Pubdate: Sun, 18 May 2014
Source: Denver Post (CO)
Page: 1K
Copyright: 2014 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: David Migoya

"IS THE FED GOING TO DO WHAT THE BANKS WON'T ALREADY DO?" NO.

Marijuana Financial Co-Ops Face More Work, but Analysts Say They're
Unlikely to Succeed.

A hurry-up bill that whizzed through the final days of the Colorado
legislature to create the world's first financial cooperatives for the
marijuana industry still faces about two years of added preparation,
backers now say.

But despite the initial optimism surrounding House Bill 1398, those
familiar with the Federal Reserve System - the agency whose approval
is required for the whole plan to work-say it's unlikely to meet with
anything but rejection.

Still others say the amount of effort needed to create the co-op
system, which is little more than a credit union for the marijuana
industry, is a wasted exercise in learning what was already known:
that only Congress can make the changes needed to allow the pot
industry access to normal banking.

"Arguably it's all a charade, thinking that some members of the
(Federal Reserve) board ... will allow access to the payment system,"
said Bert Ely, a banking structure consultant in Alexandria, Va. "If
the Fed can't let them in, the legislature's action has no meaning."

HB 1398 was conceived by marijuana-industry stakeholders, with help
from Gov. John Hickenlooper's office, as a means to force the federal
government's hand at deciding with finality whether pot and banking
can go together.

Until now, it's been undecided at best. There are bills languishing in
Congress that would give special exemptions to banks in states where
marijuana is legal - currently only two have approved recreational
sales, while more than 20 others allow for its medical use.

Federal regulators and prosecutors have done little to alleviate the
logjam, offering advice on how to approach the issue, but ultimately
causing banks to keep what could be a lucrative relationship at arm's
length.

"Colorado's congressional representatives have tried to move a bill;
the banking industry has asked for guidance; the governors of
Washington and Colorado (where recreation marijuana is legal) have
asked for guidance; we've gotten the memos from regulators and
prosecutors, and the banks ran screaming," said Chris Myklebust,
Colorado's commissioner of the division of financial services and the
one tapped for overseeing the new co-op system should it emerge.

"We want an answer, on the record, a written response. Can we do
this?" he said.

No dark shadows

But before the Federal Reserve can even tackle the issue - presumably
the first application would head to the Fed's regional bank in Kansas
City, which is likely to punt the decision to Washington, D.C.-
Myklebust says there is much more work to be done.

"It's possible we can get something to the Fed in 2015, but more
likely 2016," he said. "We need to put rules into place, come up with
standards and bylaws, and a foundation forwhat one of these
cooperatives will look like from an organizational
standpoint."

What Colorado seeks is approval for the marijuana industry to carry on
its own banking-type segment, with accounts and credit cards and full
access to the nation's financial system. And it wants it as if it's a
new concern, with no dark shadows of a criminal past.

"The critical problem is you have money flowing through this (coop)
entity with proceeds of transactions that are still illegal under
federal law," said Oliver Ireland, a Washington, D.C., attorney
specilizing in bank regulatory issues.

"Is the Fed going to do what the banks won't already do? No. Why would
they?" he said.

Several former members of the Board of Governors of the Federal
Reserve System politely turned down Denver Post requests for
interviews for this story.

The push for an answer stems from the federal government's own
indecision on how to handle pot and banking.

Although a branch of the U.S. Treasury and the U.S. Department of
Justice in February theoretically gave banks the go-ahead to do
business with the legal-marijuana trade - medical and recreational
sellers of the drug-it was seen as little more than tacit approval
surrounded by a number of red flags.

Rather than solving the banking dilemma, it complicated
it.

"Banks are responsible to regulators, most of which are independent
and uncontrolled by the president's executive branch," Colorado
Bankers Association CEO Don Childears said when the guidance came.
"The idea of no prosecution is nice, but to banks, regulators have the
real power."

Some U.S. senators loudly questioned how a branch of federal
government - the Financial Crimes Enforcement Network, or FinCEN,
within the Department of Treasury-could buck its mandatory obligation
of keeping drug trafficking out of the nation's money system.

"(FinCEN's) guidance is dangerously misleading. Indeed, following the
guidance may expose financial institutions to civil or criminal
liability," Sens. Dianne Feinstein, D-Calif., and Chuck Grassley,
R-Iowa, wrote in April. "Congress and the President may reconsider
marijuana's legality, but until federal law is changed, selling
marijuana, laundering marijuana proceeds, and aiding and abetting
those activities all remain illegal."

It's not that the relationship between banks and pot shops doesn't
exist, despite repeated rhetoric that the marijuana industry is a
cash-only enterprise.

Millions at stake

It's simply had to survive quietly, in some cases covertly-little
different than how marijuana has hid in the shadows of criminality for
more than 75 years.

"Some bank customers have gone to great lengths to disguise accounts
related to marijuana," Childears said, "even spraying deposited cash
from 'Susie's Cookies' with Febreze air freshener."

With millions - perhaps billions - of dollars at stake, the worries of
public safety have been the oft-used words to insist that banking and
pot must come together legally, without any worry that federal seizure
looms around each deposit.

"It's just bizarre how many people out there who just don't want
marijuana to have access to banking, as if it's a punishment," said
Michael Elliott, executive director of the Marijuana Industry Group, a
trade organization for cannabis businesses.

"It's almost as if they're hoping for public safety issues to be
associated with it," he said. "It's absurd."

As it stands, it's easier to get a bank account if you run a licensed
brothel in Nevada than a licensed marijuana shop in Colorado.

"There's a great deal of skepticism over whether this can work at
all," Elliott said.

Though credit unions are chartered to serve specific groups of people,
there isn't one specific to businesses within an industry. Colorado's
legislation - it's still unclear whether Hickenlooper will sign it -
creates a cooperative, specifically prohibited from calling itself a
bank or a credit union. Either way, the idea is unique. "Some (credit
unions) were formed specifically to provide business lending for the
farming industry, but really not for anything other than feed and
things necessary to run their business," said Pat Keefe with the
Credit Union National Association. "The marijuana idea is very different."

Critical, Keefe said, is that coops in Colorado, under HB 1398, are
not required to have federal deposit insurance, theoretically keeping
it from federal laws that insist funds not have any connection to the
illegal drug trade.

That, Keefe said, may keep the concept from flying.

Wasted time?

Despite any potential setbacks, the whole idea still requires Federal
Reserve approval because it's the only way into the nation's money
system.

"As a public entity, the Federal Reserve is a creature of federal
law," Ireland reminded. "Is it, as a matter of policy, going to
promote the violation of federal law? To willingly participate and
promote that as a federal entity?"

It seems more than unlikely, he said.

"It will be interesting to see how it plays out, but I'd be very
surprised if the Fed wound up doing this without a change in federal
law first," Ireland said. "Perhaps for political reasons, Colorado
needs to know."

Ely said Colorado could well have wasted its time.

"Putting it at the Fed's feet is a cop-out," he said. "To have spent
the money to get it passed, on setting it up, only to say 'We'll see
what the Fed says.' That's just not how you do business."

The way Myklebust sees it, that's precisely how it needs to
go.

"I don't know what we'd do otherwise," he said. "If we stop asking,
stop pushing on doors, then nothing happens."  
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MAP posted-by: Jo-D