Guest Author: Alexis Lazzeri, Esq.
Eaze Consultant Convictions: A “Clear Criminal Conspiracy.”1
As long as cannabis remains federally illegal, licensed cannabis businesses are forced to operate outside of the mainstream FDIC insured banking system. This delegation to the financial shadows remains a well known liability, physically and financially, for cannabis companies operating in cash and an inconvenience for consumers, who often cannot use credit or debit cards to make purchases of cannabis products.
Eaze Technologies, Inc. has been a force to be reckoned with since its launch in California in 2014, initially connecting medical cannabis dispensaries to patients. Eaze’s technology platform allowed the consumer to order on-demand cannabis products right to their door AND utilize a credit or debit card – an anomaly.2 It was insanely convenient and seriously befuddling to anyone who had a basic understanding of U.S. banking regulations.
Eaze Execs Claimed to be in the Business of Dog Food, Face Creams and Green Tea.
Following several years of profound success, Eaze and its former executives have now felt the ire of federal banking regulators. The United States District Court of the Southern District of New York recently alleged that while working for Eaze between 2016 and 2019, Los Angeles businessman Hamid (Ray) Akhavan, 42, and German e-commerce consultant Ruben Weigand, 38, assisted in circumventing card payment network policies, deceiving U.S. banks that prohibit marijuana transactions for payments of around $150 million.3 The three week trial recently ended in the conviction of Akhavan and Weigand on one count each of conspiracy to commit bank fraud.4
News reports have stated that a former Eaze CEO, who last month pled guilty to conspiracy and entered into a cooperation agreement with the prosecution, testified in the trial that the scheme passed transactions through fake businesses in order to prevent being flagged for suspected marijuana transactions to Visa and Mastercard.5 Both card merchants do not allow not allow marijuana businesses to access their card networks and would have removed Eaze’s merchant accounts from their networks if they had been discovered.
Federal prosecutors allege that what Akhavan and Weigand (and nearly 140 co-conspirators) orchestrated was a “transaction laundering scheme.”6 Akhavan and Weigand “set up fictitious businesses, complete with websites and bank accounts, purporting to sell a host of products like dog food, face creams, green tea, carbonated drinks, and diving gear. They then used these fictitious businesses to fool the banks into approving marijuana credit card and debit card sales by disguising those transactions as sales of dog food and the like. As a result, the banks processed more than $100 million worth of transactions that they otherwise would have declined.”7
Attorneys for the defendants continue to argue that the international banks and card networks tacitly approved of the cannabis sales, “turning a blind eye” to the unsavory albeit profitable transactions from Eaze’s merchant accounts.
Cannabis Remains a Criminal Enterprise Under Federal Law – The SAFE Banking Act would help.
Federal law currently defines all cannabis related endeavours as criminal enterprises. Therefore, despite the legality of licensed cannabis operators under various state laws, the profit and monies associated with that “legal” business is essentially that of a criminal enterprise. Currently, FDIC insured banks want nothing to do with that.
However, cannabis is now legalized in some form in 48 U.S. states. Cannabis related businesses are a billion dollar industry.8 Cannabis companies cannot continue to operate as cash-only and remain in the financial shadows. The convictions of these businessmen simply underscore the ongoing predicament surrounding payment processing in the cannabis space. Passage of the Federal Secure and Fair Enforcement (SAFE) Banking Act would alleviate the very issues prosecuted here.
California has already made strides in legitimizing cannabis financial services. In September 2020, Governor Gavin Newson signed Assembly Bill 1525 into law making it easier for financial institutions to adhere to federal reporting requirements and elucidates that financial servicers to cannabis businesses do not violate California law “solely by virtue of the fact that the person receiving the benefit of any of those services engages in commercial cannabis activity as a licensee.”9 The Federal SAFE Banking Act is similar to, but more robust than, AB 1525 in that they both aim to legitimize the cannabis industry and alleviate some of the risks of operating a cash-only business.
Ultimately, the SAFE Banking Act would be monumental for cannabis companies nationwide. The Act would allow, and not actively discourage, financial institutions to offer financial services to cannabis companies.10 The Act would prohibit regulators from terminating or limiting either deposit or share insurance of such a financial institution for the sole reason that it does business with a cannabis company. Additionally, the Act would bar regulators from taking an adverse action on a loan made to an individual solely because of their ownership in a cannabis related business, or equipment or real estate leased to a cannabis related business.
