A small Illinois bank has carved out a potentially lucrative niche in the growing market for legal marijuana.

Illinois National Bank in Springfield recently won a state contract to process taxes for cash-only pot businesses. Illinois legalized medical marijuana in 2013; dispensaries started selling it in early November.

The four-year deal could be a boon to the $711 million-asset bank, which will generate fees for handling wire transfers to the state government. It will also give Illinois National a stake in the industry for legal weed industry without having to lend money or accept deposits.

"We see it as continuing to do business with the state of Illinois and the Department of Revenue," said Pat Phalen, an executive vice president at Illinois National, who noted that the bank also processes state taxes for other industries.

The arrangement comes as banks have cut ties with customers who deal in marijuana — an illegal drug under federal law — over concerns about money laundering penalties and reputational risk.

More state governments, meanwhile, are pushing to legalize marijuana. Nearly half of all states have legalized the drug for medical purposes, according to the National Council of State Legislatures. Four states — Colorado, Washington, Alaska and Oregon — and the District of Columbia have legalized it for recreational use.

The conflict between state and federal laws has created an unclear regulatory framework. Most banking regulators have adopted guidance from the Financial Crimes Enforcement Network, which allows banks to serve pot businesses.

Still, regulators' recent rejection of a startup credit union in Colorado, which planned to serve the state's legal weed industry, illustrates the uncertainty that surrounds pot banking, barring any future change to federal policy.

"The fact remains that assisting in this business is a federal crime," Linda Koch, president and chief executive of the Illinois Bankers Association, said in an email. "Banks are heavily regulated by the federal government, and their federal regulators have been understandably caught in the middle, causing them to send mixed signals."

Roughly 260 banks served marijuana businesses as of the end of July, according to Fincen. Still, pot businesses often lack access to the banking system, creating a logistical issue for state governments looking to collect tax revenue.

Illinois National's contract is designed to give pot businesses a "safe" option for paying state taxes, executives said.

Oregon's Department of Revenue, which does not have a contract with a bank for tax collection, bought cash-handling equipment, hired staff and revised security procedures at its headquarters in Salem. The state is preparing to implement a tax on recreational marijuana next year, with expectations that 40% of tax revenue from pot sales to be paid in cash, a department spokeswoman said.

Pot businesses often "bring in their tax payments in shopping bags full of cash," said Taylor West, deputy director of the National Cannabis Industry Association.

Such a reliance on cash has created an unusual — and potentially lucrative — opportunity for Illinois National.

All licensed, cash-based pot businesses in Illinois will pay sales and payroll taxes at an Illinois National branch. The bank, which will earn a $13 fee for each wire transfer it makes to the state treasurer, declined to provide projections for how much it plans to generate in fees under the contract. There are also other fees that the bank could collect under the contract.

Illinois National's executives noted that the bank will not allow pot businesses to open bank accounts. Rather, the bank will deposit cash payments into an account designated for the state government.

"There's only one account, and it's for the Illinois state treasurer," said Tom Gihl, Illinois National's chief operating officer. The bank is "not necessarily serving" pot-related businesses, he said.

There are early signs that consumer demand in Illinois could be strong for medical marijuana.

So far, 52 businesses have received licenses to operate pot dispensaries, according to a spokesman for the Illinois treasurer's office. Under state law, 60 sellers will be authorized to operate.

In its first week of sales, seven dispensaries generated $210,000 in sales, according to the Chicago Tribune.

Illinois National was the only bank in the state to bid on the contract, according to the treasurer's office.

The state, which struggled to generate interest from banks, secured Illinois National's bid after removing a provision in the contract requiring banks to provide armored car services for cash deliveries.

Illinois National executives said the bank consulted with its regulators before moving forward with the contract.

"We explained to them the type of business that we were looking at," Gihl said. "Everybody understood."

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