Banks, credit unions caught between state and federal marijuana laws
Brattleboro Savings and Loan President and CEO Dan Yates has been serving on a state subcommittee to explore taxation and regulatory policy for legalizing recreational marijuana — a policy change he thinks will be inevitable.

Banks, credit unions caught between state and federal marijuana laws

Brattleboro Savings and Loan President and CEO Dan Yates discusses his work in Montpelier to hash out the details of regulation and taxation in a world where recreational marijuana is legal

BRATTLEBORO — Dan Yates, president and CEO of Brattleboro Savings and Loan, serves as a member of the Taxation and Regulation Subcommittee of the state's Marijuana Commission, which is looking into legalizing marijuana in Vermont.

I find it fascinating. When we talk about legalizing marijuana - and it does look like the state is moving in that direction - we pay attention to very important things like impairment and prevention and regulation.

But for Yates, who is heading up a bank, he is stuck in a tricky kind of gray area between state law and federal law, because even if the state should regulate marijuana, the federal government still sees it as illegal - and the feds govern a lot of what banks can and cannot do, and what kind of services they provide.

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Olga Peters: So, Dan, what is your greatest concern as someone who is managing the bank right now, if Vermont were to go forward with legalizing?

Dan Yates: I think the biggest challenge for Brattleboro Savings and Loan, as well as all the other banks and credit unions in Vermont, is the fact that at the federal level marijuana is a controlled substance. It is illegal and, therefore, as a federally insured financial institution, we are technically prohibited from engaging in any business that is considered illegal.

And one of the things that most concerns the federal government about this industry, aside from its concern with relations to health issues, is where organized crime fits in and how this industry is used for the purpose of laundering money.

O.P.: Which, I have to say, just kind of blows my mind, because as a layperson I'm thinking, Well, if marijuana is legal in Vermont, how could you possibly launder money if it's legal money? But you're right. There are forces outside Vermont that could potentially come to bear.

D.Y.: Absolutely, as some of the studies that we've read in places like Colorado talk about the volume of business and the fact that it is right now a cash business because of the inability to get banking services. You hear about retailers who have vaults filled with cash.

Now, as banks begin to think about offering these services because of guidance that has been provided by the federal regulators, there is always the risk that it's more than the cash generated from the sale of recreational marijuana that's going to find its way into the system to try and be laundered as legitimate.

O.P.: When you say services, you mean everything from providing a bank account to providing a loan. And one of the risk to banks is if you, say, lend money to a new marijuana business. And then if the feds decide that business is shady, for whatever reason, they can seize its assets, which then of course leaves the bank holding the bag.

D.Y.: So to speak. Exactly. The federal government can come in and seize the assets, which typically would be the collateral the bank would take to secure the loan. Now the bank is facing [being unable to recover its assets from] a business that has been put out of business. No secondary source of repayment will go against the assets that it held as collateral, and the bank would be looking at potentially significant losses.

O.P.: So as you're working on this commission and you're trying to kind of navigate this ground between federal and state, you know, one thing that is fascinating to me is how we are potentially looking at an industry that has been operating underground, whether it's just a neighbor selling marijuana to a friend for medical reasons or if it's a full-on multimillion-dollar drug business -

D.Y.: Empire.

O.P.: - empire. There you go. This is an industry that has been running underground and technically has the opportunity to come to light and legitimize. You worry about the feds, but what are some of the other issues you're trying to watch and pay attention to?

D.Y.: Well, as I think about the legalization of recreational marijuana, I compare that to, say, liquor and think back to Prohibition, when it, too, was an underground industry. And while certainly there were legal distillers in places like Canada, Mexico, and other parts of the world, there was a huge amount of bootlegging going on.

So you also begin to think about the potential risks to the health of the consumer. Consider your bathtub gin. What was that, anyway?

O.P.: Stuff that burned your eyeballs out, basically.

D.Y.: I'm sure, among other things. And so, when I think about the marijuana business, one of the advantages I see to legalizing at the state level and - ultimately, I think - at the federal level will be quality controls.

Will you have an agency like the Department of Liquor Control assume responsibility for this industry where they can manage the levels of THC [tetrahydrocannabinol, the main psychoactive chemical component of marijuana] in the various products that are produced? Who are the producers?

We really need to make sure that it is a well-regulated and -licensed industry.

O.P.: What do you feel is really important for people to understand right now about legalization in Vermont?

D.Y.: I think the important thing for people to understand is that the governor, through the appointment of this commission and the subcommittees, has taken both a very pragmatic approach and a very structured approach to the question of legalizing recreational marijuana. My personal opinion is that it will happen.

The governor wants to make sure that it happens in a manner that is as safe as possible, as secure as possible. So he's really charged the commission and the subcommittees to look at health issues, taxation, regulation, safety.

In states where recreational marijuana has been legalized, studies have shown the increase in traffic fatalities where THC has been present in the victims of those accidents. It makes sense that somebody who is smoking marijuana and perhaps in combination with alcohol may be more likely to be involved in an accident than somebody who isn't.

