Pot Banking Under Trump
The co-author of the Department of Justice Cole Memorandum, John W. Vardaman III, said that despite the anti-pot rhetoric from the Trump Administration, credit unions should not be overly alarmed and that the marijuana market opportunities will flourish even if the feds crackdown on states where pot is legal.
Vardaman served in the U.S. Department of Justice for 10 years and helped author the Cole Memorandum, which outlined how financial institutions can permissibly bank marijuana businesses in the states where marijuana has been legalized. He is now an EVP and general counsel for the Scottsdale, Ariz.-based Hypur, which provides banking and payment technology designed for highly regulated industries.
Although marijuana remains illegal under federal law, recreational marijuana use is legal in eight states and the District of Columbia. In 28 states, pot use is permitted for various medical purposes.
During a press conference last month, U.S. Attorney General Jeff Sessions indicated he is reviewing the Cole Memo and the corresponding FinCEN memo that clarified Bank Secrecy Act expectations for financial institutions that serve marijuana businesses.
Vardaman noted that since the memos were publicly released in February 2014, there have been no major enforcement actions taken by federal prosecutors against any financial institution for violating the guidelines in the memos.
In fact, none of the publicly posted FinCEN enforcement actions, cites any financial institution for violating the federal government's stipulations, Steve Hudak, chief of FinCEN's public affairs office, noted.
The Cole Memo stated it may not be appropriate to prosecute financial institutions servicing marijuana companies that operate legally under state law and as long as those businesses did not violate the Cole Memo's eight priorities. Those priorities included preventing the revenue from marijuana sales from going to criminal enterprises, gangs and cartels, and preventing state-authorized marijuana activity from being used as a cover for trafficking of other illegal drugs or other illegal activity.
“They could have rescinded the Cole Memo on day one of this administration, but they haven't done so, although Sessions’ hostility toward marijuana use is no secret,” Vardaman said. “But if you read his language carefully, he's never said, this state legalization experiment is over, it's not going to continue under my watch. Instead, he has talked about things like the limitation of resources, he has talked about working with states. So, I think there's enough there to suggest that whatever some administration officials may want to do, there's at least a recognition that just pulling the plug on this thing overnight is far more complicated than they may have originally thought.”
Even if the Trump Administration rescinded the memos, the DOJ would need to set new directives for marijuana enforcement priorities.
“This raises an interesting issue because historically enforcement of marijuana laws has been sort of a partnership between the federal and the state law enforcement,” Vardaman explained. “I don't think the federal government can anticipate a lot of cooperation from state and local law enforcement in states that have legalized marijuana.”
The $405 million Salal Credit Union in Seattle was one of the first financial institutions in the country to serve cannabis businesses starting in June 2014.
“Salal is committed to helping these companies be successful and operate within the regulations, and we support Washington's Attorney General Bob Ferguson and Gov. Jay Inslee, who have vowed to defend our state's legal marijuana law against potential federal action,” Russell Rosendal, president/CEO of Salal Credit Union, said.
During his press conference last month, Sessions reportedly claimed that experts were telling him there is “more violence around marijuana than one would think and there's big money involved.”
But Rosendal argued the legalization of pot is making communities safer.
“Forcing legal businesses outside the banking system does not improve public safety and provides no tracking system for tax purposes and no means of prevention of criminal activity,” he said. “By offering service to this industry, we are helping the Drug Enforcement Agency and FinCEN with the monitoring of these businesses.”
What's more, improving public safety was one of the reasons Salal decided to serve the cannabis industry.
“Providing banking services to licensed cannabis businesses is a public safety issue,” Rosendal explained. “No firearms are allowed in licensed I-502 [marijuana] businesses and providing cash pick-up and delivery services via professionally licensed armored transportation reduces the likelihood of assault and robbery for business owners, their customers and neighbors.”
However, a 2016 Washington State Marijuana Impact Report showed that state enforcement officials issued 134 warnings to some marijuana businesses, 169 fines, four suspensions and six cancellations of licenses. These businesses sold marijuana to minors, violated advertising guidelines, failed to maintain security systems or failed to maintain traceability of marijuana products.
The 135-page report also noted that in the City of Seattle, marijuana accounted for more than 53% of all narcotics violations, and while all narcotics violations increased by 2.75%, marijuana incidents increased by 30.5% during the second quarter of 2014. Medical marijuana dispensary incidents increased by 46%.
“Based upon information comparing the incidents before legalization in 2011 to offenses in 2014, changes can be seen,” the report stated. “The number of juveniles involved, the use of handguns and the overall incident of marijuana offenses compared with primary narcotic offenses illustrates that marijuana remains an issue of concern within the City of Seattle.”
White House Press Secretary Sean Spicer hinted last month at a federal crackdown in states where recreational pot use is legal.
Vardaman, however, noted Spicer also said the Trump administration views the recreational use and medical use of weed as two separate issues.
“Even if the administration decides to do something about the recreational use of marijuana, if they just leave the medical marijuana in place, well, that's an enormous market right there,” he said. “And if you’re going to have any form of legalized marijuana, whether it's just medical or some combination of medical or recreational, you simply have to have banks and credit unions involved. You cannot have one without the other.”
Moreover, the marijuana industry also fits into the Trump Administration's No. 1 priority of accelerating the nation's economic growth engine.
For example, just in Washington State, more than 15,000 jobs are directly or indirectly connected with the cannabis industry, which generates millions of dollars of tax revenue to cities throughout the state, Rosendal noted.
Indeed, since 2014, marijuana sales have totaled $1.5 billion, which generated tax revenue of more than $400 million and $137 million in sales taxes, according to 502data.com, which keeps track of marijuana sales and tax revenue based on state data.
“This is an incredibly sophisticated market that comes with a lot of high-tech jobs, whether it's in agriculture, medical research or finance, it's really an impressive industry,” Vardaman said. “I think for an administration that helped save 1,000 jobs with Carrier Air Conditioning, I think they would think twice before pulling the plug on an industry that employs tens of thousands and generates millions in tax revenue.”
Although the future of pot banking under the Trump administration remains uncertain, some credit unions seem to be optimistic that the market to serve the marijuana industry will only continue to grow.
At last month's GAC, representatives from about 40 credit unions considering entering the marijuana banking space gathered at the Grand Hyatt to discuss the future of partnering with legal pot businesses.
Former NCUA Board Member and current Bacino & Associates Partner Geoff Bacino organized the reception, which featured a short presentation by Partner Colorado Credit Union President/CEO Sundie Seefried. Seefried, whose Arcada, Colo., credit union has been serving marijuana businesses for two years, shared four reasons why she got into it. First, it helped take billions of dollars in cash off the streets in Colorado, improving community safety; second, it lined up with Partner Colorado's mission to serve underserved markets; third, it was a strategic move that allowed the credit union to stay relevant; and fourth, it made a major impact on the institution's bottom line.
She also authored Navigating Safe Harbor, Cannabis Banking in a time of Uncertainty, a detailed, step-by-step, how-to guide for financial institutions that are looking to serve marijuana businesses. The 118-page book is available on Amazon.