At Aacadia., we understand. You just want to accept your customers’ payments like any other business, right?
For cannabis business owners, and the consumers that frequent those businesses, it can be difficult to truly understand why they’re unable to accept traditional credit card payments.
That is both due to the complexity of the federal banking and anti money laundering laws that govern the banking, payments, and card brand industries. As well as the complexities of the banking and payment industry itself.
It’s important to understand banking regulations set by the Bank Secrecy Act (BSA) and Anti Money Laundering laws that federally regulated banks are required to follow. But it is equally important to understand the inner workings of the Payment Card Industry (PCI). Only then can one see how BSA and AML laws pertain to and affect the ability to accept traditional credit card payments for cannabis purchases.
Even if you understand the concept of money laundering, it may not be clear why that pertains to cannabis sales. After all, those sales are legal sales in their state. Business owners and consumers don’t need to understand the flow of a payment transaction. Or the multiple entities involved in completing the transaction. Why should they? That is what they have us for. They are busy doing what they specialize in – their own business. We specialize in the inner workings of card payment and money transfer pathways and the very complex laws and regulations surrounding them.
However, understanding these two subjects is the key to understanding why there is no way to accept credit card payments for cannabis. And this can be very beneficial for business owners working to thrive in the cannabis industry.
So today, we’re going to review the banking and money transfer laws that banks and payment rails are bound by. We’ll also explain in layman’s terms how credit card payments work. This way, it will be easier to see why the disparity between state and federal laws put banks, payment processors, and cannabis companies in a tight spot.
Let’s talk about money laundering and AML law.
At its core, money laundering is basically the act of disguising the true nature of a transaction.
Money laundering refers to the illegal process of concealing the origins of illicitly obtained money, typically through a series of complex financial transactions. The primary objective of money laundering is to make unlawfully acquired funds appear legitimate, making it difficult for authorities to trace the funds back to their criminal source.
The process typically involves three main stages:
Placement: At this stage, the illegally obtained cash is introduced into the financial system. This can be done by depositing the money into banks, purchasing assets, or using various financial instruments to convert the cash into a more manageable and less suspicious form.
Layering: During this stage, the money launderer engages in a series of transactions and movements, often across multiple accounts and jurisdictions. The purpose of layering is to create a complex web of financial transactions that obfuscates the money’s origin, making it challenging for authorities to trace the funds.
Integration: The final stage involves reintroducing the “cleaned” money back into the economy, making it appear as legitimate funds. This can be accomplished by investing the money into legal businesses, purchasing real estate, or engaging in other transactions that give the appearance of legitimate financial activity.
Money laundering is a serious crime and a significant concern for governments worldwide, as it facilitates the funding of illegal activities and undermines the integrity of the financial system. Laws and regulations are in place in many countries to detect, prevent, and prosecute money laundering activities effectively.
Anti Money Laundering regulations are provisions of the Bank Secrecy Act (BSA). BSA laws were created in 1970 to prevent criminals from using financial institutions to hide or launder the proceeds from their illicit crimes. Under BSA law, banks are required to participate in the fight against money laundering and the financing of terrorism. AML laws are a set of rules and procedures meant to detect and weed out criminals engaging in money laundering and financing terrorism.
These comprehensive regulations impose obligations on financial institutions to implement robust systems for anti-money laundering (AML) measures. These include customer due diligence (CDD), transaction monitoring mechanisms (TM), and suspicious activity reporting (SAR).
These laws aim at detecting any potential signs of money laundering promptly by requiring banks, insurance companies, securities firms, and other regulated entities to be vigilant gatekeepers against money laundering activities within their establishments. This includes identifying high-risk customers who may attempt concealment through complex ownership structures or shell corporations.
By imposing stringent reporting requirements on financial institutions, scrutinizing transactions for suspicious patterns, and establishing comprehensive regulatory mechanisms, anti-money laundering laws strive to safeguard the transparency and stability of financial markets while fostering public trust in the banking sector.
How does a credit card transaction work and who is involved?Do the credit card payment networks allow cannabis payments?
There are four main parties involved in a credit card transaction, in addition to the merchant and the customer: the card-issuing bank, the acquiring bank, the merchant’s depository bank, and the card brand’s payment networks.
Customer/Cardholder – The payment card holder and the one who initiates the transaction.
