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When voters or legislators decriminalize cannabis sales, cannabis retailers strive to stabilize several critical areas, including: supply, safe and legal online payment transaction methods, as well as stability in laws regulating the industry (state law vs federal law).
Marijuana is still listed as a Schedule I controlled substance by the US Drug Enforcement Agency. Large financial institutions in the United States have been reluctant, and intentionally slow, to process credit and debit card transactions involving cannabis. Since the federal government continues to outlaw cannabis sales, banks will not process transactions with businesses that engage in cannabis sales.
This case study profiles California cannabis delivery company Eaze Technologies, Inc. (Eaze), its former CEO James Patterson, and two foreigners, Hamid Akhavan and Ruben Weigand, who were accused of conspiracy to commit bank fraud. Eaze operated as a marijuana delivery service. Customers ordered their cannabis online, paid for the products online, and Eaze delivered it to the consumer. The charges against these defendants resulted from online consumer transactions for the purchase of cannabis.
All of the information in this case study comes from the US District Court for the Southern District of New York, the criminal indictment, and one newspaper article.
Patterson, Akhavan, and Weigand were charged separately via a charging document filed by federal prosecutors called a criminal indictment. Eaze was not charged as a defendant related to the criminal charges. This case involves the white-collar crime of bank fraud. Federal prosecutors define bank fraud as:
Whoever knowingly executes, or attempts to execute, a scheme or artifice—
(1) to defraud a financial institution; or
(2) to obtain any of the money, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; and shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
A grand jury charged the defendants with conspiracy to commit bank fraud stemming from an alleged scheme to deceive banks into processing more than $100 million in marijuana sales. The marijuana sales were intentionally misidentified in banking systems to avoid detection by the banks. In layman’s terms, Patterson, Akhavan, and Weigand, were charged with lying to the banks about the types of transactions on the Eaze website in order to trick the banks into accepting and processing the marijuana sales transactions.
Patterson pled guilty to one count of conspiracy to commit bank fraud. Patterson also agreed to cooperate against Akhavan and Weigand in their criminal trials. Patterson’s agreement to plead guilty may result in a lighter prison sentence. The criminal trials for Akhavan and Weigand will take place in 2021.
With the infancy of the legal cannabis industry, we can expect charges for bank fraud. The United States economy relies on law enforcement taking a stand against fraudulent behavior in order to stabilize the economy and our banking system.
Fraud creates victims where none previously existed. According to prosecutors, Patterson, Akhavan, and Weigand victimized the banks and the credit card companies. When the defendants deceived the financial institutions into processing payments for cannabis, they landed in the crosshairs of federal authorities.
Cannabis retailers must understand that the major credit card companies will not accept bank transactions for marijuana purchases since it remains illegal to do so under federal law. The only way these electronic payments could be approved would be if cannabis retailers demonstrate the payments are properly labeled in the financial transaction and do not violate the Bank Secrecy Act.
Despite media reports indicating a “run” on new medical marijuana retailers, cannabis retailers have seen market share stagnate due to consumer shifts toward other natural products such as CBD. In order to compete and stay compliant, cannabis retailers must stay vigilant over their internal compliance measures, including how consumers pay for their cannabis.
Business owners’ (and their employees’) lives can be disrupted in the blink of an eye because of a government investigation. At Compliance Mitigation, each of the professionals on our team has personally gone through some type of federal investigation. Our training programs assist business owners, leaders, and employees in understanding the ramifications of failing to recognize fraudulent transactions. We recommend strong, written internal compliance plans for all types of businesses.
Training on and understanding federal laws are the best ways to protect yourself, your business, and your employees. We can help!
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