July 20, 2021 | Experts were originally published by FINCANN
The former CEO of Eaze Technologies, Inc., a California-based cannabis delivery service, recently pleaded guilty to conspiracy to commit bank fraud charges in connection with deceiving banks into providing credit card processing services for more than $100 million in cannabis sales.
This bombshell news is having a chilling effect throughout the cannabis industry. These recent developments are a painful reminder that many common industry workarounds are in fact fraudulent, including and especially the popular cashless ATM workaround solution.
For the sake of avoiding legal consequences and bolstering your cannabis business’s brand, there has never been a better time to review the sufficiency of compliance practices to avoid winding up in a prosecutor’s crosshairs. To do so, it’s important to understand why many of these payment workarounds , including cashless ATMs, are illegal and risky.
Although cannabis is legal for adult use in many states, it remains a federally illegal Schedule 1 substance under the U.S. Controlled Substances Act.
The major credit card networks – MasterCard, Visa, American Express, Discover and JCB – have explicitly stated that they will not support any cannabis transactions – on their networks.
Coercing or deceiving a bank into supporting card transactions for a federally illegal substance not supported by the card networks and/or the intermediary or settlement banks constitutes fraud and money laundering.
The issues don’t stop there. The fees charged to customers for use of a cashless ATM are in violation of a Dodd-Frank rule known as the Durbin Amendment. This provision prohibits card networks from charging consumers add-on fees when processing debit transactions. Additionally, the entire system is based on the presumption that the bank either doesn’t know a cashless ATM is in use or is willing to look the other way.
The truth is: it’s likely that multiple people involved with a cashless ATM system know that the “withdrawals” are for cannabis sales. Everyone from dispensary management to the associate behind the counter is demonstrably aware of what’s going on, and now unfortunately, it’s also on the radar of federal law enforcement, prosecutors, banks and merchant terminal equipment manufacturers.
In light the recent bank fraud guilty plea, the widespread use of cashless ATMs are now a ripe target for law enforcement. Cashless ATMs are a deliberate example of multiple fraudulent practices than the payment processing scheme described in the Eaze case, so there is reason to fear that those solution stakeholders who don’t quickly migrate away from such an illegal system may face prosecution.
Clear banking regulations have emerged governing THC licensees and the anti-money laundering (AML) and know-your-customer (KYC) measures banks must have in place to ensure all cannabis-related funds are derived from legitimate, licensed operations.
These recent developments suggest that law enforcement is not willing to allow violations of those rules to go unpunished.
Payment processing issues may not be a new occurrence in the cannabis industry, but the charges against the former Eaze CEO are turning up the heat on businesses caught using payment processing solutions that operate in flagrant disregard of the law. In the past, the biggest consequence a dispensary might face for this deceptive practice is sudden termination of the cashless ATM and subsequent loss of debit card processing capabilities. In the wake of the Eaze case, the stakes might now be higher.
What used to result in a slap on the wrist and a temporary disruption in debit card transactions could now result in federal criminal prosecution.
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Jim Krawczyk
Director of Retail Sales
Cell: (832)-264-4154