On Weed Day, banks caught between pot and the law

National Weed Day (4/20) comes as the marijuana legalization movement gains momentum. On April 17, Pennsylvania became the 24th state in the nation to legalize medical marijuana. Recreational use is now legal in four states and some 20 states may vote on different forms of legalization in November.

But it's becoming clearer that banking, anti-money laundering, and marijuana laws and regulations have not kept up with the changing views on weed and are holding back entrepreneurs trying to navigate the minefield of conflicting federal and state laws. Congress and bank regulators at a minimum should update rules and regulations to deal with reality and take banks out of the marijuana debate.

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Corey Young, a founder of courier service CannaRabbit LLC, delivers bags of marijuana to a dispensary in in Louisville, Colorado, U.S., on Friday, March 27, 2015. CannaRabbit and peers are rushing in as regional truckers and nationwide haulers United Parcel Service Inc. and FedEx Corp. steer clear of transporting marijuana on concerns over the lack of nationwide clearance of a practice that is still illegal in most states.

The problem is that, under federal law, marijuana is still illegal, so banks are prohibited from serving them. And while federal agencies have generally turned a blind eye to financial institutions that do provide services, banks must monitor transactions for possible illegal activities and report any they find using suspicious activity reports (SARs), an expensive and cumbersome process. Since selling marijuana is illegal under federal law, commercial marijuana transactions are inherently "suspicious" even if they are legal under state law.

It's become so twisted that, if a state collects taxes from marijuana transactions and those taxes are deposited in the state's bank account, that bank may have to report suspicious activity by the state itself. Similarly, transactions by a hospital that acts as a medical marijuana dispensary would likely trigger a suspicious activity report.

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To avoid such counterintuitive scenarios, financial regulators could issue guidance similar to that offered by the U.S. Department of Justice which says that due to limited resources, the agency would not prioritize enforcement actions against marijuana businesses that are legal under state law.

A fractured federal response to legalization has also created problems for commercial marijuana that only exist in some parts of the country, with Colorado perhaps the most notable example. When a Colorado credit union got state permission to serve the marijuana industry, it ran into government roadblocks.

But a banking relationship is a vital component to any retail business. One of the selling points for marijuana legalization has been to reduce crime. According to that view, if people can buy and grow cannabis legally, there is no need for a black market and the criminal activity that goes with it.

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However, businesses without access to the banking system can't take credit or debit cards or other kinds of electronic payment. They are forced to sell products and pay their wages, taxes, vendors, and other expenses exclusively in cash. This paradoxically makes marijuana businesses, which can handle a great deal of cash, a target for crime. In Colorado, that has encouraged marijuana businesses to hire bodyguards to ferry suitcases of cash to make these payments.

To address this issue, Congress should look for changes that could be made to anti-money laundering laws that would allow financial institutions to process the payments of marijuana firms in a way that is independent of whether marijuana is legal under federal law. This would reduce cash-only businesses and the risks that go with them.

Altering any complex system — whether through changes in technology, the law, or social attitudes — can create problems the existing system was not designed to address. Marijuana legalization has led to unintended consequences.

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Labeling marijuana transactions that are legal under state laws as suspicious activities effectively force some commercial marijuana businesses to operate outside the banking system, which can have a more dangerous impact.

The conflict between federal and state laws over legalization creates uncertainty for financial institutions that serve marijuana businesses. At some point, Congress will have to decide how to settle the inherent clash so that a more coherent system can emerge. This will only become more pressing as the tide of legalization spreads.

Commentary by Justin Schardin is acting director the Bipartisan Policy Center and Kristofer Readling, a policy analyst at BPC. Follow Justin on Twitter @jschardin.