Despite its common sense features, the Bill has faced difficulty gaining traction in Washington. It was initially introduced in 2019 and reapproved twice in the House and yet the Bill has simply stalled in the Senate.11
However, the long-awaited reintroduction of the SAFE Banking Act occurred early this week, with a bipartisan group of 124 members of the House12 and 31 members of the Senate.13 Industry experts are hopeful, but not holding on for the passage of the bill. The timing is likely bittersweet for Mr. Akhavan and Weigand, who are now set to be sentenced in June 2021.14 With hope (and some lobbying), we can look forward to a greener, more accessible future.
Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.
1 Rebecca Davis O’Brien, Businessmen Convicted of Duping Banks in Marijunana Sales, The Wall Street Journal, (Mar. 24, 2021), https://www.wsj.com/articles/businessmen-convicted-of-duping-banks-in-marijuana-sales-11616601574
2 Rebecca Davis O’Brien, Men Accused of Tricking Banks Into Aiding Marijuana Sales Head to Trial, The Wall Street Journal, (Mar. 1, 2021), https://www.wsj.com/articles/men-accused-of-tricking-banks-into-aiding-marijuana-sales-head-to-trial-11614603992
3 Rebecca Davis O’Brien, Businessmen Convicted of Duping Banks in Marijunana Sales, The Wall Street Journal, (Mar. 24, 2021), https://www.wsj.com/articles/businessmen-convicted-of-duping-banks-in-marijuana-sales-11616601574
4 Jody Godoy, Consultants Convicted of Eaze Marijuana Payments Scheme, Reuters Legal, (Mar. 24, 2021), https://today.westlaw.com/Document/I0fd33c008cd011eba824a01d1c1bf194/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true&bhcp=1
5 MJBiz News Brief, Ex-Eaze CEO pleads guilty in $100 million cannabis payment scheme, Marijuana Business Daily, (Feb. 22, 2021), https://mjbizdaily.com/ex-eaze-ceo-james-patterson-pleads-guilty-in-100-million-marijuana-payment-scheme/; Rebecca Davis O’Brien, Men Accused of Tricking Banks Into Aiding Marijuana Sales Head to Trial, The Wall Street Journal, (Mar. 1, 2021), https://www.wsj.com/articles/men-accused-of-tricking-banks-into-aiding-marijuana-sales-head-to-trial-11614603992
6 Rebecca Davis O’Brien, Businessmen Convicted of Duping Banks in Marijunana Sales, The Wall Street Journal, (Mar. 24, 2021), https://www.wsj.com/articles/businessmen-convicted-of-duping-banks-in-marijuana-sales-11616601574
7 United States v. Weigand, No. 1:20-cr-00188, (S.D.N.Y. Aug. 31, 2020).
8 Will Yakoqicz, U.S. Cannabis Sales Hit Record $17.5 Billion As Americans Consume More Marijuana Than Ever Before, Forbes, (Mar. 3, 2021), https://www.forbes.com/sites/willyakowicz/2021/03/03/us-cannabis-sales-hit-record-175-billion-as-americans-consume-more-marijuana-than-ever-before/?sh=416cf0862bcf
9 Assembly Bill No. 1525 (Chp. 270), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB1525
10 Jihee Ahn, The Safe Banking Act’s Reintroduction in 2021, Harris Bricken CannaLaw Blog, (March 27, 2021), https://harrisbricken.com/cannalawblog/the-safe-banking-acts-reintroduction-in-2021/
11 NORML, House Reintroduces SAFE Banking Act to Normalize Cannabis Commerce, NORML, (Mar. 18, 2021), https://norml.org/blog/2021/03/18/house-reintroduces-safe-banking-act-to-normalize-cannabis-commerce/
12 H.R. 1996, 117th Congress, (2021-2022) https://www.congress.gov/bill/117th-congress/house-bill/1996/cosponsors?pageSort=lastToFirst&searchResultViewType=expanded (Last visited on Mar. 29, 2021)
13 S.910, 117th Congress, (2021-2022) https://www.congress.gov/bill/117th-congress/senate-bill/910/cosponsors?searchResultViewType=expanded&pageSort=lastToFirst (Last visited on Mar. 29, 2021)
14 Post conviction Mr. Weigand’s attorney refused to comment, whilst Mr. Akhavan’s attorney stated that he would certainly be challenging the decision.