Another fine regulatory mess

fine regulatory
fine regulatory

If you are in business and the government will not allow you to open a bank account, what do you do? Thirty years ago, almost anyone could walk into a bank and open a bank account with no questions asked. But now it is increasingly difficult for honest people and businesses to open bank accounts because of all the new regulations on banks, which are intended to make life more difficult for terrorists, drug dealers, child pornographers, money launderers and other assorted criminal types. Banks and other financial institutions are subject to “know your customer” regulations and are supposed to monitor the funds they receive to make sure they do not come from criminal sources.

Twenty-nine states have laws legalizing marijuana to some extent, such as for medical purposes. Eight states — Colorado, Washington, Alaska, Oregon, California, Nevada, Massachusetts and Maine, plus the District of Columbia — now have legalized marijuana for recreational use, even though marijuana is still illegal at the federal level. Federal law trumps state law — the Civil War decided that issue — but the Obama administration stated it would not try to enforce the federal anti-marijuana law in states where it had been made legal.

But banks and other financial institutions are subject to federal law, and thus cannot legally accept deposits from criminals — and those who are in the marijuana business are considered criminals by the feds but not by the states in which it is legal. The big banks fear massive fines if they have customers or customers of their customers who are engaged in an illegal activity. The feds have ultimate control over every financial institution, even ones that are purely local, because every financial institution needs a bank account with another financial institution in order to transmit and receive funds from customers outside of their own bank. Small local banks and credit unions normally have bank accounts with a bigger bank, which, in turn, has an account with one of the biggest banks that has an account with the Federal Reserve.

If the folks in Washington, D.C. don’t like some of the customers of some small bank in Denver, or in Switzerland, or even China, they have the ability to label it a “bad bank,” which is a warning to all the banks in the world that have direct or indirect corresponding bank accounts with the “bad bank” that “you are going to have trouble with us unless you drop them as customers.” Shutting down corresponding banking relationships is a major tool that the United States uses to put financial sanctions on a country like North Korea or Iran.

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