5 minutes
With the legalization of marijuana production and sale to varying degrees under the laws of several states, the ability of credit unions to serve businesses and persons engaging in such production and sale has been a subject of increasing debate. Recently, a CUES member posed the following question on the CUES Net members-only listserv:
We have a member who lives in Colorado and is a marijuana grower. While it is legal in the state of Colorado, can we, as a federal credit union, located in Florida, use his income to qualify for a loan? It is his sole source of income.
While I have no moral objection to either the business or the desire to do the loan, the answer under current federal (and Florida) law is a clear “no.”
Regardless of Colorado law related to marijuana production and sale, such activities are clear violations of United States law. The federal Controlled Substances Act makes it illegal to “manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense” marijuana. As such, the member’s activities are in clear violation of federal law. Moreover, 18 United States Code Sections 1956 and 1957 criminalize most financial transactions related to the proceeds of marijuana activities. Regardless of the federal government’s current priorities (or lack thereof) in prosecuting such crimes, the current lack of vigorous prosecution in certain states is not binding and can change at any time.
In all, federally-chartered credit unions, state-chartered credit unions and their members continue to be at risk of federal prosecution for any involvement in the marijuana industry.
In the case at hand, the credit union would knowingly receive proceeds from an illegal activity under federal law in the form of payments on the loan. At a minimum, the credit union would be compelled to report such activity under the Bank Secrecy Act as a violation of law under the suspicious activity reporting requirements (and subject to the SAR thresholds). Even if the credit union filed all SARs as appropriate, the credit union would still risk potential prosecution under 18 United States Code Sections 1956 and 1957. Ironically, the SARs filed by the credit union could be interpreted as the credit union’s admission of its own violation of federal law.
Even if we assume that the current lack of prosecution continues, Article XVI, Section 1, of the current federal credit union bylaws provides as follows: “All power, authority, duties, and functions of the members, directors, officers, and employees of this credit union, pursuant to the provisions of these bylaws, must be exercised in strict conformity with the provisions of applicable law and regulations, and of the charter and the bylaws of this credit union.” [Emphasis supplied.] Consequently, the credit union’s board of directors could risk removal and administrative action against both the board and the credit union, should the board permit the approval of the requested loan in violation of federal law.
Even in the absence of regulator scrutiny or criticism, an unhappy employee or member could successfully mount a campaign against the board for removal based on such violations of law. Moreover, the board would risk the loss of indemnification and protection by the credit union as well as coverage under the credit union’s insurance/bond coverage for such a knowing criminal law violation.
If the loan in question is secured by any collateral, the credit union would risk the loss of its lien rights if the collateral is seized by either state or federal authorities in conjunction with any arrest of the member for violation of applicable law. Federal forfeiture law (as well as the forfeiture laws of most states, including Florida) provides law enforcement with authority to seize property used to further certain criminal activities (including illegal drug activities) and property obtained through the benefits of such activities.
Credit unions can generally avoid the loss of their liens on collateral seized under such forfeiture laws by raising the “innocent owner/innocent lienholder” defense in forfeiture proceedings. However, in the case of a loan extended based on income received from activity in violation of federal law, it seems unlikely, if not impossible, that the credit union could successfully argue an “innocent owner/innocent lienholder” defense to loss of the collateral. Even if the loan is not fully secured by collateral, an aggressive prosecutor could make a strong argument that any shares or deposits of the member are subject to forfeiture.
The bottom line is that regardless of the legality of the member’s business activities in Colorado, the violations of federal and the laws of other states arising from such activities make the requested loan an unacceptable risk for the credit union. The fact that prosecution of such violations appears to be a low priority for the federal government at this time does not mitigate this risk and will provide no protection against prosecution of the credit union at some point in the future. Unless and until federal laws are revised to address changing state laws, no loan to a federal credit union member involved in the marijuana business can be considered a safe and sound practice.
John DeLoach is a managing shareholders of the Williams Gautier law firm in Tallahassee, Fla., and lead presenter for CUES’ Director Risk and Compliance Seminar coming up Sept. 14-15, 2015 in Savannah, Ga. Williams Gautier has represented credit unions in Florida, Georgia, Alabama and throughout the United States for more than 30 years. DeLoach has focused his practice for the last 20 years on representing credit unions in compliance, contract, transaction and corporate matters. He has conducted numerous seminars and workshops on credit union law and operations and, in particular, the various compliance issues credit unions face. Reach him at 800.377.3325.
