A record number of banks and credit unions are doing business with state-legal marijuana businesses despite ongoing federal cannabis prohibition – and attempts by the Federal Reserve to help enforce it.
The federal Financial Crimes Enforcement Network (FinCEN) tracks cannabis banking trends. According to the latest FinCEN data, 812 financial institutions reported working with marijuana businesses during the second quarter of 2023. That was the most since the FinCEN started tracking the numbers in 2014.
The number of banks and credit units working with marijuana businesses increased from 773 in the first quarter of the year.
FinCEN compiles the data based on financial Suspicious Activity Reports (SARs) banks are required to file for marijuana-related business (MRB) clients.
According to FinCen data, California financial institutions did the most marijuana-related business. Banks and credit unions filed 3,757 SARs for Q2. Surprisingly, Oklahoma was second with 2,531 SARs. According to Marijuana Moment, this is due to the fact that the Oklahoma medical marijuana program allowed for a massive proliferation of dispensaries.
Interstingly, Kansas law does not allow for regulated access to cannabis, but banks in the state filed 282 SARs. This indicates that some financial institutions in the state are servicing black market marijuana businesses.
The increase in banks working with marijuana businesses comes despite the threat of enforcement actions against them. The feds can prosecute bankers for knowingly engaging with cannabis businesses under the Bank Secrecy Act, the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act.
The Federal Reserve has served as an enforcement arm in the drug war, cutting off vital services to financial institutions that defy federal prohibition and service marijuana businesses.
For instance, in 2015, the Federal Reserve Bank of Kansas City denied Fourth Corner Credit Union’s application for a master account. The Denver-based credit union was formed by Colorado’s state-licensed cannabis manufacturers as a non-profit cooperative. By denying its application, the Fed prevented the institution from accessing the Fed’s payment facilities, including its check clearing, wire transfer, and ACH facilities. This made it virtually impossible for Fourth Corner to do business.
In February 2018, the Federal Reserve Bank of Kansas City finally gave conditional approval for Fourth Corner’s master account. However, according to the Marijuana Business Daily, the credit union will not serve plant-touching businesses. It will cater to “advocacy groups, charities and ancillary companies such as accountants.”
State-chartered banks do not have to be members of the Federal Reserve system. But as it did with Fourth Corners, the Fed can deny any non-member bank or credit union access to its services. In other words, the Federal Reserve can lock any bank attempting to operate in the cannabis industry out of the broader banking system, making it impossible for them to do business with any other bank or merchant.
Marijuana Monent offers a couple of possible reasons for the uptick in the number of banks and credit unions willing to defy the feds.
First, New York and Connecticut both launched adult-use marijuana programs since the last FinCEN update. More states legalizing weed means more marijuana businesses. The bigger the state-legal cannabis market gets and the more businesses that exist, the harder it becomes for the feds to maintain prohibition. As federal enforcement resources get stretched thinner and thinner, punitive action becomes less likely, and more banks are willing to take the increasingly negligible risk in order to tap into a lucrative market.
Second, a federal cannabis banking reform bill is moving through Congress. The belief that regulatory relief may be coming may make some banks willing to go ahead and take the plunge now.
It should be noted that federal-level marijuana reforms are being driven by state and local action. Legalization at the state level has made it impossible for the feds to maintain prohibition. After years of aggressive enforcement in an attempt to stop the expansion of marijuana legalization, the federal government is quietly giving up the fight.
Under the federal Controlled Substances Act (CSA) passed in 1970, the federal government maintains complete prohibition of marijuana. Of course, the federal government lacks any constitutional authority to ban or regulate cannabis within the borders of a state, despite the opinion of the politically connected lawyers on the Supreme Court. If you doubt this, ask yourself why it took a constitutional amendment to institute federal alcohol prohibition.
The legalization of medical marijuana removed a layer of laws prohibiting the possession and use of marijuana. This is significant because FBI statistics show that law enforcement makes approximately 99 of 100 marijuana arrests under state, not federal law. When states stop enforcing marijuana laws, they sweep away most of the basis for 99 percent of marijuana arrests.
Furthermore, figures indicate it would take 40 percent of the DEA’s yearly budget just to investigate and raid all of the dispensaries in Los Angeles – a single city in a single state. That doesn’t include the cost of prosecution. The lesson? The feds lack the resources to enforce marijuana prohibition without state assistance.
The increasing willingness of banks to flout federal law is further proof that state and local actions can undermine the will of the federal government.
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