By Don Quijones / Wolf Street.
It’s hard to do business without banks.
The first country to fully legalize the recreational use of marijuana, Uruguay, has suddenly found itself facing an unexpected obstacle: the international banking industry.
It all began a few weeks ago when one of the 15 pharmacies that had agreed to sell the two varieties of cannabis distributed by the Uruguayan State announced that it was withdrawing from the scheme after its bank, Santander, had threatened to close its account unless it stopped providing services for the state-controlled sales. Shortly afterwards it was revealed that other banks, including Brazil’s Itaú, had canceled the accounts of the private companies that had been granted a license to produce marijuana as well as some cannabis clubs.
To fill the funding void, the state-owned lender Banco República (BROU) stepped up to provide financing to the 15 pharmacies involved in the scheme as well as producers and clubs. But within days it, too, was given a stark ultimatum, this time from two of Wall Street’s biggest hitters, Bank of America and Citi: Either it stops providing financing for Uruguay’s licensed marijuana producers and vendors or it’s dollar operations could be at risk — a very serious threat in a country where US dollars are used so widely that they can even be withdrawn from ATMs.
Under the US Patriot Act, handling money from marijuana is illegal and violates measures to control money laundering and terrorist acts. However, US regulators have made it clear that banks will not be prosecuted for providing services to businesses that are lawfully selling cannabis in states where pot has been legalized for recreational use. Some cannabis businesses have been able to set up accounts at credit unions, but major banks have shied away from the expanding industry, deciding that the burdens and risks of doing business with marijuana sellers are not worth the bother.
But that may not be their only motive. There are also the huge profits that can be reaped from laundering the proceeds of the global narcotics trade. According to Antonio María Costa, the former Under-Secretary of the United Nations Office on Drugs and Crime, over $350 billion of funds from organized crime were processed by European and US banks in the wake of the global financial crisis.
“Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities… There were signs that some banks were rescued that way,” Costa said. To date, no European government or bank has publicly denied Costa’s charges. Meanwhile, numerous big banks on both sides of the Atlantic have been caught and fined, some repeatedly, for laundering billions of dollars of illicit drugs money — in direct contravention of the US anti-drugs legislation.
Whatever the banks’ real motives in denying funds to the Uruguayan pharmacies, the perverse irony, as the NY Times points out, is that applying US regulations intended to crack down on banks laundering the proceeds from the illegal sale of drugs to the current context in Uruguay is likely to encourage, not prevent, illicit drug sales:
Fighting drug trafficking was one of the main reasons the Uruguayan government gave for legalizing recreational marijuana. Officials spent years developing a complex regulatory framework that permits people to grow a limited supply of cannabis themselves or buy it at pharmacies for less than the black market rate. Lawmakers hoped that these legal structures would undercut illicit marijuana cultivation and sales.
“There probably isn’t a trade in Uruguay today that is more controlled than cannabis sale,” said Pablo Durán (a legal expert at the Center of Pharmacies in Uruguay, a trade group).
Despite that fact, the pressure continues to be brought to bear on Uruguay’s legal cannabis businesses. Banco República has already announced that it will close the accounts of the pharmacies that sell cannabis in order to safeguard its much more valuable dollar operations.
In other words, a state-owned bank of a sovereign nation just decided to put draconian US legislation before a law adopted by the Uruguayan parliament authorizing the sale and production of marijuana. The law’s prime sponsor, Uruguay’s former president, José Mujica, is furious. During a session of the country’s Senate, he accused the banks of directly attacking democracy. His successor, President Tabaré Vázquez, is far less enthused about the plans to legalize pot.
The potential implications of this issue extend far beyond Uruguay’s borders. For years opposition to the US-backed war on drugs has been building across Latin America. At the 2013 UN General Assembly Latin American leaders of all political stripes rose to the podium to take a stand against the war. They included Bolivia’s Evo Morales, Costa Rica’s Laura Chinchilla, Guatemalan president Otto Perez Molina, Mexico’s then foreign minister (and now finance minister) José Antonio Meade.
Even Juan Manuel Santos, the president of Colombia, the United States’ staunchest ally in South America and third largest recipient of US military aid after Israel and Egypt, bemoaned that that his country, which received more than $3.5 billion in counter-narcotics aid between 2002 and 2011 and was frequently cited as a model by the Obama administration, “has suffered more deaths, more bloodshed, and more sacrifices in this war” than almost any other, with the obvious exception of Mexico.
By now it is painfully obvious, to all but those who financially benefit from it, that the US government’s heavily militarized War on Drugs has been a dismal failure. Despite the slaughter of over 150,000 people in Mexico in a war that no one is winning and just about everyone is losing, the drugs keep crossing the border, and in many cases in greater numbers than ever before.
Uruguay’s efforts to legalize marijuana could represent a sea change in drugs policy in a region that is being ripped asunder by the global narcotics trade. If successful, it could go viral as other countries, including Canada, set out to legalize marijuana. But if big global banks like Santander, Citi and Bank of America get their way, the scheme will be snuffed out before it even has a chance to make a difference. By Don Quijones.
One reason stands out, and it’s not the price of oil. Read… How Did Things Get This Bad This Fast for Oil Giant, Pemex?