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The Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City

United States District Court, D. Colorado

January 5, 2016

THE FOURTH CORNER CREDIT UNION, a Colorado state-chartered credit union, Plaintiff,
v.
FEDERAL RESERVE BANK OF KANSAS CITY, Defendant.

ORDER

R. Brooke Jackson United States District Judge

The Fourth Corner Credit Union seeks a mandatory injunction directing the Federal Reserve Bank of Kansas City to grant it a “master account.” The bank in turn asks the Court to dismiss the case. The dispute arises from the current clash of state and federal law concerning the legality of marijuana. For the reasons discussed in this Order, this Court is unable to grant plaintiff the relief it seeks.

BACKGROUND

In 2012 the people of the State of Colorado voted to amend the state’s constitution to legalize recreational use of marijuana. Declaring it to be in the “interest of the efficient use of law enforcement resources, enhancing revenue for public purposes, and individual freedom, ” the Colorado Constitution authorizes personal use of marijuana by persons 21 years of age or older. Art. XVIII, § 16(1). The amendment also authorizes the operation of marijuana-related facilities. Id. at (4). Personal possession and marijuana-related facilities are subject to regulation by the Department of Revenue. Id. at (5).

Unsurprisingly, a substantial industry has arisen around the cultivation, processing, transportation, and sale of marijuana. Like other industries, these “marijuana-related businesses, ” often simply called “MRBs, ” have a need for banking services. However, despite legalization in Colorado and several other states, the cultivation and distribution of marijuana remains illegal under the Controlled Substances Act. 21 U.S.C. § 801 et seq. See Gonzales v. Raich, 545 U.S. 1, 13-14 (2005).[1] For that reason, perhaps among others, banking institutions have been reluctant to serve MRBs. Bills that would modify the federal prohibition have been proposed but not yet enacted.

In January 2014 several members of Colorado’s congressional delegation sent a letter to Deputy Attorney General James Cole of the United States Department of Justice and to the Director of the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of the Treasury, asking that they “expedite guidance that would enable licensed marijuana dispensaries and retail stores in Colorado to avail themselves of the banking system.” Amended Complaint, ECF No. 24, at ¶27. The letter reported (and common sense confirms) that operation of MRBs on a cash-only basis created significant public safety concerns for customers and employees, while making regulation, auditing and tax collection more difficult. Id.

Deputy Attorney General Cole responded with a memorandum dated February 14, 2014 that reiterated the Department of Justice’s commitment, first expressed in an August 29, 2013 guidance document, to “enforcing the CSA consistent with Congress’ determination that marijuana is a dangerous drug that serves as a significant source of revenue to large-scale criminal enterprises, gangs, and cartels.” ECF No. 31-1 at 1. The Cole memorandum also noted that financial institutions that conduct transactions with money generated by marijuana-related conduct could face criminal liability under money laundering statutes and the Bank Secrecy Act. Id. at 2. The memorandum stated that United States attorneys should apply the same eight priorities identified in the earlier guidance document in determining whether to charge individuals or institutions with marijuana-related violations of federal law. Id. However, it repeated that the memorandum “does not alter in any way the Department’s authority to enforce federal law, including federal laws relating to marijuana, regardless of state law.” Id. at 3.

On the same date FinCEN issued a document entitled, “BSA Expectations Regarding Marijuana-Related Businesses, ” FIN-2014-G001, frequently referred to as the “FinCEN guidance.” ECF No. 34-3. This document acknowledges that the Controlled Substances Act “makes it illegal under federal law to manufacture, distribute, or dispense marijuana, ” and it advises banking institutions, as part of their customer due diligence, to consider whether an MRB implicates one of the Cole memorandum priorities. Id. at 1, 3. Purporting to clarify how financial institutions can provide services to MRBs consistent with their Bank Secrecy Act obligations, it reminds such institutions that, “[b]ecause federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity, ” they must file a “suspicious activity report” on activity involving an MRB. However, a more limited report may be filed if the institution reasonably believes that the business does not implicate one of the Cole memorandum priorities or violate state law. Id. at 3-4.

Some banking institutions have apparently elected to serve MRBs and to take their chances under federal law. However, that has by no means been a universal reaction to the Cole memorandum and the FinCEN guidance. The Amended Complaint attaches and quotes a press release from the Colorado Bankers Association which interprets those documents as inviting banks to serve MRBs “at your own risk” while emphasizing all of the risks. ECF No. 24 at ¶32. Indeed, the Association’s President is quoted as stating that “[t]he only real solution is an act of Congress.” Press Release at 2.

Nevertheless, in plaintiff’s words, “ten courageous citizens” came together in March 2014 to “organize a Colorado state-chartered credit union to develop a robust anti-money laundering . . . program to comply with the newly issued FinCEN guidance and Cole memorandum and thereby provide much needed banking services to compliant, licensed cannabis and hemp businesses and to thousands of persons, businesses and organizations that supported the legalization of marijuana.” ECF No. 24 at ¶35. On November 19, 2014 the Colorado Division of Financial Services granted The Fourth Corner Credit Union a state credit union charter pursuant to C.R.S. § 11-30-117.5(3). Id. at ¶52.

The newly minted credit union promptly applied to open a “master account” at the Federal Reserve Bank of Kansas City. Despite its name, the Bank is not a federal agency. Rather, it is a private corporation created by an Act of Congress and run by its own board of directors. Affidavit of Susan Zubradt, the Bank’s Vice President of Supervision and Risk Management, ECF No. 34-1, at ¶3. Depository institutions can only access the Federal Reserve payments system through a master account or through a correspondent bank that has a master account. ECF No. 24 at ¶53. This access is necessary for the electronic transfer of funds. Simply put, without this access The Fourth Corner Credit Union is out of business.

On July 16, 2015 the Bank denied the Credit Union’s application for a master account, and this suit followed. Plaintiff’s position can be simply stated: it is entitled to open a master account pursuant to the Banking Act of 1935, as amended by § 107 of the Monetary Control Act of 1980, 12 U.S.C. § 248a(c)(2). Applications are normally granted as a matter of course within a few days. Plaintiff believes that the Bank was motivated by a desire to exclude it as a competitor for the marijuana industry’s banking business. Plaintiff moves for summary judgment on the statutory interpretation issue. ECF No. 26.

In response and in its motion to dismiss the Bank makes three arguments. ECF Nos. 31, 34. First, it submits that Colorado’s actions taken to facilitate the distribution of marijuana are preempted by federal law. Second, it argues that this Court should not use its equitable powers to facilitate criminal activity. Finally, it contends that the Credit Union misinterprets § 248a which only concerns the pricing of services provided by the Bank, not the Bank’s obligation to provide a master account. The dueling motions have been fully briefed. The Court held oral argument on ...


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