Federal Reserve says No to Credit Union for Marijuana

© Benjamin Rasmussen for The New York Times Mark Mason, center, a lawyer in South Carolina, is leading the creation of the Fourth Corner Credit Union in Denver.
© Benjamin Rasmussen for The New York Times Mark Mason, center, a lawyer in South Carolina, is leading the creation of the Fourth Corner Credit Union in Denver.

Banking regulators just said no to a financial institution that aims to be the first to serve the expanding marijuana industry in Colorado.

The Fourth Corner Credit Union in Denver applied in November to the Federal Reserve for a “master account,” which would allow it to interact with other financial institutions and open its doors to some of the hundreds of state-licensed marijuana businesses in Colorado.

Although recreational marijuana has been legalized in Colorado, it is still illegal on the federal level, discouraging most traditional banks from working with pot businesses.

The Fed’s branch in Kansas City, which has been reviewing the application, privately informed the Fourth Corner Credit Union earlier in July that it had not been approved for a master account, the credit union said on Thursday.

The credit union, which has the backing of Colorado’s governor, fired back on Thursday night by filing a lawsuit in federal court in Denver against the Fed, demanding “equal access” to the financial system.

Mark Mason, who has been leading the credit union’s creation, said that after months of answering the Federal Reserve’s queries, he was unsurprised by the answer he received.

“I felt all along like they were trying to figure out a way to deny our application,” said Mr. Mason, who also runs a law firm in South Carolina. Now, he said, “a federal judge who is only concerned in applying the law can make the decision.”

Nearly all banks have refused to open accounts for the hundreds of marijuana businesses in Colorado and other states with similar laws, leaving the businesses to operate in an all-cash economy with the significant dangers that can bring. Many small-business owners in the state have had to improvise with safes, armored cars and other alternatives to banking.

Colorado’s state government has said that the lack of access to banks is a public safety issue, as well as a deterrent in the state’s effort to collect taxes. Mr. Mason won the state’s backing for his venture after he brought on money-laundering experts to build its policies. The credit union was granted a state license last year, on the condition that it still had to receive approval from the Fed before opening for business.

Andrew Freedman, Colorado’s director of marijuana coordination, said he was disappointed by the Fed’s decision.

“We thought it was a good solution to the problem,” he said. “Here was a place willing to take on the risk of banking this underbanked group — and that could do rigorous compliance.”

The credit union’s lawsuit could push the courts to resolve the continuing conflict between the federal laws against marijuana and the dozens of states that have legalized it in some form.

Peter Conti-Brown, a professor of legal studies at the University of Pennsylvania’s Wharton School, said there was little precedent to guide the courts in such a case. Still, he said, it will be an uphill battle for the credit union to prove that the Fed does not have the power to turn down the institution.

“Most of the cards are in the Fed’s hand,” he said.

This year, the president of the Kansas City Fed, Esther George, wrote that the Fed had “discretion” in deciding which master accounts to open. She also said the Fed would consider the decision made by the National Credit Union Administration on whether to grant the Denver credit union deposit insurance, similar to the $250,000 coverage that the Federal Deposit Insurance Corporation provides for standard bank accounts.

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Source: The New York Times | NATHANIEL POPPER

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