(Bloomberg View) -- Understated and simpatico, former Uruguayan president Jose Mujica isn't easily rattled. Just don't mess with his reefer.
That was the message from Montevideo last week when a state-owned lender, Banco Republica, followed several private banks in shutting down accounts of clients who deposited money from marijuana sales -- a direct blow to the Mujica era's marquee policy of making Uruguay the first country to legalize the smoking, growing and selling of marijuana nationwide.
The 82-year-old leader, who now serves in the senate, was furious. He threatened to sandbag the legislative agenda and called for the economy minister -- who'd served alongside Mujica as vice president -- to resign if the authorities failed to come up with a solution. "Otherwise we're going to have a fight."
Fighting is something Mujica, a former Tupamaro guerrilla, is good at. He beat Big Tobacco in international trade court, forcing cigarette makers who did business in Uruguay to plaster their smokes with grisly pictures of diseased users, and he stood up to conservative compatriots by sanctioning same-sex marriage. Then Mujica went even further in 2013, with his marijuana initiative. But taking on the strictures of the international financial system and its global gatekeepers in Washington promises to be the scrappy gaucho's biggest battle.
Convinced that global anti-narcotics policies were an abject failure -- a position gaining ground among world leaders -- Mujica (2010-2015) declared war on the war on drugs. After a sharp debate at home and a long policy rollout, accredited pharmacies opened their doors last month to recreational users, and the long lines of customers became the toast of the web and a talking point for drug pundits everywhere.
Apparently, what Uruguay neglected to adequately plan for was international law, including several anti-drug treaties, and the hard-nosed gnomes of the United States Treasury, none of which recognize the legal trade in drugs. Marijuana is a Schedule 1 conrolled substance in the U.S., which is bureaucratic speak for an illegal drug. U.S. banks, including their correspondent banks abroad, are therefore banned from dealing in proceeds from the sales or finance of the marijuana business.
United Nations officials and some of Uruguay's own financial executives had long warned of the trouble ahead if marijuana legalization passed. (Last year, the Banco Republica canceled the first account of a company licensed to grow pot.) By last week, most pharmacies had suspended sales to clamor for solutions from state authorities.
Uruguay is not alone. In the U.S., where eight states have legalized recreational use of marijuana and 29 condone its medicinal use, many clients and businesses have been shut out by banks fearing reprisals under federal financial laws meant to crack down on the laundering of drug money. And now the administration of President Donald Trump may revisit then-President Barack Obama's 2014 attempts to assure banks that they would not be prosecuted for serving clients in states where marijuana was legal.
In Amsterdam's storied cannabis cafes, customers can roll their own indoors unfettered by the cops even though dope is illegal in Holland and merchants end up procuring their stash from outlaws -- a "schizophrenic business" that Stijn Hoorens, an analyst at Rand Europe, said has taken the mellow out of the banking sector.
Still, Uruguay might have expected a break. After all, the bold anti-corruption treaties and laws on money laundering were aimed at stopping drug traffickers and transnational crime rings that thrive in the shadows. Not least in Latin America, where the combination of locked and loaded traficantes and failed strategies to stop them has turned Uruguay's hemispheric neighbors into the world’s deadliest region.
Here was Uruguay, trying to turn the tables -- legally -- and yet running afoul of the rules. To critics of the dysfunctional drug war, this makes no sense. "This is not some stoner deal," John Walsh, drug policy expert at the Washington Office on Latin America, told me. "This is government and industry working together to show they are fully compliant with the rules. They want to work closely with the regulator to keep drugs from children and out of criminal hands, and help get bad actors out of the sytem."
Rather than a setback, Walsh called Uruguay's troubles the "growing pains" of a first responder to the global drug emergency -- a work in progress that policymakers, financial leaders and societies will have to shape into broader and more enduring reforms, as a recent study by the U.S. Congressional Research Service highlighted.
For the moment, Uruguay's pharmacy-based pot-sellers, who have reportedly moved some 60 to 70 kilograms of marijuana since mid-July, are scrambling for alternatives to conventional banking, including local credit unions, home growers' clubs, or following the lead of some unbanked U.S. vendors, virtual currencies such as Bitcoin.
For now, a whiff of irony hangs in the air: As long as honest brokers are pushed out of the banking system, the black market fueled by cash and shady operators will flourish -- exactly the business model that Uruguay hopes to retire.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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