While voters in Colorado and Washington legalized the recreational sale and use of marijuana, the federal restrictions on drug use are setting up a regulatory nightmare. Just look at the potential trap banks are in.

They cannot lend or handle payroll for any company in the business because that would be a violation of federal drug money-laundering laws.

Some banks could argue that means they cannot even be a conduit for all the tax money promised from legalization because, from a federal perspective (and, for national banks, the federal perspective is all that matters), marijuana is still illegal. If they do business with marijuana shops, banks in these states could face civil or even criminal penalties.

"Don't break out the Cheetos or Goldfish too quickly,"Colorado Gov. John Hickenlooper has cautioned.

These huge roadblocks will make it difficult, if not impossible, to institutionalize the business infrastructure of pot, and therefore make it difficult to collect taxes. And taxes are needed since studies show increased drug use leads to increased crime – and someone has to pay for the police.

"If financial institutions are federally licensed or insured, they must comply with federal regulations, and those regulations are clear about conducting financial transactions with money generated by the sale of narcotics," Jim Dowling, a former Internal Revenue Service special agent who was also an anti-money laundering advisor to the Office of National Drug Control Policy, told Thomson Reuters. 

However, the pressure is on to change federal law, a push which started with California, the first state in the country to legalize medical-marijuana use in 1996. To date, 18 states and the District of Columbia now have such laws on their books, Thomson Reuters reports, a business now estimated at $1.7 billion in 2011 and growing.

However, the federal government has gone after medical marijuana businesses for violating the federal 1970 Controlled Substances Act, a law enacted under President Richard Nixon which says pot is addictive and has zero medical value. Already, the Dept. of Justice has shuttered about 600 medical pot shops in California since the fall of 2011, and has moved against dozens more.

Pot was legal up until 1937, when the federal government backed “Reefer Madness” short films in movie theaters, a push which led to the Marihuana Tax Act, now called the Marijuana Tax Act, which slapped a tax on the sale of pot, as well as fines and penalties for violation of the law.

Before then, the government was regulating the sale of pot as a drug dating back to 1860. Under J. Edgar Hoover, Harry J. Anslinger, chief of the Federal Bureau of Narcotics, argued to the Roosevelt Administration that a rising number of people were smoking pot and a crackdown was needed. The government then passed the Uniform State Narcotics Act in 1935, with backing from president Franklin D. Roosevelt, which said states must regulate the sale of pot.

All this has triggered a classic federalist fight, a serious federal-states rights battle now plunked down in the laps of the country’s 50 U.S. state attorneys general. University of Washington law professor Hugh Spitzer says: "Under the U.S. Constitution, the federal government can't force a state to make something illegal."

However, that may not stop the federal government from still sweeping in and shutting down pot shops in Colorado and Washington, even seizing assets as well as charging them with federal penalties via federal money laundering and forfeiture laws. The federal government can also hit these states massive federal lawsuits to stop them from launching drug markets.

On top of all this, the tax revenues from legalization could be wiped out by the costs of resulting crimes in the pot market.

Law enforcement officials and studies have shown that pot dealing has been connected to a range of crimes, notably by drug gangs, from petty thefts to burglaries to assault and murder, as well as money laundering and smuggling. Legalization of marijuana would “almost certainly exacerbate drug-related crime, as well as cause a myriad of unintended but predictable consequences,” the Heritage Foundation says.

Already studies by the RAND Corp. have found a high percentage of criminals who are also regular marijuana users. Rand found that about 60% of people arrested for various crimes tested positive for marijuana use in the United States, England, and Australia. Moreover, it says marijuana metabolites were found in the urine of those arrested more frequently than those of any other drug. The National Research Council, which has also concluded that the “long-term use of marijuana may alter the nervous system in ways that do promote violence.”

The biggest laboratory experiment, Amsterdam, has found a rise in crime, with the city ranked as one of Europe’s most violent cities, reports indicate. City officials have shut or are in the process of closing a number of pot shops because of rising crime. And Heritage notes that the Dutch Ministry of Health, Welfare and Sport has expressed “concern about drug and alcohol use among young people and the social consequences, which range from poor school performance and truancy to serious impairment, including brain damage.”

In California, which has legalized medical marijuana, Los Angeles police have seen a tripling in the number of robberies around marijuana clubs, a more than 57% increase in aggravated assault, and a 131% jump in robberies from cars.

Drug crimes in general are still high. There are six times as many homicides committed by people on drugs versus those looking for money to purchase drugs, reports the Drug Enforcement Administration. It notes that the majority of those arrested for violent crimes test positive for drugs at the time of arrest. 

There is “a misconception that most drug-related crimes involve people who are looking for money to buy drugs. The fact is that most drug-related crimes are committed by people whose brains have been messed up with mood-altering drugs,” testified Donnie Marshall, then deputy administrator of the DEA before Congress in 1999.

Joseph Califano, member of President Lyndon Johnson’s cabinet, said back in the late ‘60s: “Drugs like marijuana and cocaine are not dangerous because they are illegal; they are illegal because they are dangerous.”

And all this means the marijuana industry will move in cautious fits and starts, a legal, regulated, taxed business in some states, and yet still a federal crime.

Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.