I think that the ideal outcome of this commission is to find a way to legalize the recreational use and sale of marijuana.

O.P.: And since it does look like we are heading in that direction to legalize recreational marijuana, where will that leave financial institutions? Because if the feds still see marijuana as illegal, and you're still governed by the feds...

D.Y.: Well, that's a big risk for us, because part of it depends on the mood at the U.S. Justice Department.

O.P.: Right.

D.Y.: And also with the regulatory agencies - whether it's the FDIC, the Office of Comptroller of the Currency, the Federal Reserve, the National Credit Union Administration - there are still significant risks to the banks.

For example, Deputy Attorney General James Cole wrote a memorandum back in 2014 about banks engaging in this business saying that if banks follow the guidance that has been provided by the regulatory agencies, the DOJ may choose not to prosecute.

They're not saying that they won't.

And the risks are great - again, related to the money laundering aspect. We could face fines of up to half a million dollars. And somebody in the bank could go to jail for 20 years.

Personally, I'm disinterested in spending time in prison. Nor am I interested in any of my employees spending time in prison as a result.

O.P.: Right. And, however, on the other side of the coin just to play devil's advocate, there is also a pretty good chance that marijuana will be a revenue generator for the state.

D.Y.: Absolutely. That's the reality of it. Like alcohol, like tobacco - and it doesn't matter what your personal feelings are on those substances, they generate tax revenue. The Department of Liquor Control for the state of Vermont contributes roughly $25 million to the general fund, once all of the expenses have been covered.

O.P.: That's significant.

D.Y.: It is.

O.P.: We are a small state. We are a small county, and we are a county that borders two other states. Have you been able to give thought to how the bank may be impacted going down the road, depending on what Massachusetts or New Hampshire does?

D.Y.: We have thought about that, particularly, because, as you know, Massachusetts passed a legalization bill last year. It wasn't passed at the legislative level; it was a referendum on the part of the voters.

So the state is struggling with how to implement the sale of recreational marijuana. In the meantime, you are allowed a certain number of plants to be grown in your own home for your own consumption. However, once they've figured out how they're going to manage the public sale of marijuana, we'll have to look at that and, you know, where might the closest shop be and might they want to bank with us.

O.P.: When I hear the folks from the state talk about impacts from other states, they're really looking at tourism as something they would have to consider for people coming from outside Vermont. I think this is just because so many of them are in the Montpelier and Burlington area. Because [in the Brattleboro area] we share our workforce and the labor market with two other states, you're right. You might have a shop in Greenfield that could potentially approach you.

D.Y.: Absolutely. We will provide banking services to businesses outside of Windham County, whether they're in Franklin County, Mass. or in Cheshire County, N.H. So it really depends upon location and what the bank is willing to do. It drives whether or not someone banks with us.

O.P.: I realize that the subcommittee's in the early stages of its work, but it seems like there's a lot more uncertainty with all these intricacies than there is yes-we-know-how-we're-going-to-move-forward-with-this. Is that just because the work is so new, or is it just because there are that many unknowns around marijuana?

D.Y.: I would say it's both. The governor signed his executive order in September, the subcommittees had their first meetings at the end of September, beginning of October, and we're meeting pretty regularly. A couple of times every month I'm up in Montpelier.

And as we dig into this issue, we find that there's more and more that has to be thought through, that it's not simply a matter of well-this-makes-sense-so-let's-do-it-and-we'll-figure-out-how-to-get-all-the-pieces-together-afterwards.

O.P.: And does your subcommittee have a milestone, like a report that's due?

D.Y.: All the subcommittees do have milestones or deliverables. And, on January of 2018, each of the three subcommittees is expected to provide at least their initial reports to the commission.

But the work goes on. We have another deadline in December of 2018. So I think one thing that people should not expect is that this is all going to be done in 2018. I think it's probable that it will take longer.

I think, again, people should be patient. There are a lot of dedicated people working very hard at this. So stay tuned.

O.P.: How helpful has it been to look at other states like Colorado that have legalized marijuana?

D.Y.: It's been helpful for the Health Subcommittee, and it's been helpful for the Subcommittee on Safety. Not so much when I think about it from the banking standpoint. I have yet to find a bank that provides banking services, either in Washington or Colorado. I continue to search, and contact colleagues in those states.

I think really the answer for us in Vermont is if the banks and credit unions come together and agree upon an approach to providing banking services that are uniform.

One reason is safety in numbers. If we're all willing to provide these services, it's less likely that we're going to run afoul of the federal government.

Two, if we all come together with uniform services, we can minimize the risk that we're afraid of now, which is, will organized crime or other bad apples use our banking system for nefarious purposes?

O.P.: Thank you, Dan. It does sound to me as we're talking that the state is working really hard to come up with a system that works for Vermont, even if it takes time.

D.Y.: Absolutely. And I think it's a commonsense approach.

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