NORTH COAST BANKS THRUST INTO FEDS' WAR ON DRUGS

Federal regulators are instructing North Coast banks to scrutinize
their customers' financial transactions for signs of money laundering
and drug deals, the result of the region's reputation for marijuana production.

The little-known policy has drawn local banks into the war on drugs,
forcing them to spend time and money searching for evidence of
illegal activity. To avoid the hassle, some have simply closed the
bank accounts of medical marijuana dispensaries, which were
authorized by California voters in 1996 but remain illegal in the
eyes of the federal government.

Evidence of the policy emerged last month, when the largest bank in
Mendocino County notified shareholders that federal banking
regulators were requiring it to closely watch its accounts because
the North Coast had been designated a high-risk area for money laundering.

Savings Bank of Mendocino County was ordered to more closely monitor
deposits, withdrawals and transfers by its customers, said Charles
Mannon, chief executive of the Ukiah bank.

"This area in general has been targeted by Washington because the
amount of cash that comes out of here," he said.

Mannon and executives at other North Coast banks said regulators have
stepped up their enforcement in the past 12 months.

"They have to be more diligent," said Bill Grassano, a spokesman for
the Financial Crimes Enforcement Network, a division of the U.S.
Treasury Department tasked with administering the Bank Secrecy Act.
"There is a lot of marijuana grown in the area, and there is a lot of cash."

Advocates for medical marijuana complain that pressure by regulators
has resulted in bankers terminating the accounts of pot dispensaries
operating legally under state law.

Mike Johnson, co-founder of a medical marijuana dispensary in Ukiah,
said he has been forced to leave two banks since October and is now
on his third account.

"It's a huge problem," Johnson said. "I operate a legal dispensary
and need a bank account to stay in business."

Wells Fargo closed his account in October, and then Umpqua Bank
closed his account in December, he said. Johnson didn't want the name
of his business or current bank mentioned because he was afraid his
account would be closed again.

"As far as the federal government is concerned, we are all drug
dealers," he said. "Now most dispensaries are working with their
banks on a 'don't ask, don't tell' policy."

Some members of Congress have called upon bank regulators to issue a
written policy that clearly states how banks should treat the
accounts of people operating state-authorized medical marijuana operations.

In a letter sent to U.S. Treasury Secretary Timothy Geithner, 15
members of Congress wrote that they did not want regulators
"targeting or pursuing institutions whose account holders are
involved in a business ostensibly operating in compliance with a
state medical marijuana law."

The issue has become a top priority of medical marijuana advocates,
said Caren Woodson, governmental affairs director at Americans For
Safe Access, the nation's largest medical marijuana advocacy group.

"I just can't imagine with all the banking problems right now, that
eliminating the bank accounts of medical marijuana customers is a top
priority for regulators," she said.

Bankers say that because medical marijuana is not recognized as legal
under federal law, they are required under the Bank Secrecy Act to
spend costly time and resources monitoring and reporting on
businesses involved in the state-authorized medical marijuana industry.

Savings Bank of Mendocino County was the first North Coast bank
specifically ordered to improve its compliance with the act, which
was established in the early 1970s to detect money laundering and
help prosecutors fight organized crime. The law was broadened in the
wake of the 9/11 terrorist attacks, giving regulators and law
enforcement agencies more access to financial records.

The Federal Deposit Insurance Corporation, which regulates banks, is
just making sure that North Coast banks are complying with the law,
said Greg Hernandez, a spokesman for the agency. He said he was not
aware of any crackdown targeting banks in the region.

"One formal enforcement action does not equate to increased
enforcement efforts," Hernandez said. "The FDIC examines banks to
ensure regulatory compliance."

Across the region, banks are taking extra precautions to ensure they
are following federal rules. And that oversight means the banks are
closely scrutinizing anyone who is moving large amounts of cash in
and out of their accounts.

"State and federal law are in conflict with each other," said Bill
Schrader, president of Exchange Bank. "If there are suspicious
activities under federal law, we have to report it."

Last year, Exchange Bank instituted a policy effectively banning
businesses that deal in medical marijuana from opening accounts
because the cost of monitoring the business is too expensive and time
consuming.

The bank already has three full-time employees who do nothing but
monitor for money laundering or other suspicious activities. Mike
Leonard, a retired Sonoma County sheriff's detective who specialized
in white-collar crime, is in charge of Exchange Bank's team.

"We are both a federally designated high-intensity drug area, and a
high-intensity financial crime area," Leonard said. "There is more
drug cash circulating in our economy."

As a result, regulators have pushed North Coast banks to install
advanced equipment that allows bankers to closely monitor the
transactions of all customers and report any suspicious activity to
regulators and law enforcement agencies.

"We are being forced by the regulators to install these very robust
anti-laundering systems," Leonard said. "We can see a lot deeper into
people's transactions now."

Any suspicious activity, whether noticed by a bank teller or the
sophisticated computer equipment, prompts banks and credit unions to
file a report with the Financial Crimes Enforcement Network, which
maintains a giant database available to law enforcement agencies such
as the FBI and the Drug Enforcement Administration.

This month, Savings Bank of Mendocino County agreed to a wide list of
changes as part of the enforcement order it received from its
regulators, the FDIC and the California Department of Financial Institutions.

The bank is required to increase its monitoring of all customers
"with particular emphasis on high-risk operations," which North Coast
bankers read as code for people involved in the marijuana industry.

"Everyone thinks they aren't affected by these outlaws. But they
are," Mannon said. "It requires all our people to be alert."