Visa, the world’s second-largest card payment company, recently issued a compliance memo to customers warning them that miscoding point-of-sale transactions through the use of so-called cashless ATMs—a practice used by some cannabis retailers as a workaround to accept credit or debit cards for purchases—could lead to penalties or other unspecified enforcement action.

The warning comes as congressional lawmakers grapple with how to handle marijuana business banking. The House passed a defense bill in September with language that would have protected banks that work with state-legal cannabis companies, but after talks with the Senate, those provisions were not attached to a new bicameral deal filed Tuesday.

The December 2 memo from Visa that was obtained by Marijuana Moment says the company is “aware of a scheme” in which merchants are using the cashless ATMs to effectively sidestep restrictions on what types of sales that payment cards can be used for.

“Cashless ATMs are POS devices driven by payment applications that mimic standalone ATMs. However, no cash disbursements are made to cardholders,” the memo explains. “Instead, the devices are used for purchase transactions, which are miscoded as ATM cash disbursements. Purchase amounts are often rounded up to create the appearance of a cash disbursement.”

Via Visa.

At a cannabis retailer, for example, a $45 purchase might be rounded up to $60 and coded as a cash disbursement. The retailer would then subtract the purchase price plus taxes from the apparent $60 withdrawal and return the change to the customer. To the payment processor it would look like a $60 ATM withdrawal, but to the customer it would seem as though they’d bought cannabis with a card.

While Visa’s memo doesn’t mention cannabis specifically, it notes that cashless ATMs, which are sometimes called reverse ATMs, “are primarily marketed to merchant types that are unable to obtain payment services—whether due to the Visa Rules, the rules of other networks, or legal or regulatory prohibitions,” a category that includes cannabis businesses.

With federal prohibition preventing most marijuana retailers from accepting credit or debit cards as direct payment, some have seen the use of cashless ATMs as a convenience for customers and thus a smart business decision. Rather than maintain an on-premises ATM or ask customers to show up with cash, they can simply swipe a card like any other retailer. Companies that market cashless ATM devices, meanwhile, remind retailers that customers tend to spend more when they can pay with plastic.

Nathaniel Gurien, CEO of Fincann, which provides financial services specifically to cannabis businesses, estimated that thousands of cannabis retailers in the U.S. currently use what he called “the cashless ATM solution” in order to accept cards, a setup he described as “clever, attractive and likewise fraudulent.”

“What keeps me up at night is that when, not if, one or more eager assistant U.S. attorneys with their eye on advancement sinks their teeth into this, it has the catastrophic potential to derail our industry’s momentum and inflict great damage,” he said in an email to Marijuana Moment.

Visa’s compliance memo is brief when it comes to enforcement. Misuse of cashless ATMs “will be subject to non-compliance assessments and/or penalties” or “subject to further compliance enforcement,” it says, but doesn’t include details.

The company did not immediately respond to emails and a phone message from Marijuana Moment.

Steven Hawkins, CEO of the US Cannabis Council, said in a statement to Marijuana Moment that cannabis retailers across the country “are being squeezed by unfair banking and tax rules that single out cannabis businesses.”

“We urge Visa and other financial institutions to constructively engage with lawmakers and the cannabis industry on payment options,” he said. “Ultimately Congress will need to step in by passing the SAFE Banking Act, which we are urgently working to pass.”

Other industry groups expressed disappointment with Visa for targeting cannabis retailers rather than supporting them.

“It is unfortunate that Visa is unwilling to work with the cannabis industry, which is legal in dozens of states and represents billions of dollars in economic activity, at a time when this country needs all the financial options it can use,” said Morgan Fox, media relations director for the National Cannabis Industry Association. “But it is even worse that they are trying to discourage alternative solutions that are primarily utilized by small businesses to protect themselves and their customers from theft and violent crime.”

“The announcement amounts to intimidation,” Fox added, “and will directly put cannabis businesses at even greater risk that could cost lives.”

A Chicago Bar Association blog post from January that examined the use of cashless ATMs in the cannabis industry said that miscoding cannabis sales would not only violate payment processors’ policies but “would be a violation of federal law as well.”

