Colorado, which was the first state to legalize the possession, production and sale of recreational marijuana, has now become the first state to establish a financial system for the marijuana industry. On May 7th, the Colorado legislature approved a proposal to create a state-run financial cooperative for marijuana businesses by passing the “Marijuana Financial Services Cooperatives Act.” Colorado Governor John Hickenlooper is expected to sign the bill into law. The financial cooperative will be overseen by Colorado’s financial services commissioner and will operate much like a credit union, though it will not offer deposit insurance.
The proposal’s main sponsor, Representative Jonathan Singer, called it “the final piece to [Colorado’s] pot puzzle.” Singer stated that such a measure was necessary because the marijuana industry had become largely cash-based, due to the reluctance of traditional financial institutions to offer banking services to marijuana-related businesses. The summary of the bill noted that marijuana businesses “operate almost entirely on a cash-only basis, which raises their costs, increases the risks of crime, and impedes the state’s ability to account for these businesses’ revenues.” Senator David Balmer said the bill was an attempt to “improvise and come up with something in Colorado to give marijuana businesses some opportunity, so they do not have to store large amounts of cash.”
Banks have been very reluctant to provide services to marijuana businesses even after the Department of Justice (“DOJ”) and the Financial Crimes Enforcement Network (“FinCEN”) each released guidance in February indicating that banks could potentially do so without being prosecuted for violating federal law (which still prohibits the use and distribution of marijuana). Guidance from the DOJ indicated that outside of eight enumerated enforcement priorities (such as preventing the distribution of marijuana to minors), federal prosecutors would generally not focus on marijuana-related conduct within states that had legalized marijuana and which had implemented effective regulatory and enforcement systems. For banks offering services to marijuana businesses whose activities do not implicate any of the eight priorities, the DOJ stated that prosecution “may not be appropriate,” but explicitly stated this would provide no legal defense or immunity to such banks. Guidance from FinCEN focused on how financial institutions could provide services to marijuana businesses while complying with their anti-money laundering obligations. FinCEN highlighted the importance of customer due diligence (including verifying that businesses were in compliance with all state laws), and also provided that financial institutions providing such services would always be required to file suspicious activity reports (“SARs”), establishing a reporting framework distinguishing between “Limited” and “Priority” marijuana-related SARs.
Many within the banking industry felt that the federal guidance was far from enough to make banks comfortable with serving marijuana businesses, given that banks would continue to face risk of prosecution and sanctions, and also noted FinCEN’s guidance imposed a heavy burden on banks to know and control their customers’ activities. Governor Hickenlooper had also criticized the federal guidance, stating that it did not provide the clarity Colorado banks needed to provide basic banking services and would only result in the industry’s continuing to operate largely on a cash-only basis.
The newly approved financial cooperative still faces some hurdles, perhaps the most significant of which being that the Federal Reserve will need to give its approval in order for the financial cooperative to have access to credit card processing, checking accounts and other banking services. Some think the Federal Reserve will be reluctant to provide this approval, either because of the lack of deposit insurance or because the Federal Reserve will have a negative view of marijuana banking. Mike Elliot, executive director of Colorado’s Marijuana Industry Group, stated that the financial cooperative proposal would likely not be a solution to the banking problem faced by marijuana businesses since the Federal Reserve would “likely not grant” access to merchant services and checking.