This week, federal prosecutors in the Southern District of New York will try their case against Defendants Ruben Weigand and Hamid “Ray” Akhavan for one count each of bank fraud in violation of 18 U.S.C. § 1349 related to the purchase of marijuana through Eaze, a California cannabis delivery platform. Specifically, the indictment alleges that Defendants Weigand and Akhavan – along with co-conspirators – created a transaction laundering scheme that facilitated over $100 million of credit and debit card payments to licensed cannabis operators by disguising the transactions to appear as if they were unrelated to cannabis. Prosecutors allege that the scheme was executed due to the fact that most banks are unwilling to facilitate electronic payment transactions related to cannabis, even if those transactions are legal under state law.
Weigand and Akhavan have pleaded not guilty and are set to begin trial on March 1, 2021. However, on February 19, 2021, the former CEO of Eaze Technologies, LLC, James Patterson – who resigned from Eaze in 2019 – pleaded guilty to one count of conspiracy to commit bank fraud and agreed to assist prosecutors with their case against Weigand and Akhavan. In doing so, Patterson told the court that he cooperated with Akhavan because “otherwise, banks wouldn’t have allowed the transactions.” Though this may be true for the vast majority of financial institutions, there are banks and credit unions that knowingly facilitate electronic payments for the purchase of cannabis. Such transactions are typically conducted with full transparency so that each participant in the transaction knows that cannabis is involved.
This transparency mitigates risks associated with bank fraud and helps financial institutions willing to service the cannabis industry remain compliant with the Bank Secrecy Act and FinCEN guidance obligations. However, with the recent proliferation of new cashless payment solutions entering the market, how do marijuana retailers know which solution is best for their business and consumers and the financial institutions with which they maintain a banking relationship?
Cannabis merchants must understand that the major credit card networks such as Visa and MasterCard are still not accepting transactions for the purchase of marijuana because it remains illegal to do so under federal law. At this time, there are no legitimate merchant codes associated with marijuana, so if a cannabis business is accepting credit cards for cannabis-related purchases, they are likely doing so without authorization. By executing these transactions, financial institutions run the risk of committing bank fraud. Accepting credit cards for marijuana purchases is a violation of network rules and, if enforced, could result in a permanent ban from the networks.
Electronic payment solutions conducted via ACH networks or ATM networks may be feasible if the payment facilitators can demonstrate that their solutions are transparent. To ensure this, the solution provider must only work with cannabis operators that are licensed and operate in compliance with state and local cannabis laws; only work with financial institutions to originate transactions that knowingly provide services to and on behalf of cannabis-related businesses; and only transmit money to cannabis merchant clients that have compliant cannabis banking accounts with financial institutions that openly serve the cannabis industry.
It is no surprise that cannabis retailers want access to legitimate payment solutions, as electronic payments increase the average sale amount of an individual cannabis transaction. Likewise, consumers are now more willing to use electronic payment solutions due to the perceived risks of using cash in a COVID world. Advancements in technology continue to contribute to the creation of additional viable solutions. Therefore, cannabis businesses need to take time to evaluate proposed payment solutions so that they can be sure that any electronic transaction that is originated in their establishment is transparent and not a masked transaction that could constitute bank fraud.