By processing both debit and credit card payments from customers through its online platforms, plaintiff alleges its biggest cannabis services competitor committed wire and bank fraud. A spokesman for the stateside company called these allegations, “false.”

As longtime Southern California marijuana lawyers, we recognize that in any other industry with any other product – this would not be an issue. Unfair business practices lawsuits crop up fairly often enough, but most competitors aren’t concerned with how each other’s payments are processed. Cannabis commerce is the only place we see this because of the labyrinth of laws varying. It starts with the statutes in 34 states plus Washington, D.C. that directly conflict with federal classification of the drug and only gets more confusing from there.

Last year, Canada’s law-of-the-land granted permission for the for the cultivation, use, sale and possession of marijuana – the second nation globally to do so.

However, this is a state-level matter, filed in San Francisco County Superior Court, Marijuana Business Daily explained.

How the Cannabis Company Processing Fraud Allegedly Worked

Because marijuana is a Schedule I narcotic per federal law, banks and other financial institutions that engage in commerce with state-legal companies that sell it could themselves be found guilty of federal felony money laundering. That’s why most every marijuana dispensary and ancillary business has customers pay in cash.

Here, plaintiff alleges defendant sidestepped this rule by setting up shell companies in Europe whose sole purpose was to process these payments.

Several months ago, one of plaintiff’s subsidiaries severed ties with the defendant because it was unable to ensure state-legal compliance with the way it processed credit cards. The parent company now alleges its competitor was able to buy cannabis flowers, tinctures, capsules and candies that instead on their credit card showed up as items carbonated drinks, dog toys, drone components, and diving gear (among others) – the latter all being goods a bank could process without running afoul of federal money laundering and racketeering (RICO) statutes.

Plaintiff said these items never existed – that’s not what customers understood they were buying and that’s not what they ultimately did purchase.

This is a competitive advantage, plaintiff explained, because customers would not need to go through the hassle of obtaining cash for purchases, including doling out a few bucks on ATM fees. Yet the Toronto-based firm isn’t asking for monetary damages. Rather, it is asking for an injunction to cease all such activity.

It’s not clear whether any criminal investigation has been launched as a result of these allegations.

A spokeswoman for the defendant flatly denies the allegations, and insists plaintiff is the one trying to claw out an unfair advantage, using litigation to get free advertising and bolster stock prices. She said their delivery service doesn’t process any electronic payment, which is the responsibility of their licensed vendors whose sales are facilitated through the vendors’ smartphone apps.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 949-375-4734.

Additional Resources:

New lawsuit alleges marijuana delivery giant Eaze engaged in payment processing fraud, June 7, 2019, California Marijuana Business Attorneys

The dangers of cash transactions cannot be overlooked. Violent crimes surge whenever large amounts of cash are present. In one bizarre case from 2013, the owner of a lucrative marijuana dispensary was kidnapped and tortured in a futile attempt to force him to disclose the location of his cash reserves. The LA Times reports that the assailants removed the victim’s penis, then took it with them so it could not be reattached. While this is a bizarre and extreme example, the fact remains that violent crime is inevitably correlated with cash transactions, and it is a real danger for cannabis business owners. Thinking Outside the Cash Box Some cannabis business owners have explored more creative solutions to this problem. The LA Times reports on two such tactics. One such owner deposits his cash “in drips and drabs” into an account held by a limited liability company. The LLC is represented to the bank as a property management firm, and the bank “doesn’t know what we do”. This process is described as “not far off” from money laundering. Another business owner is reported to send his cash payments directly to the Federal Reserve Bank in Los Angeles. They are deposited into the account of a credit union that is “eager to do business” with the cannabis company. This is a far cry from the dangerous cash transactions and ersatz money laundering of other cannabis businesses. Yet the strategy relies on the participation of a willing financial institution. According to the U.S. Treasury Department, 368 financial institutions in America served the cannabis industry. This is only a small fraction of the twelve thousand financial institutions across the nation. Opening such a bank account can also be cost-prohibitive for many businesses. Initial fees for financial audits and criminal background checks can be as much as $10,000. Monthly fees are also significant due to due diligence and reporting requirements of the Treasury Department. One credit union charged $5000 per month for growers to hold a bank account, and $7,500 per month for dispensaries. While this figure may sound inflated, it is not certain to cover the bank’s expenses associated with IRS audits, DEA investigations, and a host of other regulatory costs not faced by other industries. Cash-based transactions and operating expenses leave cannabis business owners vulnerable to violent crime. An experienced marijuana lawyer can help business owners to find financial solutions which both meet federal regulations, and also protect their personal safety and financial interests. The Los Angeles Cannabis Law Group represents growers, dispensaries, collectives, patients and those facing marijuana charges. Call us at 949-375-4734. Additional Resources: Why pot businesses hide their cash – and others truck it straight to a federal vault, July 7, 2017 by James Rufus Koren, The LA Times More Blog Entries: Local Leaders Ask Feds to Ease Marijuana Banking Rules, January 24, 2017, by Cannabis Law Group