Even though recreational marijuana is legal in two states, federal law still prohibits its production, sale and possession.

This makes for a tricky situation at American banks, trying to determine which marijuana-related cash transactions are legitimate.

But now the federal government has issued regulations designed to clear away the haze of confusion.

On Friday, the U.S. Treasury and Justice Departments issued a set of rules for the nation’s banks to help them separate legal and illegal marijuana operations. 

“Our guidance provides financial institutions with clarity on what they must do if they are going to provide financial services to marijuana businesses and what reporting will assist law enforcement,” said Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network, in a press release

The document includes a list of “red flags” that will help bankers determine whether they need to file a suspicious activity report (SAR.)   

Of course, financial institutions are urged to do a background check on new clients to see whether they’ve been involved in violent or drug-related crimes.

Meanwhile, banks should look out for people using a licensed marijuana-related businesses “as a front or pretext to launder money derived from other criminal activity.”

For example, businesses that have nondescript names with words such as “consulting,” “holding” or “management” should get a second look, especially if they point out that what they do is not related to the drug, but that they're "depositing cash that smells like marijuana.” In other words, smell your customers' cash.

Businesses calling themselves “non-profit” while making excessive payments to employees should also raise flags.  

There are more guidelines, most of which are pretty basic.

For instance, banks should investigate a company that “receives substantially more revenue than may reasonably be expected,” or accounts that see a “rapid movement of funds, such as cash deposits followed by immediate cash withdrawals.”