Special to the Chronicle by Clarence Walker

[Editor's Note: Houston-based crime and criminal justice journalist Clarence Walker is an occasional contributor to the Chronicle. He can be reached at [email protected].]

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.