I dont really understand much about in person trading regulations for currencies. If I met someone and I had a bunch of Euro Banknotes and traded them for U.S. Dollars with someone and he bought drugs, guns or Cuban cigars with them would I really have any liability? Is it reasonable to prosecute the money exchanger for a part in the crime? I do in person exchange occasionally because its faster and easier than MtGox but I will stop if someone thinks there is a real liability in doing it but I dont want to stop just out of paranoia.
Even if there's not a legal liability, there'd definitely be a liability in the court of public opinion.
Selling duct tape is not illegal, but if someone went to Home Depot and made a covert video of a clerk cheerfully selling duct tape to a guy who is asking what's the best brand to bind and gag children, or asking to cut a pipe into six-inch segments "for some pipe bombs" or something, it's going to look bad on the six o'clock news and in a courtroom no matter what, even if the clerk has no authority or discretion to refuse to sell the product. And that's without assuming that something bad happens later in the public eye (abduction/murder/bombing/whatever).
Needless to say, "here's your bitcoins, hope your transaction goes well" (after learning it's for drugs) would make for a sound bite that wouldn't reflect well on us.
If not government entrapment, it could just as easily be a member of the press looking for some salacious content for their story. Look around, the cameraman may be in the bushes, or that thick pen in their shirt pocket may be a hidden cam.
