Marijuana is legal in Colorado, but federal law makes banking nearly impossible for the cannabis industry. The result: a dangerous all-cash operation that requires armed guards and layers of security.
It was zero degrees in Denver on a late December morning, and the ice-covered streets were mostly empty. Mark Mason, wearing a full-length black coat, green wool hat and sunglasses, sat in a white Buick LaCrosse, eyeing the squat building across the street. It was the local branch of the Federal Reserve Bank.
“Behind that gate, that’s where the armored cars come in,” he said, pointing to a parking lot. “They’ve got a bunch of money in the basement — a bunch.”
For some months, Mr. Mason, 54, has been thinking about the bank and how, he said, “to break in.” Not to take money, but to leave it. Mr. Mason and a group of other entrepreneurs in Colorado want to start the first-ever financial institution established specifically to serve the pot industry. To do that, they need to make deposits in a Federal Reserve account, and the agency hasn’t let them. Such humdrum administrative decisions are made all the time by federal banking officials, but this one raises big political and legal issues between the federal government and the state of Colorado over the legalization of marijuana.
Mr. Mason and his business partners have already received a license from the state of Colorado for their Fourth Corner Credit Union. They have leased a building in downtown Denver, put up a Facebook page and generated predictable jokes on late-night TV. Jimmy Fallon: “If you think the line is slow at your bank …”
Medical marijuana has been legal in Colorado since 2009 and recreational marijuana use became legal a year ago. But marijuana businesses have had limited, if any, access to banking services. The federal government considers marijuana illegal and so traditional banks, fearing prosecution for aiding and abetting illegal drug dealers, have shut down pot-business accounts and declined to give loans. Some banks have ferreted out pot entrepreneurs by sniffing their bills, leading to a countermove: bills sprayed with air freshener.
Without a bank account, pot businesses deal in cash, lots of it, held in safes, handed out in clipped bundles on payday, carried in brown paper bags and cardboard boxes to the tax office and the utility company, ferried around the state by armored vehicles and armed guards. And without access to essential banking services — from credit cards to electronic transfers to loans — those businesses pay a huge premium. The reality in Colorado is that it is legal to grow pot but extremely hard to grow a pot business.
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Earlier, Mr. Mason had sat in on several conference calls with Mr. Harwell and said he was told by the risk specialist that the decision was “above my pay grade,” but declined to specify in whose pay grade it was. (Mr. Harwell did not return emails but forwarded them to a spokesman, who declined to comment about the application.)
There is also the issue of deposit insurance, which a financial institution needs in order to operate. The Fourth Corner Credit Union has applied to the National Credit Union Administration, a federal regulator that provides insurance for the vast majority of the nation’s 2,500 or so state-chartered credit unions. If it isn’t approved, the fledgling credit union plans to apply for private insurance with Lloyd’s of London.
As for the Federal Reserve, Mr. Conti-Brown of Stanford said the granting of a master account by the Federal Reserve had usually been routine. “It’s been so prosaic,” he said.
On one level, this application is no less routine. But there is another level on which the granting of a master account to the credit union can fairly be seen as undercutting the authority of the federal government to easily regulate marijuana through the traditional banking system.
Right now, traditional banks would rather not risk prosecution — or regulatory trouble — to get a few million dollars from marijuana businesses. And so to keep the industry on a low throttle, the federal government need only threaten tighter enforcement, and already skittish banks might get out entirely. In this way, restricting banking limits the size of the industry without directly challenging the states that have legalized it.
With the credit union, Mr. Conti-Brown of Stanford said, “The dam breaks.” The credit union is not looking to marijuana businesses for “small deposits,” he said. “It’s their raison d’être.”
If the federal government goes after such an institution, Mr. Mason argued further, it will no longer be just a banking issue. “If they come after me, it represents an attack on the industry itself,” he said, and, by extension, the voters who approved it. “They’re attacking the will of the people,” he said.
