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. While it is no secret that cannabis companies struggle to obtain compliant and transparent banking, 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, also called “Point of Banking” or POB for short.
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, though, it’s important to understand why many of these payment workarounds for THC licensees, including cashless ATMs, are illegal and risky despite being presented as benign.
Cashless ATMs are currently used to enable debit card purchases at more than 1,000 dispensaries across the U.S. For example, if a customer wants to purchase $72.35 worth of product, they “withdraw” $80 from the dispensary’s cashless ATM to pay for their product, with an ATM convenience fee added on top. The cashier would then give the customer $7.65 in change for the “purchase.” While the customer doesn’t actually receive any cash from an ATM, the transaction appears to the bank to simply be a legitimate cash withdrawal rather than a cannabis sale.
Although cannabis is legal (or about to be) for adult use in 15 states, it remains a federally illegal Schedule 1 substance under the U.S. Controlled Substances Act (CSA). The major credit card networks – MasterCard, Visa, American Express, Discover and JCB – have explicitly stated that they will not support any cannabis transactions – state-legal or otherwise – 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 fee
s 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 aforementioned bank fraud guilty plea, the widespread use of cashless ATMs in the cannabis industry may now be a ripe target for law enforcement. Cashless ATMs are an even more 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.
As the industry has matured, 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 could turn 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.
Broadly speaking, the high-profile nature of the Eaze case — and the intent behind it — has the risk of undermining the broader cannabis industry’s credibility. The incident has the potential to make the entire industry appear criminal. This is a damaging misconception the cannabis industry still struggles to overcome, and it is cited as of the key reasons why some financial institutions refuse to work with the cannabis industry.
Fortunately, there are legally compliant and transparent cannabis banking and payment processing services available to all sectors of the cannabis industry in every U.S. state. At a time when cannabis businesses will be put under a microscope, the best defense is proactively shifting to compliant merchant processing programs.
Fincann‘s merchant processing program offers 100% transparent, compliant in-person debit card processing for cannabis sales. Unlike cashless ATMs, our merchant processing accounts are fully transparent to all participating banks and stakeholders, and therefore do not put you or your company at risk of legal jeopardy or other unpalatable consequences. It is also fully compliant with the regulations enforced by federal bank examiners.
A Fincann merchant account also offers more perks and benefits beyond what a cashless ATM would offer. For example, it allows you to charge the precise dollar amount of the customer’s purchase as opposed to the cashless ATM workaround that rounds up the total purchase price to a combination of apparent bills to be dispensed. Additionally, the solution doesn’t charge a convenience fee, like a cashless ATM. Cashless ATMs also typically require a multi-year commitment with contracts that typically last from 3 to 5 years, while merchant processing accounts can be terminated at any time without penalty fees.
When in-person transactions are not possible, such as for intrastate e-commerce cannabis sales, Fincann can seamlessly integrate a secure one-touch Express ACH “pay now” button into your shopping cart via our open API, transparently sponsored by a compliant cannabis-friendly bank. Customers simply enter their account and routing numbers on the form to pay for their purchase from their checking account. This makes shopping cart checkout as easy, seamless and convenient as entering your credit card information for payment.
When it comes to cannabis-friendly banking services, such as checking accounts, there are many banking partners available to suit your specific business. While it might be hard to locate a cannabis-friendly financial institution on your own, Fincann works with our exclusive Cannabis Banking Financial Network™ servicing all sectors of the cannabis industry in all 50 states. Stop deceiving your bank about your operations and open an account with a cannabis-friendly banking partner who not only knows what your business does, but wants to help it succeed.
The charges filed against the former CEO of Eaze demonstrate the severity of deceiving the banks, card networks, and federal bank examiners. Luckily, the crackdown comes at a time when the cannabis industry no longer has to rely on legal grey areas, loopholes, and workarounds.
Gone are the days of lying to your bank or running shady, deceptive cashless ATMs for card processing – for the cannabis industry to truly step into the light, cannabis businesses need to embrace transparent, compliant payment processing and banking. Now is the time to transition away from the quasi-legal workarounds of the past. Failure to do so is no longer just disadvantageous for your business – it could now result in serious legal consequences as well.