A recent federal district court in Colorado ruling that the Kansas City Federal Reserve Bank (KC-Fed) could deny a master account to a Colorado state chartered credit union created to serve marijuana businesses may be a catalyst for resolving the divergence on marijuana banking.
This case strengthens the ability of regional Federal Reserve Banks to independently decide whether marijuana businesses in their districts will have access to the financial system. We are already starting to see this happen. As BPC previously noted, the San Francisco Federal Reserve Bank has shown a higher degree of tolerance towards marijuana banking. To avoid inconsistent policy on this issue, the Federal Reserve Board in Washington, D.C., may have to address the issue in the same way the Supreme Court resolves inconsistencies between courts.
Fourth Corner Credit Union (FCCU) was created to provide banking services to marijuana related businesses operating in Colorado. To operate as a credit union, generally you must be granted a charter, obtain deposit insurance, and procure a master account. Master accounts allow banks and other financial intermediaries to process and settle payments using the Federal Reserve operated Fedwire service. FCCU successfully obtained a Colorado state charter and applied for a master account with the KC-Fed which serves all banks and credit unions in Colorado. The KC-Fed denied FCCU’s application. FCCU then sued the KC-Fed arguing that it was not in the regional fed’s discretion to deny FCCU access to the payment system.
The KC-Fed responded with three arguments. First, they challenged Colorado’s authority to create a class of state chartered financial institutions to serve marijuana firms under the Constitution’s Supremacy Clause, which provides that when federal and state law conflict, the state law will be treated as void. The KC-Fed argued it follows that any state attempt to provide support for commercial marijuana was inconsistent with federal law outlawing its use and thus was “void and without effect.” Second, they argued that courts are not allowed to use their powers to support criminal activity. Therefore, so long as marijuana is illegal under federal law, a court may not order any Federal Reserve Bank to provide access to marijuana related financial firms because doing so would force it to facilitate illegal activity. Finally, the KC-Fed argued it had general discretion to accept or deny master account applications. In doing so, they cited the plain language of the statute which uses permissive terms such as “[a]ny Federal reserve bank may receive … deposits” (emphasis added) from various financial institutions.
The court focused on its inability to use court authority to further criminal activity and did not consider the KC-Fed’s Supremacy Clause argument. The court noted federal guidance on marijuana banking, stating that law enforcement and regulators might “look the other way” if banks provide services to marijuana firms but, as a federal court, it would not. Concluding its analysis, the court also indicated, with some limitations, that KC-Fed does at least have the discretion to refuse master accounts to firms proposing to engage in criminal activities.
Implications for Broader Marijuana Banking
By deciding the case on the grounds that a court should not use its power to further criminal activity and acknowledging some Federal Reserve Bank discretionary authority over master accounts, the court effectively granted regional Federal Reserve Banks discretion over whether marijuana related financial firms will have access to the financial system. Since each Federal Reserve Bank is responsible for financial institutions in a specific region, this order could open the door for marijuana policy to effectively be set by regional Federal Reserve Banks rather than elected state legislatures.
If Federal Reserve Banks begin to direct marijuana policy, they may become like the federal circuit court system. Federal circuit courts are responsible for a geographic region called a circuit and review cases from that circuit. Circuit decisions on these cases then become the law of the circuit. Circuit courts are not required to agree with each other and sometimes disagree on the interpretation of specific laws. These disagreements result in a “circuit splits” where the law is different in the different circuits. Circuit splits can only be resolved by a new circuit decision, an act of Congress, or more often by a Supreme Court decision.
In much the same way that a Supreme Court decision is binding on all lower courts, a Federal Reserve Board rulemaking is binding on regional Federal Reserve Banks. It seems like such a split on marijuana banking may now be taking place between the KC-Fed and its counterpart in San Francisco. Thus, it may take a rulemaking by the Federal Reserve Board to resolve the issue.