Combing through Visa’s rules, author Kasim Carbide, a corporate and banking compliance lawyer, noted that such violations of company rules “may result in a disciplinary action against the Merchant, as well as a potential fine of $200,000 or $2,500 per day (which can be retroactively apply [sic] to and from the first day of noncompliance), and termination of the Merchant’s account.”

“Merchants are encouraged to remove their cashless ATMs and seek out legitimate data and payment processors without violating Network Rules,” Carbide wrote. “While many Merchants are willing to tolerate the risk for immediate profits, most Merchants have too much invested in their business to jeopardize it for an illegal fad.”

Already the use of cashless ATMs by the cannabis industry has prompted crackdowns. Leafly reported in 2019 that operators of roughly a third of San Francisco’s licensed stores had their cashless ATM devices abruptly shut down, leaving them unable to accept payments.

Yet the use of cashless ATMs at cannabis businesses is still practiced widely.

“It’s been an industry cliché for a decade that getting thrown out of one’s bank several times a year is just another cost of doing business and speed bump in the road towards bringing our industry slowly into the mainstream,” said Gurien, the Fincann CEO. “Of course, the reason most lose their bank accounts is that they committed federal bank fraud and de-facto money laundering by hiding the true nature of their business from the bank and putting the bank at serious risk in the process.”

Jessica Billingsley, CEO of cannabis technology company Akerna, said that some businesses in the industry may not even understand the cashless ATM practice may be unlawful.

“With the number of unique complexities and challenges the cannabis industry faces, many operators don’t understand that they have been sold misrepresented products that may not be legal,” Billingsley said in a statement. “The work of a few bad actors cannot undermine the important legal work the majority of ancillary providers have been doing.”

Calls for easier access to financial services for cannabis businesses have been growing since the first states legalized. In the past year or so, however, Congress has indicated its interest in addressing the issue, and lobbying by businesses and other groups has crescendoed.

Earlier this month, the American Bankers Association (ABA), Credit Union National Association (CUNA), United Food and Commercial Workers Union (UFCW) and 11 other organizations sent a letter imploring Senate leadership to adopt language protecting banks that work with state-legal cannabis businesses into the National Defense Authorization Act (NDAA).

“Our organizations have banded together because the status quo is untenable for workers, communities, ancillary businesses and law-abiding financial institutions,” the group’s letter said, adding that enacting the banking reform would “also provide legitimate business with access to necessary insurance products and protections that are afforded to other businesses.”

In September, the House attached language from the Secure and Fair Enforcement (SAFE) Banking Act in its version of NDAA. The groups wanted the Senate to follow the chamber’s lead, though it ultimately did not.

Bipartisan members of the Senate Armed Services Committee had also sent their own letter urging leaders to include the SAFE Banking Act in the final NDAA. Shortly thereafter, U.S. senators representing Colorado made the same request in a separate letter.

The SAFE Banking Act has been approved in some form in the House five times now, but it’s so far languished in the Senate. Stakeholders have held out hope that the chamber would advance the legislation with a Democratic majority, but some key players like Senate Majority Leader Chuck Schumer (D-NY) have insisted on passing comprehensive legalization—like a reform bill he’s finalizing—first.

That said, Schumer had signaled he was open to enacting banking reform through NDAA if it contained social equity provisions.

Last month, a bipartisan coalition of two dozen governors implored congressional leaders to finally enact marijuana banking reform through the large-scale defense legislation.

A group of small marijuana business owners also recently made the case that the incremental banking policy change could actually help support social equity efforts.

Rodney Hood, a board member of the National Credit Union Administration, wrote in a recent Marijuana Moment op-ed that legalization is an inevitability—and it makes the most sense for government agencies to get ahead of the policy change to resolve banking complications now.

Meanwhile, an official with the Internal Revenue Service said that the agency would like to “get paid,” and it’d help if the marijuana industry had access to banks like companies in other legal markets so they could more easily comply with tax laws.

Federal data shows that many financial institutions remain hesitant to take on cannabis companies as clients, however, which is likely due to the fact that the plant is a strictly controlled substance under federal law.

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