Tricking Banks into Processing Marijuana Transactions Carries Major Consequences
Cannabis Industry News Alert
Two Men from the “Uber of Pot” Convicted of Conspiracy to Commit Bank Fraud
Eaze Technologies made quite the splash when it burst onto the cannabis scene advertising direct delivery of marijuana products in a matter of hours. With the help of two consultants, Hamid “Ray” Akhavan and Ruben Weigand, Eaze was able to gain a significant market advantage by offering customers in California and Oregon the option to pay with a credit or debit card. This was virtually unprecedented because marijuana remains illegal at the federal level, and as a result, most federally regulated banks are unwilling to process transactions related to the sale of marijuana. So how was Eaze able to convince banks to process these transactions? As it turns out, they weren’t.
Last month, a New York jury convicted Akhavan and Weigand of conspiracy to commit bank fraud, finding that the two men tricked US banks into processing around $150 million in cannabis transactions between 2016-2019 using an elaborate scheme. Specifically, they routed the transactions through shell companies, offshore bank accounts, and payment processing companies, disguising the transactions as ones involving dog food, dive gear, face cream, beverages, and various other products to avoid detection by Visa, MasterCard, Bank of America, and others. Another factor at play was the use of merchant category codes (MCCs). MCCs are assigned by the merchants as a means of categorizing purchases based on the type of product or service being purchased. Because credit card and debit card companies do not permit cannabis purchases, there is no “cannabis” category to select for transactions involving the sale of cannabis.
Of particular interest was one of the defense theories that the banks and credit card companies were not truly defrauded because they profited from these transactions, which was inconsistent with the state’s burden of proving that the defendants intended to deprive the victims of money or property. In support of this defense, witnesses testified that Eaze customers can still use Visa and Mastercard to purchase Eaze products so long as the transactions are routed through a third-party digital wallet provider. In response, witnesses from Visa and Mastercard testified that their policies prohibit marijuana business from accessing their networks. A bank witness from one of the banks processing the transactions also emphasized the importance of receiving accurate information from its customers so that it can adequately manage the risks associated with its customers’ businesses.
James Patterson, the former CEO of Eaze, pleaded guilty to conspiracy to commit bank fraud in connection with the scheme and cooperated with prosecutors during the trial. Eaze also cooperated, although it was not charged. Akhavan and Weigand are set to be sentenced on June 25, 2021 and attorneys for both the men have indicated they will appeal the convictions.
For the cannabis industry, this case demonstrates the significant risk associated with day-to-day transactions and the heavy cost of trying to circumvent the policies of credit card and debit card companies. Cannabis companies must remain cognizant of stiff federal penalties relating to making untruthful statements of any sort to federally regulated banking institutions.
* * *
Bradley lawyers have the breadth of experience to provide full-service representation to our cannabis clients, advising clients on the legality of residency requirements and other common cannabis issues. As strategic advisors, we give each client the practical counsel they need to make the best decisions for their businesses.
Bradley’s Cannabis Industry team is a leading voice in the cannabis sector. Our attorneys have presented on cannabis issues at conferences around the country and have been quoted in an array of legal and mainstream publications, from the National Law Journal, Law360 and Westlaw Journal to the Atlanta Journal-Constitution, the Associated Press, and ABC News.