The legal marijuana business is booming — worth $1.53 billion in 2013, and predicted to grow to $10.2 billion in the next five years, according to a 2013 report by ArcView Market Research. Twenty states have approved marijuana for medical use, and eight more have pending legislation on the books. Colorado and Washington have legalized marijuana for recreational use, with more states showing significant interest.

Billions of dollars in new markets should mean a windfall for banks, right? 

Not in this case. 

The fact that state laws conflict with federal anti-money laundering statutes means banks are prohibited from offering services to businesses who sell pot, or to employees of those businesses. As financial firms seek to diversify operations in the face of contracted mortgage sales, banks are forced to sit on the sidelines of a profitable new industry.

“Basically, banks that offer services to these businesses risk prosecution from both state and federal law enforcement officials,” said Rob Rowe, vice president and senior counsel for the American Bankers Association

And banks in the affected states have taken that risk to heart — refusing to open accounts for businesses or individuals connected to the industry, and closing down accounts at the slightest sign of money from the trade. In other words, following the string of federal anti-money laundering laws that go back to the Bank Secrecy Act (BSA) of 1970.

Every bank that was contacted for this story either declined to comment or released a statement similar to this from Wells Fargo: 

“While new state laws will permit marijuana businesses in Colorado and Washington, and medical marijuana dispensaries are legal in some states, the sale and use of marijuana is still illegal under federal law. Our policy of not banking marijuana businesses is based on applicable federal laws and our own assessment of our responsibility.” 

When state laws conflict with federal laws, the supremacy clause in Article VI of the Constitution kicks in and the federal law has the final say. Unless the federal government decides not to enforce the federal law, leaving citizens (and in this case, banks) in a legal no-man’s land. 

Last August, after voters elected to legalize in Colorado and Washington, the Department of Justice released a memo updating its enforcement policy for marijuana production, processing and sale that was initially cheered by proponents of the state laws, but quickly proved to only muddy the waters regarding regulation. It outlined eight enforcement areas that federal prosecutors considered a priority, leaving state and local officials to enforce (or not enforce) the rest. 

These eight areas include preventing the distribution of marijuana to minors and to other states where it is not legal, and preventing it from being grown on federal public land. Two of the eight are particularly relevant for banks and others in the financial sector:

Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels.

Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity.

Basically, money-laundering. 

But even if banks were buttoned up on those eight areas, the DOJ letter makes it clear that they can be in trouble. “Finally, nothing herein precludes investigation or prosecution, even in the absence of any one of the factors listed above, in particular circumstances where investigation and prosecution otherwise serves an important federal interest.” 

That kind of caveat is big enough to drive a truck through, and banks responded accordingly. “Obviously what the Department of Justice and Treasury intended was for these businesses to start accessing banking on a broader scale, but the banks for the most part are reluctant to step in and provide services,” said Taylor West, deputy director of the National Cannabis Industry Association.

Meanwhile, without banking services, legal marijuana businesses are operating on a cash basis, transporting their money in rolls of twenties and hundreds in everything from large suitcases to armored cars, West said. 

“At the end of the work day these businesses are trying to move cash off the premises to a secure location, sending multiple people out of the building at the same time, or using decoy cars to go in different directions,” West said.

This puts the legal businesses in a dangerous position to be targeted for robbery, or conversely, to commit theft themselves on a grand scale. Indeed, if Breaking Bad were set in today’s Colorado or Washington, there would be no need for Walter to operate a car wash to filter his meth money.

“The current situation is an anomaly because it forces the industry to be all cash,” said Rep. Earl Blumenauer, D-Ore., who supports a change in the federal law. “This is lunacy because it promotes tax evasion, money laundering and outright theft.”

While the Drug Enforcement Agency tries to figure out how to separate the good players from the bad, and state and local governments reap a financial windfall by taxing the legal marijuana businesses, banks are caught in the middle.

In an effort to make things clearer, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN)issued a guidance letter in February to banks.

“This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.”

If only. Rather than providing a solution, the guidance set off a firestorm among banking groups and on Capitol Hill.

FinCEN’s guidance addressed the customer due diligence that banks need to apply to their dealings with these businesses and outlined new Suspicious Activity Reports that banks would need to file in certain cases. It also lists a number of “red flags” for banks to look out for. 

The Colorado Bankers Association (CBA) issued a scathing press release that opened by stating, “The guidance issued today by the Department of Justice and the Treasury only reinforces and reiterates that banks can be prosecuted for providing accounts to marijuana related businesses.“

Don Childears, CBA’s president and CEO, said, “After a series of red lights, we expected this guidance to be a yellow one. This isn’t close to that. At best, this amounts to ‘serve these customers at your own risk’ and it emphasizes all of the risks. This light is red.”

The CBA press release also pushed back against FinCEN’s guidance to banks on due diligence and acting on red flags, saying it “imposes a heavy burden on them to know and control their customers’ activities, and those of their customers. No bank can comply.” 

The fight between federal authorities is just as heated. Two Senate heavyweights — Sen. Chuck Grassley, R-Iowa, and Sen. Dianne Feinstein, D-Calif. — fired off a letter to FinCEN on April 2 that asked the Treasury to defend its position, saying the guidance “severely undermines the mission of the agency,” and that it was “dangerously misleading.”

