DENVER — A Colorado credit union — once on the cusp of revolutionizing banking for marijuana businesses before being thwarted by the Federal Reserve Bank of Kansas City — has resumed its quest to open.
But going into the new year, The Fourth Corner Credit Union — a state-chartered credit union in Denver — again finds itself in a courtroom battle with the Kansas City Fed for the ability to open and serve marijuana businesses.
This time, the credit union is approaching the challenge with a new strategy — a scaled-back mandate to serve only advocacy groups rather than its previous, broader ambition to serve plant-touching businesses.
Whether the plan will work remains to be seen.
The outcome of the U.S. District Court case — no date has been set — could have important implications for the availability of banking to state-legal marijuana businesses.
The issues, said Steve Fox, director of VS Strategies, the consulting arm of Vicente Sederberg law firm, are ". trying to address a serious public safety issue" and "... businesses having the right to operate safely and freely."
Only a small number of banks serve the marijuana industry, so most cannabis companies must conduct their transactions in cash, thereby making them more vulnerable to robberies than traditional businesses with banking access.
Fourth Corner's conflict arose in November 2014, when the credit union received its Colorado state banking charter and then applied for a master account with the Kansas City Federal Reserve.
Then, in July 2015, the Kansas City Fed denied Fourth Corner's request for a master account. Such accounts are crucial because they connect banks and credit unions to the nation's financial system.
Fourth Corner responded with a lawsuit, which a District Court dismissed in January 2016. Fourth Corner appealed that ruling, and in June 2017, the U.S. Court of Appeals for the Tenth Circuit in Denver voided the lower court's decision.
The appeals court essentially ruled :
—The Kansas City Fed can't assume Fourth Corner intends to violate federal law by serving marijuana-touching businesses and therefore deny it a master account,
—The credit union can file a fresh application for a master account.
After the ruling, Fourth Corner decided to take a different approach to its application.
In hopes of improving its chances, Fourth Corner scaled back its mission — at least temporarily — to serving only marijuana advocacy organizations .
"We told the Federal Reserve that we would not use our charter at this point in time to bank those marijuana-related businesses until there was more guidance from Congress," said Mark Goldfogel, executive vice president of industry relations at Fourth Corner.
But instead of granting the master account, the Kansas City Fed asked the credit union in September for more information.
Fourth Corner said the request was discriminatory because the Fed hadn't previously asked any other institution for additional information: The one-page master account application asks only for a bank's name, routing number, state certification number, and address.
So, on Sept. 29, Fourth Corner filed a civil suit in U.S. District Court in Denver.
"I don't see this being a long-term big winner for Fourth Corner because I think what they really want at the end of the day is to be able to serve the whole marijuana industry," said Julie Hill, a Federal Reserve expert and University of Alabama Law School professor.
"And I don't really see a path for them to do it unless marijuana becomes legal under federal law."
'Ministerial' or 'unique'?
When the court hears the case, it must answer two key questions:
—Does the Federal Reserve have the right to withhold an account?
—Is granting a master account a "ministerial" act that the Federal Reserve simply carries out, no questions asked, or does the process allow applicants to be scrutinized?
"It's a ministerial duty. It's not anything that's given," Goldfogel said. "Once you have your charter and bank account number, you apply for your master account and get it, usually within five to seven days.
"Nowhere in Congress' mandate to the Federal Reserve or in the Federal Reserve's charter does it say these applications are open for preview."
"Normally it is a ministerial action, but normally people who ask for a Federal Reserve account don't say, 'When we get it, our plan is to violate federal law. It's a totally unique situation," said the Alabama professor.
"When (Federal Reserve officials) hear Fourth Corner say, 'No, we won't violate federal law, even though we told you that was our plan to do that before,' what are they supposed to do?
"It seems to me a reasonable regulator in that circumstance would say, 'I probably need to do a little bit more investigation to make sure I believe what Fourth Corner is saying now, that they really won't violate federal law.'"
'Guidelines' vs law
Others say federal regulators, not the Federal Reserve, are best suited to make such a decision.
"Fourth Corner should have been given a master account and then it could have been left to federal regulators to determine whether they were operating properly," said VS Strategies' Fox.
To that end, federal regulators in 2014 drafted the Financial Crimes Enforcement Network (FinCEN) guidelines , which outline how banks can serve marijuana businesses.
While the FinCEN guidelines may give the U.S. Treasury and Justice Department the leeway not to crack down on banks that serve marijuana businesses, it doesn't give that wiggle room to other federal entities, Hill said.
"That's the Department of Justice and FinCEN saying, 'We might overlook it, but that doesn't mean that the Federal Reserve, which is a completely separate entity, or other banking regulators have to overlook it,'" she added.
Even if the court rules in Fourth Corner's favor, it remains to be seen whether the credit union can get enough investor support, startup capital and clients to be sustainable — especially since plant-touching businesses remain off-limits.
"We're pretty confident that we'll win this one," Goldfogel said. "It's really a question of how much we can do with it once we win it."