The sale of adult-use cannabis has been legalized in 24 states in
The Challenge of Providing Payment Processing and Financial Services to the Cannabis Industry
Despite progress in numerous US states to authorize the distribution and use of cannabis for both medical and adult-use purposes, cannabis is still federally illegal under the Controlled Substances Act (CSA). For financial services providers, this means that transactions involving proceeds generated by cannabis activities may form the basis for prosecution under anti-money-laundering statutes and the Bank Secrecy Act (BSA). Therefore, banks and money transmitters risk criminal liability when they are involved in certain financial and monetary transactions with proceeds derived from unlawful activities, including proceeds from cannabis-related conduct under the CSA. However, providing financial services to the cannabis industry is not strictly prohibited.
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As a result, cannabis businesses have traditionally relied on cash payments. Not only do cash payments fail to provide the most convenient and modernized customer experience, but they also create public safety concerns and invite increased criminal activity. Operating in cash also makes it impracticable to scale up business operations and further complicates the tracking of funds and collection of tax payments.
The Cashless ATM Workaround and the Crackdown
Market participants have used the "cashless ATM" model to circumvent the restrictions on card payments in the context of cannabis retail businesses. To do so, a cannabis dispensary would set up a payment device that was registered as an ATM. A customer would insert their debit card, enter their PIN, and select a dollar amount that covered the sales price of cannabis and transaction fee, rounded up to the whole dollar. After the transaction was authorized, the dispensary would hand over the product to the customer and give the customer change in cash. The transaction was reported and coded as an ATM withdrawal for the card network. In theory, the economic substance of a cashless ATM transaction is equivalent to a transaction in which the customer withdraws cash from an ATM placed on the dispensary's premises and uses that cash to purchase the cannabis (which is not prohibited by any network rule), except that in a cashless transaction, the withdrawal and purchase transactions are settled simultaneously without cash changing hands.
The card networks have raised concerns that cashless ATM transactions are simply disguised illegal cannabis transactions. At the end of 2021,
Risks for Merchants and Payment Processors and Ways to Mitigate
Whether a permissible way of using cashless ATM exists and whether it should be viewed as a simultaneous cash withdrawal and cash purchase is debatable, but the card networks have discretion to decide whether a transaction has violated network rules or is damaging to the reputation of the network. Cannabis dispensaries and payment processors that continue to facilitate cannabis sales via the prohibited cashless ATM methods assume the risk that their respective businesses could be shut down or fined by card networks. In addition, they might be contractually liable to the acquiring bank for knowingly submitting illegal transactions. A payment processor may also be liable to the bank for failure to implement a sufficient anti-money-laundering compliance program.
Therefore, we recommend that cannabis dispensaries and payment processors carefully review the cashless ATM model to mitigate their risk exposure. For a payment processor, it is important to perform thorough due diligence on the cannabis merchant and the owners that receive the payment services. We recommend that the diligence confirms, for example, the physical dispensary location, evidence that the operation of the cannabis business is fully compliant with local and state laws and regulations, information about the dispensary owner's background and criminal records, whether the dispensary has safeguards in place to prevent diversion, and whether the dispensary has been banned by any payment network or its relationship terminated by any bank. We recommend that the payment processor be fully transparent about the plan with the acquiring bank and seek approval from the bank. Transparency with partners early on when establishing these partnerships can help both parties better evaluate the potential risks associated with a processor's payment solution.
It is also important to ensure transaction data in the merchant's records are accurate. For example, the registered address of the ATM terminal should match the physical location of the cannabis dispensary, and all transaction details required to be disclosed or reported should be disclosed and reported truthfully. Some payment processors provide a cash vault to better support the argument that the transaction is an ATM transaction and not an illegal purchase. Providing customers with the option to obtain cash can support an argument that a true ATM transaction has occurred, separate from the cash purchase of cannabis. A payment processor may also consider adopting a short-term referral model in which it simply refers cannabis merchants to acquiring banks without undertaking the screening and monitoring obligations.
For a cannabis merchant, it is important to understand the risks and benefits of using cashless ATM at checkout as well as the effects on future business operations if it is to be shut out from a payment network or an acquiring bank. Merchants have options when evaluating potential payment processor partners. We recommend that merchants evaluate whether the partner can offer true ATM transactions transparently as opposed to a workaround that is not fully compliant with the network rules and applicable law. The merchant should always make sure the information it provides to the payment processor and the acquiring bank is complete and true, and the merchant should fully cooperate with requests to provide additional documentation or information. Meanwhile, we recommend that merchants explore alternative payment methods such as those discussed below as an exit strategy if cashless ATM is to be completely banned.
Alternative Payment Solutions
Other than cash payment, Automated Clearing House (ACH) payment is generally permissible in the context of cannabis sales. We recommend that merchants consider collaborating with payment providers that support ACH processing at the point of sale. For example, some providers offer mobile apps in which a customer links their bank account as the payment method, and when paying at the store with the app, the linked account will be charged via ACH.
Payment service providers looking to serve the cannabis industry may consider offering a "preloaded" payment method for customers, leveraging their state money transmitter licenses. Similar to the way people can top up and spend their PayPal account balance, a customer can top up a cannabis-friendly payment account using their preferred payment method and later spend the balance at participating cannabis merchants.
Last, cannabis merchants are allowed to take payments in virtual currency. Due to the volatile nature of virtual currencies, however, the better course of action is to accept only stablecoins and convert them to fiat currency afterward. The challenge is that not every customer owns virtual currency or is willing to go out of their way to procure it. A payment service provider that provides a seamless crypto on-ramp process would prove helpful in this situation by allowing a customer to purchase cannabis using virtual currency with a few clicks on their phone, for example.
Footnotes
1. These are: (i) preventing the distribution of marijuana to minors; (ii) preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels; (iii) preventing the diversion of marijuana from states where it is legal under state law in some form to other states; (iv) preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; (v) preventing violence and the use of firearms in the cultivation and distribution of marijuana; (vi) preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use; (vii) preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and (viii) preventing marijuana possession or use on federal property.
2. See "Responses to Questions for the Record to Judge
3. "BSA Expectations Regarding Marijuana-Related Businesses," FinCEN,
4. Id.
5. "Visa Core Rules and Visa Product and Service Rules,"
6. "Mastercard Rules,"
7.
8. Dario Sabaghi, "Mastercard Cracks Down on Marijuana Transactions on its Debit Cards," Forbes,
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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