B Banking and the Marijuana Industry a M y

W While Colora may ha given th green lig to the m ado ave he ght marijuana in ndustry, the sale and u of use m marijuana st is illegal at the fede level. In late June 2011, the U till eral n U.S. Depart tment of Ju ustice is ssued a me emo reiterat ting the con nsequences of those in s ndividuals c caught culti ivating, sell ling or distributing marijuana. The memo also went on to includ other pa m T de arties who knowingly f facilitate such activitie as targe of prose es ets ecution. The exact lang e guage as s stated in the DOJ mem reads: e mo P Persons wh are in the business of cultivatin selling o distributing marijuana, and tho who ho e ng, or ose knowingly facilitate such activit f ties, are in violation o the Con of ntrolled Substances A Act, re egardless of state law Consiste with res w. ent source cons straints and the discre d etion you ma ay exercise in your district such pers y t, sons are su ubject to fed deral enforc cement acti ion, includi ing p potential pr rosecution. State laws or local ordinances a not a de s are efense to c or criminal civil enforcement of federal law with re t espect to su conduc including enforceme of the C uch ct, ent CSA. T Those who engage in transactio involvi the pro ons ing oceeds of s such activ may als be in vity so violation of federal lau f undering statutes an other federal finan s nd ncial laws. A few banks had banke medical marijuana businesses prior to dir s ed s rectives fro federal b om banking re egulators (F Federal Res serve Syste Federa Deposit In em, al nsurance C Corporation, Comptroller of the C Currency) co onsistent with the DOJ letter. Since that actiion by bank regulators we know of no w J k s, bank continu uing to bank marijuana businesse knowing a es gly. T There are tw elements to the issu One is being invo wo s ue. olved in an i illegal act p federal l per law (e explained above), the other is mo a oney launde ering. Thos laws prec se clude handling deposits of an ill legal activit and require filing Su ty uspicious Activity Repo (SARs) for any tra orts ) ansaction th may hat violate feder law. ral M Money Laun ndering: The process of taking the proceed of crimin activity a making them T s ds nal and g ap ppear legal Money laundering la are federal and therefore not impacted by Colorados l. aws t decision to le egalize marijuana. Any banking transaction (a checking account credit/deb cards, A g t, bit w wires) invo olving funds from the marijuana industry is t very de s m the efinition of m money laund dering. A banks, ev state-charted banks, are requ All ven uired to com mply with fe ederal mon launder ney ring laws. F Financial ins stitutions that bank the marijuana industry no only are facilitating money laundering e a ot by the mariju uana customer, but the financial institution a actually is la aundering m money itsel and lf subject to all applicable criminal and civil pen e nalties . A Alternative Institution Financia institutions in Colora are not permitted b federal n: al ado by re egulators to bank ma o arijuana dispensaries. Even state e-charted b banks have a federal r regulator and are bound to comp with fede law. Th has led some in the marijuana industry to ply eral his e a o s d c n) exclusively to the indu ustry. propose the idea of a state-owned bank (or credit union devoted e T This concep brings up a whole ne set of issues, includ pt ew ding: Still precluded: Any financial institution owned by the state or a spec p : e cific group s is still subje to federa law regar ect al rdless of ow wnership, and results i the same prohibition The in e ns. only exception to this is a state-owned bank that has no con e o s d nnection with the paym ment system, which is federally regulated. That means checks fro it could not be dep s r T s om posited in other financial in nstitutions, credit/debit cards coulldnt be issu c t ued, funds couldnt be wired e

to/from other financial institutions In short, it could not operate as we understand banks today. It could only accept deposits (in cash) and pay them back out to depositors (only in cash) at only its own location(s). Its deposits would not be FDIC insured. This arrangement presents security issues and the possibility of federal seizure of aggregated funds. Then it would face the below issues. Colorado Constitution: The Colorado Constitution does not permit the state, any county, or city, town to aid, become an owner or a shareholder of any corporation or company. (See below for language from the constitution.) Capital: The minimum it takes to start a small bank is $20 million money that the state of Colorado does not have. FDIC: Operation without FDIC insurance we believe is playing loose and reckless. For a bank to be chartered without FDIC insurance, it requires numerous changes in law. If such an institution should fail, any depositors funds in the institution could be lost and perhaps those of the investor State of Colorado; there are no protections for the customers. FDIC insurance is required for any institution connected to the payments system. FDIC will not grant insurance to an institution involved in an illegal activity (federal), regardless of the business being legal on a state level. Federal Seizure: Any funds on deposit would continue to be subject to federal seizure just as they are now; the distinct difference would be the ease of seizure by aggregating the funds of numerous dispensaries. Payment System: Without proper (FDIC or NCUA) insurance, a financial institution does not have access to the payment system. Without access to the payment system, an institution cannot issue checks or credit/debit cards, wire funds, or conduct electronic transactions. Regulation: Who would set the rules and regulations? If the state does, it will end up with a case of the fox watching its wholly owned hen house. The state as owner and regulator of the bank and its policies could change with each election.

Change federal Controlled Substances Act: The only way we know to deal with this is for the federal government to amend the Controlled Substances Act to create an exception (e.g., per state law and for limited amounts). That may address legal issues for other aspects of marijuana use, but it may not be sufficient for the banking aspect. For financial institutions to handle such transactions, further amendments may be needed to the USA Patriot Act, Bank Secrecy Act and other federal statutes. Lending to the marijuana industry: It is prohibited for any financial institution to lend to the marijuana industry. Financial institutions cannot lend against inventory or receivables because the collateral is illegal at a federal level. The challenge even extends to real estate loans. The collateral (building and/or land the marijuana business operates from) is subject to federal seizure. As a result, the loan is not secured. Banking regulators will not permit loans to illegal businesses with or without collateral. For a loan customer that owns and leases out space to other businesses (a landlord), a bank may not count rent from any illegal business (e.g. a business that deals in illegal firearms) as income to repay the loan. With that rental income disqualified, the landlord has greater difficulty qualifying for a loan. Additionally a lender normally takes an assignment of rents as collateral for the loan. Regulators do not permit the bank to take such an assignment which then makes it more challenging for the landlord to qualify for a loan on the property. In the eyes of regulators, the entire property is subject to federal seizure and as such it is questionable if the property can be used as collateral at all.

Colo. Const. Art. XI, Section 2

Section 2. No aid to corporations - no joint ownership by state, county, city, town, or school district. Neither the state, nor any county, city, town, township, or school district shall make any donation or grant to, or in aid of, or become a subscriber to, or shareholder in any corporation or company or a joint owner with any person, company, or corporation, public or private, in or out of the state, except as to such ownership as may accrue to the state by escheat, or by forfeiture, by operation or provision of law; and except as to such ownership as may accrue to the state, or to any county, city, town, township, or school district, or to either or any of them, jointly with any person, company, or corporation, by forfeiture or sale of real estate for nonpayment of taxes, or by donation or devise for public use, or by purchase by or on behalf of any or either of them, jointly with any or either of them, under execution in cases of fines, penalties, or forfeiture of recognizance, breach of condition of official bond, or of bond to secure public moneys, or the performance of any contract in which they or any of them may be jointly or severally interested. Nothing in this section shall be construed to prohibit any city or town from becoming a subscriber or shareholder in any corporation or company, public or private, or a joint owner with any person, company, or corporation, public or private, in order to effect the development of energy resources after discovery, or production, transportation, or transmission of energy in whole or in part for the benefit of the inhabitants of such city or town.
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