The senators’ letter asked FinCEN to answer eight questions “to help Congress, financial institutions, and the American public understand both the basis and the real-world implications of FinCEN’s guidance.” The list of questions challenges FinCEN’s authority to give guidance that goes against federal law, and serves as a chilling outline of all that could go wrong for banks. 

FinCEN answered the senators’ questions on May 8, (see sidebar), appearing to backpedal on much of the initial guidance. The answers did nothing to mollify Grassley or Feinstein. Grassley released this statement: 

“Unless federal law is changed, selling marijuana, laundering marijuana proceeds, and aiding and abetting those activities all remain illegal. FinCEN’s guidance to financial institutions is absolutely contrary to the mission of the agency – it purports to ‘enhance the availability of financial services for … marijuana-related businesses’ – so it’s only logical that FinCEN would now deny the stated purpose of that guidance. The agency also concedes the obvious – that its guidance does not change federal criminal law, affect its enforcement in any way, and that there are risks in doing business with the marijuana industry which should give the financial services industry little confidence that it will be protected should an institution be federally prosecuted for getting involved in illegal activities.” 

FinCEN spokesman Steve Hudak told HousingWire: “As we try to make plain in our guidance, we do understand how difficult this issue is, and within the limits of our authority we have tried to offer at least a partial solution for banks, which we agree are in a difficult position.” 

That difficult position won’t get better until the federal law changes, according to Blumenauer, who has been a part of 11 separate pieces of legislation to address the issue. Last July U.S. Reps. Ed Perlmutter, D-Colo., and Denny Heck, D-Wash., introduced The Marijuana Business Access to Banking Act with bipartisan support, including Blumenauer. 

The bill would allow banks to service legal marijuana customers without fear of federal retribution. “Any depository institution and/or the employees shall be immune from federal prosecution or investigation solely for providing banking services to a covered business.” The bill’s definition of a covered business is fairly broad, encompassing everything from growing to distributing. 

But what are the chances of the bill passing? At press time the bill had yet to even be scheduled for a hearing in either of its committees — Financial Services and Judiciary. 

“I don’t know if this Congress has the capacity to take on things that are even relatively minor in controversy,” Blumenauer said. “The current situation is completely illogical and counterproductive so I keep hoping that people will come to their senses and move along to fix it.” 

Colorado and Washington have tried to fix the problem themselves, proposing state charters for banks and state co-ops that would function like credit unions, but with no federal backing. West sees the federal change as the only viable option. 

“All of these financial institutions are insured at the federal level. We’ve looked at a lot of these kinds of alternatives and rejected them as workable solutions,” she said. “The most substantial and lasting solution is for Congress to specifically address this issue.” 

The current situation is likely to get more chaotic, Blumenauer said, as more states come on board. Alaska is voting on legalization this summer and there is a campaign to put it on the ballot in Oregon in the fall. Florida will vote in November and a poll done in April by Quinnipac Medical University found 80% of Florida voters across all age ranges support the idea of legalizing marijuana for medical use.

States looking at Colorado’s tax benefit from its legal trade have plenty of incentive to try to legalize. Colorado collected $3.5 million in taxes and fees from the legal trade in January alone, and expects that to rise to $184 million in taxes in the first 18 months of its legalization.

“This industry is going to grow exponentially in the next couple of years, and there’s an opportunity in the financial services industry to have hundreds of new clients,” Blumenauer said. 

“It’s naïve to think that there aren’t dozens if not hundreds of people right now who are using bank accounts surreptitiously in this business, which poses problems to banks with compliance,” Blumenauer said. “It’s costing banks money at a time when it could potentially be an opportunity for them to have business in a growth sector.”

West said that some banks do find ways to service clients, albeit on a very limited scale. “Some parts of the industry have been able to work with banks if they aren’t directly handing product — by providing consulting services, equipment, etc.”

But attracting even more regulatory interest in their bank at a time of already intense scrutiny is unlikely to appeal to most banks, according to ABA’s Rowe. “As the attention on the issue continues, and as it becomes readily apparent that banks run risks associated with any kind of banking service for a marijuana business, the focus has moved from direct relationships with marijuana businesses to any related connections,” Rowe said.

“In this instance, where the employee of a marijuana business is earning income from what federal law still classifies as illegal, then accepting mortgage payments from that individual could be deemed money laundering in the eyes of an eager-beaver prosecutor. As a result, banks are starting to steer clear and even close out those relationships.”

That lost opportunity for banks is also bad news for those businesses trying to pay employees, utility bills and even taxes in cash. “There is a real concern that people aren’t going to take this seriously until someone gets killed,” West said. “Even people who are not comfortable with the whole idea of a legal, regulated cannabis industry can see that there is no actual benefit to forcing these businesses to operate outside the banking system.”

Blumenaur agreed. “There are still hundreds of businesses caught in never-never land,” he said. “The more we can bring it out of the shadows the better off everybody is going to be.”

For banks eyeing a potential golden goose in 21 states, the solution can’t come soon enough.