Federal regulators are instructing North Coast banks to scrutinize their customers' financial transactions for signs of money laundering and drug deals, the result of the region's reputation for marijuana production.
The little-known policy has drawn local banks into the war on drugs, forcing them to spend time and money searching for evidence of illegal activity. To avoid the hassle, some have simply closed the bank accounts of medical marijuana dispensaries, which were authorized by California voters in 1996 but remain illegal in the eyes of the federal government.
Evidence of the policy emerged last month, when the largest bank in Mendocino County notified shareholders that federal banking regulators were requiring it to closely watch its accounts because the North Coast had been designated a high-risk area for money laundering.
Savings Bank of Mendocino County was ordered to more closely monitor deposits, withdrawals and transfers by its customers, said Charles Mannon, chief executive of the Ukiah bank.
"This area in general has been targeted by Washington because the amount of cash that comes out of here," he said.
Mannon and executives at other North Coast banks said regulators have stepped up their enforcement in the past 12 months.
"They have to be more diligent," said Bill Grassano, a spokesman for the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department tasked with administering the Bank Secrecy Act. "There is a lot of marijuana grown in the area, and there is a lot of cash."
Advocates for medical marijuana complain that pressure by regulators has resulted in bankers terminating the accounts of pot dispensaries operating legally under state law.
Mike Johnson, co-founder of a medical marijuana dispensary in Ukiah, said he has been forced to leave two banks since October and is now on his third account.
"It's a huge problem," Johnson said. "I operate a legal dispensary and need a bank account to stay in business."
Wells Fargo closed his account in October, and then Umpqua Bank closed his account in December, he said. Johnson didn't want the name of his business or current bank mentioned because he was afraid his account would be closed again.
"As far as the federal government is concerned, we are all drug dealers," he said. "Now most dispensaries are working with their banks on a &‘don't ask, don't tell' policy."
Some members of Congress have called upon bank regulators to issue a written policy that clearly states how banks should treat the accounts of people operating state-authorized medical marijuana operations.
In a letter sent to U.S. Treasury Secretary Timothy Geithner, 15 members of Congress wrote that they did not want regulators "targeting or pursuing institutions whose account holders are involved in a business ostensibly operating in compliance with a state medical marijuana law."
The issue has become a top priority of medical marijuana advocates, said Caren Woodson, governmental affairs director at Americans For Safe Access, the nation's largest medical marijuana advocacy group.
"I just can't imagine with all the banking problems right now, that eliminating the bank accounts of medical marijuana customers is a top priority for regulators," she said.
Bankers say that because medical marijuana is not recognized as legal under federal law, they are required under the Bank Secrecy Act to spend costly time and resources monitoring and reporting on businesses involved in the state-authorized medical marijuana industry.