Pot Banking Fight Continues
The recent dismissal of Fourth Corner Credit Union's case against the Federal Reserve left the legal cannabis industry hanging once again in its search for legitimate banking services.
But the judge's dismissal, which occurred after the Federal Reserve denied the Colorado-based credit union a master account, sounded like a challenge to Congress, Fourth Corner President/CEO Deirdra O’Gorman told CU Times.
“There's actually a lot of silver lining in what he said,” O’Gorman said. “We look at it, not as an ending, but actually the beginning of the dialog that's needed to take place for some time.”
Fourth Corner's journey began more than two years ago with the purpose of serving the legal cannabis industry. While some refer to the fledgling credit union as the “pot credit union,” O’Gorman said she sees the institution differently.
“It's a little bit of a misnomer when people call it the pot credit union,” she said. “I think of us more as the compliance credit union to be perfectly honest.”
O’Gorman took the helm of Fourth Corner in February 2014, a few scant months after the credit union received its state charter. However, the celebration was short lived, as the Federal Reserve denied the institution's application for a master account in July 2014. Without it, it was dead in the water.
The credit union sued the Federal Reserve, not only for being denied the master account, but because the Federal Reserve did not allow the institution to file an appeal.
“There was no other appeals process – the only thing we could do was file a federal lawsuit against them,” she said. “We tried to see if we could get a judge to hear our side of the story.”
A Colorado District Court judge heard the case in December 2015 and tossed out the case early in January.
According to FinCEN guidance released in February 2014, any financial institution servicing the cannabis industry would need to incorporate enhanced compliance standards. O’Gorman explained Fourth Corner was very aware of the robust compliance needs associated with serving cannabis businesses and was well prepared to meet the requirements, as the credit union was surrounded with experts who were well-versed in the compliance arena.
Six federal institutions – the NCUA, the Office of the Comptroller of the Currency, the FDIC, the Department of Justice, the Federal Reserve Board of Governors and the Treasury – signed onto the guidance from FinCEN, which allowed banks and credit unions to provide services to marijuana businesses, provided the institutions follow the enhanced compliance measures contained within the guidance.
“The guidance provides that you are able to do this only if you are willing to take on the robust compliance oversight to bank the industry and it's not easy to do that,” O’Gorman said. “We were simply asking to play on the same field as other financial institutions who are currently banking the industry today and have master accounts through the financial reserve. We were just asking to be treated the same.”
While Fourth Corner Credit Union aimed to serve the cannabis industry, another idea was brewing – an application that could ultimately be the saving grace for financial institutions like O’Gorman's. A software platform, called Hypur, was being developed as a compliance tool to assist cash-intensive businesses. Its original intent was to service payday lenders and check cashing businesses.
“Back in day one, we weren't talking about cannabis at all. So there was no discussion, we didn't build it for cannabis,” Andre G. Herrera, executive vice president of banking and compliance for Hypur, said.
After showing the platform to banking consultants and regulators for feedback, Herrera said the company started getting calls from institutions in Colorado that wondered whether the platform could be used to service legitimate cannabis businesses.
Herrera confirmed the platform could accommodate such businesses and even had industry-specific features for the cannabis industry, such as SARs.
“The topic of cannabis is on fire in the banking community,” Herrera said, adding that “it's a lot like ‘Fight Club’ – you don't talk about it.”
Hypur automates a financial institution's processes by incorporating its policies and procedures into the application, according to Herrera.
For institutions that service cash-intensive businesses, it allows for the tracking of cash, documents and applications through an automated process.
There are 25 different modules in the system, including an AML/BSA module, a CTR module and one for SARs.
“We can take the enhanced due diligence process of an institution and we can automate that to where the bank is reviewing documentation, rather than scrambling to get the documentation,” Herrera said.
Institutions can customize the application as well as pick and choose which modules work best for it, according to Herrera.
“The whole idea behind Hypur is we try to bring transparency in,” he said. “The industry needs transparency; the regulators want transparency in this and there's no reason why it shouldn't exist.”
O’Gorman said she agrees.
“Our goal is to try to take this money out from behind the shadows, have it be transparent and compliant, work with regulators, work with state agencies so that it's taxed and regulated,” she said. “It's happening today with financial institutions that might not understand the implications of how to bank this industry. So that's why we felt like having an institution from the ground up geared with this type of compliance really was a smart way to approach it.”
She said the technology behind Hypur could be the saving grace for an industry that needs clarification. The legacy systems at most credit unions and banks make it hard to “bolt on some of the compliance that is necessary for helping these cash-intensive businesses,” she said.
“I think that specialized software is extraordinarily helpful in making it easier for financial institutions to take their first steps into these types of industries,” O’Gorman added.
Herrera said Hypur will work with legacy systems – a bidirectional link can run between the legacy system and application, allowing data to be sent back to Hypur for reporting purposes.
Still, the cannabis industry's need for banking services will remain a challenge until there is greater clarity on the issue from a Federal standpoint.
Scott Earl, president/CEO of Mountain West Credit Union Association, said, “It is evident that as long as marijuana is still illegal at the Federal level, there will continue to be incredible challenges to provide financial services to the industry.”
He added that the U.S. District Court ruling regarding Fourth Corner “further emphasizes the need for Congress to act.”
Kyle Sherman, CEO/founder of Flowhub, a Denver-based startup that's developing software to help cannabis businesses meet compliance regulations, wrote in an email, “As it stands, the cannabis industry is more than facing its share of hardships as a result of lacking access to banking. It is my hope that the Federal government takes steps toward allowing credit unions and other financial institutions to work with companies in the cannabis space for the betterment of the industry and the many that depend on its success.”
While Hypur has some support within the industry, how well it will be received by regulators is still uncertain. The NCUA declined to comment on the software and its implications across the financial sector.
Although Fourth Corner is not yet open for business, it will appeal the case dismissal, according to O’Gorman. She added the credit union's experience has given it a unique perspective that will hopefully translate to advocacy and education for other financial institutions and thought leaders who are looking at the long-term goal of serving cannabis businesses.
She said the credit union will continue its advocacy and lobbying efforts.
“We’ve spent two years trying to figure this out,” she said. “We have lots of knowledge to impart on people who are trying to do the right thing and step up and help these businesses. I know we are asking the tough questions that a lot of people don't feel they want to answer yet, but we think it's time to make this a conversation that gets national attention. We are trying to help whoever is trying to take up the gauntlet at this point.”