tax revenue from marijuana in 2014 alone. (18)

      As the marijuana industry expands, marijuana-related businesses need access to a variety of banking services such as corporate accounts, payroll services, and credit and lending services. (19) Due to the federal criminalization of marijuana, however, many marijuana-related businesses struggle to access the most basic financial services. Without the ability to open a banking account, marijuana-related businesses cannot deposit their revenue, write checks to pay suppliers and employees, or obtain loans to expand their operations. (20) This lack of access creates many concerns about public safety and regulatory oversight.

    2. Federal Law Has Created the Underbanking Problem

      Although this burgeoning industry needs banking services and is operating legally under state law, federal law prevents banks from providing services to marijuana-related businesses. The federal prohibition is a product of the interplay between the Controlled Substances Act (CSA) and federal anti-money laundering laws, (21) such as the Bank Secrecy Act (BSA) (22) and the Money Laundering Control Act of 1986 (MLCA). (23) In the United States, almost all financial institutions--including those chartered by state banking agencies--are regulated by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), or the National Credit Union Administration (NCUA). (24) Consequently, almost all banks and...

To continue reading