FEDS PUSH BANKS TO SPY ON LEGAL MARIJUANA DEALERS

Federal regulators ignited a firestorm of controversy recently when
they ordered banks located in the North Coast area of California to
spy on transactions of customers who are suspected of making money in
the marijuana business. In a bid to crack down on California's
marijuana industry, regulators have ordered banks to look out for
suspicious activity by those running such operations, but that is
leaving legal -- under state, but not federal law -- medical
marijuana businesses out in the cold.

Although DEA and FBI officials are not specifically targeting medical
marijuana, they say they are looking for drug traffickers and money
launderers, and they regard any marijuana-related banking activities
with suspicion. The banks are not being ordered to not do business
with dispensaries, but are instead closing accounts rather than put
up with the hassles of investigating and reporting those transactions.

Banks in the North Coast region, including Savings Bank, Wells Fargo,
the Exchange Bank, and Ukiah Bank, as well as other financial
institutions in the Sacramento and San Joaquin areas are scrambling
to comply with the government's order as the feds continue their
onslaught against the legal marijuana trade.

The enforcement action is the result of the North Coast's widespread
reputation for marijuana production and also includes the arrest of
citizens in the area operating legal medical marijuana businesses
under California state law. California voters passed Proposition 215
in 1996, legalizing the medical use of marijuana for patients whose
doctors have recommended they use it.

According to the Santa Rosa Press-Democrat, the policy took effect
last month when the largest bank in Mendocino County informed
shareholders that federal banking regulators would now require the
North Coast banks to scrutinize deposit accounts because the area had
been designated a high-risk area for money laundering, particularly
from those in the medical marijuana business.

"This area in general has been targeted by Washington because the
amount of cash that comes out of here," said Charles Mannon, chief
executive of the Ukiah Bank.

Mike Johnson, an entrepreneur in the marijuana industry who requested
that this article not identify the name of his business, felt the
squeeze from the federal regulators when Wells Fargo and the Umpqua
Bank closed his accounts last year. "They think we're all drug
dealers," Johnson said.

Those in the trade familiar with the feds' regulation policy complain
of how the government has forced banks and financial institutions to
enlist as foot soldiers in the war on drugs. The new requirements
force banks to expend unnecessary time and money probing clients'
accounts for evidence of illegal activity associated with the
marijuana business, they say.

To bypass the stringent rules, several banks closed the accounts of
medical marijuana dispensaries. Bank officers said that since medical
marijuana is a violation of federal law, they are required under the
Bank Secrecy Act to report on businesses involved in the state
authorized medical marijuana industry.

Last year, Exchange Bank issued a policy which prohibits medical
marijuana businesses from opening up accounts because of the
time-consuming scrutiny they would have to undergo and because of the
expense of having to purchase pricey monitoring systems.

"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."

The extensive monitoring of bank accounts works this way: If a bank
agent or its anti-laundering system detects suspicious activity, the
feds have required banks and credit unions to file a report with the
Financial Crimes Enforcement Network (FINCEN), which operate massive
databases available to the FBI and DEA.

Currently there are 14 states including the District of Columbia
allowed to sell medical marijuana legally under state law, but under
the federal Controlled Substances Act of 1970, marijuana is
classified as an illegal Schedule 1 drug.

The federal government cannot force states to comply with federal law
or require states to enforce federal law, but the US Department of
Justice has the authority to prosecute offenders and organizations in
violation of federal law against sales or possession of marijuana.
This law effectively blocks banks from dealing with those in the
legal marijuana business who must operate business accounts to accept
credit and debit cards for their services.

"Our organization is regularly contacted by cannabis businesses that
can't make daily deposits or have credit card processing," Allen St.
Pierre, executive director of NORML, told the Chronicle. "The
inability of cannabusinesses to gain access to regular banking and
financial services continues to hamper the expansion of medical
cannabis dispensaries."

St. Pierre took a shot at the Department of Justice. "Despite the
2009 'Ogden' memo from the Obama administration's attempt to allow
greater autonomy for states to regulate medical cannabis, the memo
didn't address the legal concerns expressed by banks and financial
services who fear they are violating federal laws if they do business
with cannabis businesses."

In May 2010, following several attempts to pass legislation to
eliminate federal penalties for medical marijuana, 15 members of
Congress, led by Rep. Barney Frank (D-MA) issued a letter written by
Rep. Jared Polis (D-CO) to Treasury Secretary Timothy Geithner.

"Legitimate state-legal businesses are being denied access to banking
services, which does not serve the public interest," the letter said.
The letter also requested "formal written guidance" to assure banks
would not be federally targeted for conducting business with medical
marijuana dispensaries.

"They were trying to ensure that medical marijuana dispensaries could
have banking services provided to them because there's so much
capital involved," said Mike Meno, director of communications for the
Marijuana Policy Project.

It's not just Northern California. Sue Harank is the co-owner of
Alpine Herbal Wellness in Denver Colorado. This medical marijuana
dispensary has been operating less than a year. Within this time,
Harank has been forced to switch banks four times after the
institutions closed her accounts without prior warning.

Harank called situation as "one heck of a nightmare." According to
Banktime.com, Harank now does business with Colorado State Bank, the
only bank in the state allowing people in the legal marijuana trade
to hold business accounts.

Don Duncan feels the adverse treatment as well, when dealing with
financial institutions. Duncan, the California director of the
pro-medical marijuana advocacy group Americans for Safe Access, had
his bank accounts shut down without notice. "Banks can't figure out
if it's okay to do business with medical cannabis organizations," he said.

US Attorney General Eric Holder issued a memo in October, 2009,
expressing administration policy of not utilizing federal resources
to pursue "individuals whose actions are in clear and unambiguous
compliance with existing state laws providing for the medical use of
marijuana." Despite Holder's direct orders the federal troops still
pursue those legally operating marijuana businesses.

"It doesn't make sense. It is an un-American thing for the feds to
do," said Mike Johnson. "Every major bank in California has been told
not to handle marijuana accounts."

Legal conflicts surrounding the bank's secrecy laws forcing banks to
report customers making suspicious deposits has created a "boom" in
business for lesser known financial services. According to
Banktime.com, Marijuanapos.com is one of the few institutions to
offer banking services, including credit and debit card processing,
for legal marijuana businesses.

Jesse Cretaro, the marketing director of Marijuanapos.com, said they
work with banks that deal with high-risk clients. Another financial
service, Direct Bancard of Livonia, Michigan, offers medical
marijuana providers a prime-time Cadillac service. Executive Vice
President Martin Khemmoro explained that Direct Bancard often uses
merchant services located overseas to bypass legal conflicts.

Guardian Data Systems offer similar services but deals only with
medical marijuana dispensaries legal under California state law.
Lance Ott, Guardian's chief executive officer said he's been trying
for years "to offer honest and secure services to an emerging industry."

Meanwhile dedicated advocates for the medical marijuana industry
insist that all they want is for those in the industry to have access
to safe and transparent banking services, like other professional
entrepreneurs.

"All medical marijuana merchants wants to do is obey the law and do
what's normal," said Duncan.

But that's unlikely to happen as long as federal marijuana
prohibition remains intact. While the federal raids on medical
marijuana dispensaries have decreased -- if not ended completely --
the feds have demonstrated that they are determined to use all the
weapons in their arsenal to continue to go after what they consider
to be a criminal industry.