I have a business customer that is a sole member LLC. He has a deli/convenience store with customer owned ATM. He is also a Western Union agent. We have monitored his accounts for years with no suspicious activity detected. However, he just was arrested for selling synthetic drugs to undercover cops. Obviously I feel we need to close his accounts. Some SVPs are debating that and I wondered if there was any published guidance regarding similar situations. Any help with this is appreciated!

My opinion, why would you want to take a risk by banking a person like that? If your Depositor's Agreement states, like most, that you can close their account(s) at any time for any reason that the Bank sees fit, do it.

What is their argument against closing the accounts? Mine might be that he has been accused, not convicted.

As for published guidance, I've heard representatives from each federal functional regulatory agency say they would never direct a bank to close an account. (Field examiners oftentimes take it on their own to offer such a direction, but they do not do it in writing.)

I'm very glad for you that you have monitored the accounts in the past and would encourage you to take a second look at that analysis in light of "new information." If you find the basis for a SAR, I think closure is appropriate. If not, I would not.

Some of the courts are having issues with getting convictions (or convictions overturned) with synthetic drugs as the compounds may not be illegal.

I'm with Ken. And I'd exercise some of that Enhanced Due Dilligence and place the account on a High Risk status until the case is over, and/or you find something SAR-worthy and you can't stand the risk.
We are in fact still in America where we are still innocent until found guilty in court.

We do not allow accounts of businesses that sell synthetic drugs for the same reason EdAudit states - not all of the ingredients are legal & with the negative effects, the reputational risk is not worth it to us.

If you can't convince SVP on this customer, maybe you roll out a procedure for any NEW customers? Our SAR Review Team is actively investigating these customers.

Some info for you:

http://en.wikipedia.org/wiki/Synthetic_cannabis

Some compounds within synthetic cannabis (HU-210) are currently scheduled in the USA under federal law, while others (JWH-073) have been temporarily scheduled until final determination of their status can be made.The Drug Enforcement Administration (DEA) considers it to be a "drug of concern", citing "...a surge in emergency-room visits and calls to poison-control centers.

Several states independently passed acts making it illegal under state law, including Kansas in March 2010, Georgia and Alabama in May 2010, Tennessee and Missouri in July 2010, Louisiana in August 2010, and Mississippi in September 2010. An emergency order was passed in Arkansas in July 2010 banning the sale of synthetic cannabis. In October 2010, the Oregon Board of Pharmacy listed synthetic cannabinoid chemicals on its Schedule 1 of controlled substance, which means that the sale and possession of these substances is illegal under the Oregon Uniform Controlled Substances Act. According to the National Conference of State Legislatures, several other states are also considering legislation, including Michigan, New Jersey, New York, Florida, Indiana, and Ohio. Illinois passed a law on July 27, 2010 banning all synthetic cannabinoids that goes into effect January 1, 2011. Michigan banned synthetic cannabinoids in October 2010.

On November 24, 2010, the DEA announced that it would make JWH-018, JWH-073, JWH-200, CP-47,497, and cannabicyclohexanol, which are often found in synthetic cannabis, illegal using emergency powers. They will be placed in Schedule I of the Controlled Substances Act, within a month of the announcement, and the ban will last for at least a year. The temporary ban, for at least a year, came in to effect on March 1, 2011.

Interesting.

Based on the fact that they were "undercover" cops, my assumption was that the synthetics were not sitting out on the shelf. (A uniformed officer could have just gone in and bought them and then charged the customer with the crime.) If a bank knows a customer is engaged in selling [insert anything] and he gets arrested for it, then I'm not certain that the bank can then legitimately claim the moral high ground by closing the account.

As suggested, if a customer is dealing in merchandise or services of questionable legality and the bank has a problem with it then it should be taken care of in advance at the policy level.

Thanks a bunch for all of your input.