By David Lawder
WASHINGTON (Reuters) - Treasury Secretary Jack Lew on Tuesday defended the Obama administration's decision to let banks do business with marijuana dealers in states that have legalized the drug, insisting to lawmakers that it was not tacit approval under federal law.
Lew, testifying before a House of Representatives Appropriations subcommittee, said Treasury's financial crimes division issued the guidance to banks in February to help shed light on the emerging licensed recreational marijuana trade in Colorado and Washington state.
Because recreational sales of the drug remain illegal under federal law and in all other states, banks were prohibited from processing transactions from the state-licensed dealers, effectively forcing them to operate on a cash-only basis. There would be no way to track these sales, raising the risk of illegal money laundering activity, Lew said.
"Without any guidance, there would be a proliferation of cash-only businesses, and that would make it impossible to see when there are actions going on that violate both federal and state law and that would be a real concern," Lew told the subcommittee. "We thought that the clarity, bringing it into daylight, was a better solution."
Representative Harold Rogers, the Kentucky Republican who chairs the House Appropriations Committee, challenged Lew, saying the move was a "rubber stamp" for an activity still illegal in most of the United States and that it would encourage illegal drug gangs to try to exploit the U.S. banking system.
He said Washington state has not yet licensed most sellers, yet Treasury was allowing banks to do business with them.
"If they aren't licensed or regulated by the state, how are they different from a drug dealer on the street corner?" Rogers said.
"What about cocaine dealers? Shouldn't we give them the same break?" he added later.
Lew said banks are already filing suspicious activity reports on some transactions related to the legal marijuana trade, helping law enforcement officials understand more about it, something that would not happen if all sales were being made in cash.
Even so, few, if any, financial institutions have chosen to begin serving legal pot dealers as a result of the guidance, marijuana industry sources and bank anti-money-laundering officials have told Reuters. The latter say the guidance does not provide clear immunity from prosecution and requires due diligence that would be too costly for banks to pursue.
According to the guidance, criminal prosecution for money laundering and other crimes is unlikely if banks meet a series of conditions, such as avoiding business with marijuana operations that sell to minors or engage in illegal drug trafficking.
Representative Mario Diaz-Balart, a Florida Republican, questioned why Treasury did not stipulate in its guidance that marijuana sales were still illegal under federal law.
"Our guidelines in no way change federal law," Lew said. "We are in no way telling people that things that are illegal under federal law are legal."
It would be preferable if Congress set policy on the issue through legislation, Lew said, adding that the bank guidance was "an attempt to have as much clarity as one can have given this unpleasant situation with the state law."
(Additional reporting by Brett Wolf in St. Louis; Editing by Leslie Adler)