Little more than a year ago, the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued written guidance to banks for extending merchant services to medical marijuana businesses that fully comply with state law. Given the huge profit to be made, it may seem hard to understand why so few acquiring banks have accepted FinCEN’s invitation to enter the fray and begin payment processing for marijuana, particularly when Visa and MasterCard have taken the position that local acquiring banks are best suited to make determinations regarding the legality of a marijuana-related merchant’s business because the question represents an “evolving legal matter with different standards applicable in different states.” 
Yet boarding marijuana merchants inherently presents acquiring banks with considerable risk, both legally and financially.
THE EBB & FLOW OF FEDERAL LAW ENFORCEMENT POLICY REGARDING “LEGAL” MARIJUANA
Legally, the bottom line is that the federal government still classifies marijuana as a Schedule 1 drug on par with cocaine and heroin, and flatly prohibits its manufacture and distribution. While FinCEN has invited banks to extend financial services to “legal” medical marijuana-related merchants, the DOJ has emphasized that the guidance does not reflect a change in substantive federal law, but simply represents a shift in enforcement policy guided by the goal of resource management. More to the point, the federal government has not offered banks any immunity from prosecution should it decide to reverse direction and return to a strict enforcement policy regarding marijuana. Should that happen, there is simply nothing in place to protect banks against the risk of prosecution under the Bank Security Act (“BSA”) and the Racketeer Influenced and Corrupt Organizations (“RICO”) act for facilitating illegal transactions. This is no small concern, particularly given the federal government’s decidedly inconsistent history regarding the issue.
Twenty-three states, plus the District of Columbia and the territory of Guam, have passed medical marijuana laws, with four of those states (Colorado, Washington, Alaska, and Oregon) also permitting recreational use. Another nine states have pending legislation to legalize medical marijuana. President Obama has openly supported “decriminalization” and, while stopping short of embracing “legalization,” has repeatedly advocated the right of individual states to make their own decision. Moreover, other recent actions by various departments within the federal government evidence a strong movement in that direction.
For example, in August 2013, the Department of Justice issued a memo to US attorneys instructing against use of federal law enforcement resources in connection with investigation or prosecution of properly state-licensed marijuana-related businesses operating in compliance with state law unless such businesses engage in illegal activities that implicate specifically enumerated DOJ priorities (such as preventing the distribution of marijuana to minors, or preventing marijuana revenue from going to criminal enterprises, gangs or cartels). FinCEN’s issuance of its 2014 guidance to banks for extending financial services to “legal” medical marijuana businesses (discussed above) represents another clear example. More recently, by language included in its December 2014 spending bill, Congress has expressly prohibited federal agents from raiding state-approved medical marijuana dispensaries.
Despite these developments, however, marijuana remains illegal under federal law, and the federal government has an inconsistent and complicated history in resolving the tension between federal and state law on the question.
When California legalized medical marijuana in 1996, the industry’s vast profit potential led many banks to throw caution to the wind and immediately begin processing card payments for dispensaries – some openly, and others in more questionable manners – and this era of readily available processing endured for a time. Sometime between late 2007 and early 2008, however, the DEA (under the Bush administration) began warning banks and processors to stay clear of medical marijuana businesses. The DEA also intensified raids on California growers and providers throughout this period into 2009.
Then, in the early days of Obama’s tenure, Attorney General Eric Holder shifted gears and announced that prosecutors would no longer target medical marijuana users and caregivers, as long as they followed state laws. Yet DEA raids and federal prosecutions continued.
In October 2009, the DOJ issued a memo (known as the Ogden Memo) to US attorneys in states with medical marijuana programs. The memo said that law enforcement efforts targeting drug manufacturing and trafficking should not “focus federal resources . . . on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” The Ogden memo provided a list of characteristics of “illegal drug trafficking activity of potential federal interest,” which included sales to minors, violence, ties to other criminal organizations, and unlawful possession of firearms.
Department of Justice backtracked on those statements in 2011, however, when it announced that larger-scale providers could still be targeted, though enforcement against patients and those caring for them would not be a priority. In October 2011, all four US attorneys for California initiated a major crackdown on marijuana-related businesses. These efforts intensified in 2012, when federal prosecutors in California implemented a strategy of pressuring commercial landlords housing pot shops to evict them, or face costly legal battles and the potential forfeiture of their properties.
In or around July 2012, the Treasury Department is also rumored to have flexed its muscle on credit card companies, who then reportedly informed merchant services providers that they’d be “dropped from Visa and MasterCard forever” unless they immediately stopped processing medical marijuana payments. This was in addition to existing pressure from the FDIC and state banking regulators to stay away from merchants they deemed unsavory in general (payday lenders, etc.).
