​Federal regulators stepped into a firestorm of controversy recently when they ordered banks in California’s North Coast area to spy on the transactions of customers who are suspected of making money in the medical marijuana business.

In a heavy-handed bid to crack down on California’s cannabis industry, federal officials have ordered the banks to look out for “suspicious activity” by dispensary owners, reports Clarence Walker at. That is making it very difficult for medical marijuana dispensaries which are legal under state, but not federal law, to conduct business.

Drug Enforcement Administration and FBI authorities claim they are not specifically targeting medical marijuana. They say they’re just looking for “drug traffickers and money launderers,” which of course under federal law includes any marijuana-related banking activity.

The banks — so far — are not being flat-out ordered to not do business with dispensaries. But they are reportedly often opting to just shut down accounts instead of enduring the hassles of investigating and reporting all those transactions to federal authorities.

Financial institutions including Savings Bank, Wells Fargo, the Exchange Bank, the Ukiah Bank, and other operations in the Sacramento and San Joaquin areas are struggling to comply with the government’s orders as federal authorities continue their full-scale onslaught against the legal marijuana trade in the United States.

The enforcement action is reportedly the result of the North Coast’s reputation for marijuana production — Emerald Triangle cannabis, from Humboldt, Mendocino and Trinity counties is famous worldwide — and also includes the arrest of citizens operating medical marijuana businesses which are legal under state law.

According to the Santa Rosa Press Democrat, the policy started last month when the largest bank in Mendocino County told shareholders that federal banking regulators would now require North Coast banks to scrutinize deposit accounts because the area had been designated a “high-risk area” for money laundering, especially 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, CEO of the Ukiah Bank.

“They think we’re all drug dealers,” said Mike Johnson, a marijuana entrepreneur who didn’t want his business’s name printed. Wells Fargo and the Umpqua Bank closed his accounts last year.

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

Medical marijuana advocates are complaining that federal regulation policies are being used to force banks and other financial institutions to enlist in the War On Drugs. The new requirements, according to activists, force banks to spend time and money probing clients’ accounts for evidence of “illegal activity associated with the marijuana business.”

Several banks continue to close the accounts of medical marijuana dispensaries due to the stringent federal requirements. Bank officers said that since marijuana violates federal law, they are required under the Bank Secrecy Act to report on businesses involved in the state-authorized medical marijuana industry.

In a sign of the times, Exchange Bank last year started banning medical marijuana dispensaries from opening accounts because of the time-consuming scrutiny they would have to undergo and because of the expense of being forced to buy pricey account 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.”

If a bank employee or anti-laundering software system detects “suspicious activity,” the feds have required banks and credit unions to file a report with the Financial Crimes Enforcement Network (FINCEN), which operates a huge database available to both the DEA and the FBI.

The federal government cannot force states to comply with federal law or require states to enforce federal law, but the United States Department of Justice has the authority to prosecute individuals and organizations in violation of federal laws against sales and possession of marijuana.

This law effectively blocks banks from serving those in the legal medical marijuana business who must operate business bank accounts to accept credit and debit cards for their services.

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​It’s a growing problem, according to Allen St. Pierre, executive director of NORML. “Our organization is regularly contacted by cannabis businesses that can’t make daily deposits or have credit card processing,” St. Pierre 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.”

Which, of course, is the idea, if you’re a federal drug warrior.

“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,” St. Pierre said.

In a May 2010 letter, 15 members of Congress, led by Rep. Barney Frank (D-Mass.), issued a letter written by Rep. Jared Polis (D-Colo.) to Treasury Secretary Timonty Geitner.

“Legitimate state-run businesses are being denied access to banking services, which does not serve the public interest,” the letter said. The letter requested “formal written guidance” to assure banks would not be federally prosecuted for conducting business with 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, communications director at Marijuana Policy Project

Northern California dispensaries aren’t the only ones having difficulty opening and maintaining bank accounts due to federal policies.

Sue Harank, co-owner of Alpine Herbal Wellness in Denver, Colorado, in less than a year of operation has been forced to switch banks four times after the institutions closed her accounts with no warning.

Harank called the banking situation “one heck of a nightmare.” She now does business with Colorado State Bank, the only bank in the state allowing people in the legal medical marijuana trade to hold business accounts, according to Banktime.com

​Don Duncan, the California director of medical marijuana patient advocacy group Americans for Safe Access and operator of a dispensary, has had his bank accounts shut down without notice as well. “Banks can’t figure out if its OK to do business with medical cannabis organizations,” Duncan said.

The federal scrutiny of the bank accounts of customers making “suspicious” deposits has created more business for alternative financial services.

According to Banktime.com, Marijuanapos.com is one of the few financial institutions to offer banking services for legal marijuana businesses, including credit and debit card processing. The outfit works with banks that deal with “high-risk” clients, according to Jesse Cretaro, marketing director at Marijuanapos.com.

Another financial service, Direct Bancard of Livonia, Michigan, offers medical marijuana dispensaries merchant services located overseas to bypass legal conflicts, according to Executive Vice President Martin Khemmoro.

Guardian Data Systems offers similar services, but only with dispensaries legal under California state law. The company has been trying for years “to offer honest and secure services to an emerging industry,” said CEO Lance Ott.

Meanwhile, medical marijuana advocates say that all they ask is for those in the industry to have access to safe and transparent banking services like everyone else.

“All medical marijuana merchants want to do is obey the law and do what’s normal,” Duncan said.