Nevada’s Marijuana Banking Bill Is Not a Viable Solution for Businesses


Nevada’s Marijuana Banking Bill Is Not a Viable Solution for Businesses

Banking actions that most entrepreneurs take for granted become incredibly difficult and dangerous when it all must be done by physically moving cash.

Over the past few years, I’ve been an entrepreneur in the legal marijuana industry in Nevada and elsewhere. I can tell you firsthand how incredibly frustrating it can be to operate in an industry for which banking services are generally unavailable. Actions that most entrepreneurs take for granted, like making deposits, transferring payments, remitting employee payroll tax withholdings or sending earnings distributions to out-of-state investors, become incredibly difficult and dangerous when it all must be done by physically moving cash.

So, it’s exciting when policymakers try to solve the marijuana banking problem, as Nevada’s Senate Judiciary Committee did recently when it introduced Senate Bill 437.  The proposed legislation would allow for the creation of limited charter banks or credit unions to serve the marijuana industry.

Unfortunately, however, the proposal would mostly fail to solve the legitimate needs of the industry and would not improve the physical safety at marijuana dispensaries. The reasons for this are not shortcomings of the legislation itself, per se, but limitations inherent to a banking system that is predominantly regulated at the federal level.

This is not the first attempt a state has made to provide banking services to the marijuana industry. When I served in the Nevada Controller’s Office, we held high-level discussions with the state treasurer’s office and other agencies about creating a state marijuana bank. California’s treasurer similarly examined the issue and recently concluded that a marijuana bank is unfeasible.

After legalizing marijuana, Colorado chartered Fourth Corner Credit Union in 2014, which had designs on serving the marijuana industry in that state. But the Federal Reserve refused to grant Fourth Corner a master account, which is necessary to participate in any of the payment portals administered by the Fed, such as electronic wires, the clearing of checks and debit and credit card transactions. The Federal Reserve’s refusal was based on two objections — Fourth Corner’s stated goal of servicing the marijuana industry meant the bank, in the Fed’s eyes, could become a money-laundering device for revenues generated from an activity the federal government still deems illegal and Fourth Corner was unable to procure deposit insurance on its accounts.

Fourth Corner sued the Federal Reserve. The U.S. Tenth Circuit Court of Appeals ordered the Fed to issue a master account only if Fourth Corner agreed not to serve marijuana businesses, which was the explicit purpose of its charter. In truth, the three judges on the Tenth Circuit reached vastly different conclusions, with one judge believing Fourth Corner should be issued an account regardless, but the court split the difference by adopting the middle judge’s viewpoint.

In a separate issue, the National Credit Union Administration, which offers depository insurance for credit unions, initially refused to issue coverage to Fourth Corner because its proposed clientele was highly concentrated in a single, risky, in its view, industry.

Understanding this history is important because any attempt at a marijuana bank in Nevada would likely run into similar complications. SB 437 essentially abandons hope of a marijuana bank receiving a Federal Reserve master account and only authorizes the bank to issue limited checks that would not go through the Fed clearinghouse. Those checks would only be payable to state and local governments for taxes and to certain in-state vendors who could only cash them at the marijuana bank. This means the marijuana bank would mostly be a glorified vault for marijuana businesses. This isn’t the type of fix that will improve the safety of marijuana businesses or their customers. The bill also requires the proposed bank or credit union to acquire deposit insurance. It’s unlikely that would happen unless the institution plans to serve a much broader population.

The Financial Crimes Enforcement Network, which oversees federal anti-money laundering provisions, has issued guidance to traditional banks that would allow them to serve marijuana businesses. The problem is complying with these provisions is time-so consuming and costly that banks would lose money on these accounts.

For now, the better way for a state like Nevada to facilitate banking of marijuana businesses is simply to provide data-sharing to existing banks regarding legitimate transactions by licensees. Short of federal action, such as passing the Safe and Fair Enforcement Banking Act, this would be the best thing states can do to facilitate marijuana banking.