Thus, recent developments in the federal government’s policies in regard to respecting state law decisions concerning medical marijuana must be viewed against this backdrop of shifting positions. Moreover, while Visa and MasterCard have followed the Obama administration’s lead and deferred to acquiring banks to determine questions of state law regarding the legality of marijuana businesses, American Express has remained steadfast on banning use of its cards to purchase marijuana. It also bears note that neither Visa nor MasterCard has thus far seen fit to create a Merchant Category Code (MCC) for marijuana-related merchants, which means that a marijuana-related merchant must process under a general MCC, or operate in violation of card association rules by using inaccurate MCCs to falsely describe their businesses as “flower shops” or “health clubs.” Accordingly, from their comfortable perch on the fence, Visa and MasterCard can (like the federal government) change their mind at any time and move back to the side of the fence prohibiting payment processing for marijuana merchants as a violation of federal law.
Further, as Obama recently explained when asked about the potential legalization of marijuana on a national basis during a town hall meeting in Jamaica: “I have to tell you, it’s not a silver bullet, because if you are legalizing marijuana, then how do you deal with other drugs and where do you draw the line?” Noting that some states, including Colorado and Washington, have now legalized recreational marijuana use, he said, “We will see how that experiment works its way though the process … [But] I do not foresee anytime soon Congress changing the law at a national basis.” http://www.mediaite.com/tv/obama-fields-inevitable-marijuana-question-at-jamaica-town-hall/
OTHER FINANCIAL RISKS
Any bank that decides to process marijuana payments also faces considerable financial risk. First, if the stereotype of “potheads” is true, then I expect that businesses providing these services are going to face substantial chargebacks from cardholders intent on obtaining the product but not really keen on paying for it. And that is before the cardholder’s wife, mom or boss reviews the cardholder’s statement. Also, as the product has a large secondary black market (i.e., take a walk down Venice beach any weekend), we can expect fraudsters to use marijuana transactions to convert their stolen and fraudulent cards into cash.
What happens if state or local law enforcement authorities force the merchant to close its doors for operating outside the limited scope of state law? Or if DEA agents raid the merchant for implicating DOJ concerns such as illegal trafficking of marijuana across state lines, or working with drug cartels? Answer, the acquirer will be left with no recourse other than to attempt to recover its losses from an incarcerated merchant, whose bank accounts (to the extent they have them) have been frozen and all inventory and other physical assets seized by the government. Given the ebb and flow of the federal government’s stated position with respect to prosecuting state-licensed marijuana businesses in the more than 18 years since California became the first state in the nation to legalize medical marijuana, the likelihood of shifting legal positions translates to substantial financial risk for any acquirer that decides to board a marijuana merchant.
While these considerable legal and financial risks have effectively deterred most acquiring banks (who are naturally risk adverse) from entering the fray, the last year-and-a-half has seen the emergence of many payments mavericks willing to fill the gap and extend their own brand of merchant services to legal marijuana businesses.
Such workaround solutions include the use of cashless ATM systems that allow dispensary customers to pay with a debit card, thereby using the ACH system instead of the credit card network to process the payment transaction. The debit card user must select the total payment amount in specified cash increments (e.g. $5, $10, or $20), and is refunded the difference in cash at the register. Debit card users also pay a transaction fee (e.g. $2) for the service at the dispensary, just like they would at most ATMs. I suspect that the providers of this service are subjecting themselves to the same risk as banks and payment processors that process marijuana transactions.
Other workaround solutions include use of mobile payment applications that allow authorized, retail marijuana merchants to accept digital payments from customers in Colorado and in other “legal” marijuana states. When a dispensary client registers for the service, a digital, prepaid card account is created for him and linked to his user account. When the customer is ready to make a purchase at the dispensary, they simply make a payment using the smartphone application and send it to the merchant via a push transaction. Upon acceptance by the merchant, the funds are sent from the customer’s account to the merchant’s digital prepaid account (i.e. prepaid credit card). Other payment providers are touting Bitcoin and other pseudonymous virtual currencies as attractive, low-fee solutions.
While the legality of such workaround solutions has yet to be tested, one thing is for certain: attorney general and regulatory authorities are likely to view such creative emerging payments solutions with extreme scrutiny. Should authorities regard the services as part of a scheme or artifice to defraud the bank, or to obtain monies under the custody or control of a bank by means of false or fraudulent premises or representations, then those involved face the risk of prosecution for bank fraud and criminal conspiracy – crimes which carry penalties of up to $1,000,000 in fines and/or 30 years in prison. Until the federal government and the card associations alike take a firm position protecting banks against the risk of shifting legal positions, most marijuana merchants will have to decide whether to take a chance on such emerging payment solutions; or continue operating on a strictly cash basis, paying substantial costs for security and cash collection services, preserving the stigma of illegitimacy associated with their industry, and presenting an attractive target for armed robbery. Despite the profits, that is a tough place to be.