Shortly after my graduation and while preparing to enter the journey of adulthood, my father took me to his favorite shoe store, Wolinsky & Levy Shoes on Roosevelt Road in Chicago. We were not there to shop; we were there for a rite of passage. We went there to buy a pair of wingtips.
On the way back in the car my dad decided to hand me a piece of advice that has stood the test of time. He said “Tommy, those shoes will serve you well for a very long time if you take care of them! Always keep them polished, nothing says more about a fella than a pair of unpolished shoes. Those are a classic. Fashion comes and fashion goes but a classic is always in style. Like bell-bottoms and leisure suits, fashion always comes and goes, but a classic always in style. Keep two white shirts clean and ironed and a dark suit always pressed, and you’ll never have to worry! Like those shoes, a classic is always in style. But never get rid of a tie, they always manage to come back in style.”
Stick with me, this is going somewhere…
Since I began consulting in the marijuana industry, I have seen fads come and seen fads go. I came into this industry with well over 25 years of financial industry experience. I have seen a lot, some very good and some very bad. I have seen the influence technology can have to level the playing field for investors and I have seen the irrational exuberance of the DotCom bubble. I have seen the very good and the very bad. My goal from the jump has always been one thing, to bring normalized financial services to this very needed and state-legal industry. You have heard that phrase before I bet, “normalized financial services?” Me too! I heard me say it over and over again while bumping my backside traveling all over the great state of Missouri since the spring of 2019 talking to anyone interested in the industry who would listen, including banks and potential MRBs. These normalized financial services exist, and they exist often obscured by the current fad solution of the day.
Much like ties, a fad from the early days of merchant processing in the marijuana industry has returned and returned in force! The solutions now go by another name, Point of Banking. Like a rose by another name but this one does not smell very sweet, it frankly stinks!
It is not news to anyone in or following the marijuana industry that banking is a challenge as is merchant processing. While many states have legalized marijuana to varying degrees, it is listed in the Controlled Substance Act as a Schedule One narcotic, similar in treatment to heroin and LSD (1). Marijuana is federally illegal and will be until it is not. That said, it will, most likely, always be a controlled substance. The marijuana industry is considered by banks and other members of financial services to be “High Risk” and that will not likely change either. While some are, not all banks and other service providers are comfortable in the space. Both Visa and Mastercard brands have not yet embraced the industry. They have in their terms and conditions provisions specifically prohibiting facilitating transactions involving illicit substances.(2)(3) Marijuana meets that criteria making not only banking a challenge but offering traditional merchant card processing impossible without misrepresenting or committing fraud in some manner.
What is an MRB to do? Enter Cashless ATMs often re-branded, veiled in a new name, “Point of Banking”. In 2013-14, Cashless ATMs were all the rage in the fledgling marijuana industry. With nowhere else to go, dispensaries turned to ubiquitous technology repurposed to act in way not as designed. ATMs, Automated Teller Machines, were designed to allow for more efficient access to funds in demand deposit accounts held at depository financial institutions. As the name suggests, the bank teller experience was replaced with automated technology allowing for both withdrawal from and deposit to accounts held at banks. ATMs were not designed to handle transactions at the till nor are they an appropriate substitute for traditional merchant processing. Go take a look at your bank statement! I will bet dollars for donuts you will NOT see a single “Cashless ATM” or “Point of Banking” coded transactions but rather “ATM Withdrawal” regardless of whether you used a cashless ATM at the time of purchase.
The 2014 removal and denial of services by Metabank affecting dispensaries in both Washington and Colorado and recent high-profile cannabis payment cases such as Eaze Technologies, Inc, should be a warning(4)(5). Processes that are designed to deceive financial institutions and hide point-of-sale transactions never end well. Bank fraud does not require there to be harm to a bank or credit union, much less result in monetary loss to the bank.
These cashless ATMs are located at the merchant’s location and are earmarked exclusively for their customers. Commonly, marijuana-related businesses and/or their payment processors deliberately obscure the nature of the business during the application process. Regardless of the application information, these solutions result is the miscoding of the transactions as a cash withdrawal. This miscoding has been identified as money laundering and the deceptive practices can be and have been determined to be bank fraud, even if one side is aware of the arrangement. These transactions are structured by amounts, always even, and coding to avoid detection and potentially missing required reporting. The merchant location itself, without the protection of a premise agreement for a traditional ATM install, put the business under additional state regulatory authority and scrutiny revolving around the operation of an ATM. I suspect many if not all of these businesses and locations will be found deficient and operating outside the law in this regard.
So…Point of Banking/Cashless ATM solutions are a hot mess! Start with structuring transactions by amount therefore possibly avoiding required detection and reporting, add to those transactions involving an exchange of value for goods and services miscoded as Cash Withdrawals and you end up with at least three parties to what is potentially bank fraud, the patient, the merchant, and the patient’s bank even! MRB owners’ risk being added to Terminated Merchant File Watch Lists that will follow and affect their current and future businesses forever! This state-legal industry deserves better, not a relic from the past dusted off for its vulnerabilities and re-branded!
Many in the marijuana industry including the banks serving them believe this is far safer and has less security risk than an all-cash payment process or other compliant viable options. These financial institutions and marijuana-related businesses should not attempt to offset the security risk of cash at the expense of exposing themselves to potential money laundering and violations of merchant card agreements.
Is it worth it when other registered, regulated, compliant, reporting, cost-effective solutions are available? I say HARD NO! These are already high-risk POS transactions for god’s sake, can you imagine the burden this now places on banks in states with legal programs statutorily required to find and report these miscoded transactions? After contact with any potential solution provider, check with both your current bank and with both federal and state regulators of financial institutions. The solution should absolutely be operated by a registered and regulated entity in good standing!
As with the Eaze Technologies case, “Willful Blindness” is NEVER a defense. I encourage all marijuana businesses, any business for that matter, currently operating or considering operating with a Cashless ATM a.k.a. Point of Banking solutions to consult with their banking partner armed with the information above. There exist properly registered and regulated companies with proprietary solutions that leverage technology allowing them to process card or non-card-based POS transactions serving under and unbanked businesses and individuals in a full reporting compliant and sustainable manner.
Remember, no one in the ’80s was fooled into thinking you were on your way to jump out of a plane because you were wearing parachute pants and these Point of Banking/ POS ATM solutions in the end are not fooling anyone either. Both are just bad ideas that need to just stay in the past and on the shelf.
Thomas Lorenz, an ACFE Certified Fraud Examiner, and an ACAMS Certified AML, Advanced Audit, and Financial Crimes Investigations Specialist, has been working with financial institutions and Marijuana-related business directly since 2013.
Stan Rubbelke is an independent consultant. He has over 25 years in bank operations and compliance. He has worked with banks and credit unions to develop and implement strong compliance management systems to serve the marijuana industry.
SOURCES
(1)21 U.S.C. Chap. 13 §801 et seq.
(2)https://ift.tt/2qG5i5s
(3)https://ift.tt/2Q56p0v
(4)https://ift.tt/3eRK7K6
(5)https://ift.tt/3sNY1k5
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