Card-Issuing Bank – The bank that issued the payment card to the customer and funds the transaction from their account.
Merchant – The business or person that accepts the payment card as payment for goods.
Acquiring bank – The merchant’s processing bank. It provides them with a merchant account to allow access to the card brand’s network and processes and settles the transactions.
Depository Bank – The bank that provides the merchant a business bank account and accepts the deposit of funds from the merchant’s completed transactions.
Card Brands and Payment Networks – Are the credit card associations that own and operate the payment networks that facilitate global transactions for each card.
In the U.S., the main card brands include Visa, Mastercard, American Express, and Discover. Together, they make up the card association that owns and operates the payment transaction network known as Interchange. They set the rules that merchants and banks must follow to process transactions across their network. A credit card transaction cannot be done without the use of their network.
Credit card issuing banks include the likes of Wells Fargo, Chase, Bank of America and Citi. These are also FDIC-backed financial institutions. In order to gain FDIC insurance, the FDIC requires banks to “guarantee that they are not facilitating fraudulent or other illegal activity”.
Merchants must open a merchant account with an acquiring bank who assigns them their Merchant ID (MID). The MID tells banks what type of business is asking for the payment transaction. Currently, acquiring banks and processors do not even have a MID for cannabis businesses.
How do these provisions apply to cannabis?
On the State level, cannabis has been legalized and states allow for transactions for the purchase of the cannabis. However, as far as Federal Law is concerned, cannabis is an illegal and illicit drug. Any funds that result from the sale of cannabis are considered illegally gained proceeds. This directly affect cannabis banking and payments.
Under the statutes of the Money Laundering Control Act of 1986, knowingly engaging in financial transactions where the funds were gained from unlawful activity is a federal crime.
So, you have a federally-regulated bank allowing the cannabis business owner to deposit the so-called illicit funds. Then they let the account holder withdraw, transfer, or otherwise pay for things with those funds. This could be construed as money laundering and open the bank to federal prosecution.
Now, on the surface, we all know that’s not what is happening. Most cannabis business owners are simply running a legitimate business and trying to engage in common business practices. I’m sure you’re not trying to hide the source of your income or the nature of your business. At the end of the day, you simply want a way to accept payments for a profitable business, don’t you?
But in this country, we live and work under the constraints of rules, regulations and laws. In this case, these laws were created to detect and catch terrorist financing, financial fraud, and illicit drug rings.
Under the Constitution. Individual States have the power to create, implement, and enforce their own laws. However, the Supremacy Clause in the Constitution basically states that federal statutes “shall be the supreme Law of the Land” and therefore preempt conflicting rules of state law .
In an effort to remedy this situation, the Financial Crimes Enforcement Network (FinCEN) created a set of regulations that banks must follow to serve the industry and comply with federal law.
FinCEN guidance requires banks to file Suspicious Activity Reports (SAR) for any transaction that could potentially be an attempt at money laundering or construed as suspicious activity. according to FinCEN, the purpose of the SAR is “to report known or suspected violations of law or suspicious activity observed by financial institutions subject to the regulations of the Bank Secrecy Act (BSA).”
So what constitutes suspicious activity? FinCEN describes suspicious activity as “any conducted or attempted transaction or pattern of transactions that you know, suspect or have reason to suspect… Involves money from criminal activity. Under the fed’s eyes, cannabis sales are a criminal activity. Therefore, each and every deposit or transaction using funds from a cannabis or a cannabis related business would then be suspicious and require a SAR filing. This was originally meant to be an “if and when” situation, not for 100’s of transactions a day, every single day. However, with cannabis, even though there is technically no “suspicious activity” found when monitoring a business, all transactions are considered suspicious.
Complying with FinCEN guidance and SAR reporting brings a level of scrutiny and risk many banks are not comfortable with.
As you learned in the payment process flow above, there are at least three banks involved in the processing of payments. And they must all access the card brand association’s network to complete the transaction process.
Problems specific to credit cards and other workaround solutions.
While there are ways to accept electronic payments for cannabis, credit cards are not one of them. Now we also must take into account the card brands and their payment network used to facilitate credit card transactions. Each card brand has their own set of rules governing the use of their credit card brand. The card brand association also sets rules for the use and access of their payment network and what type of transaction may occur.
Visa card brand member rules state:
“Each Member must comply with all applicable laws, regulations, and other legal requirements including, but not limited to, laws and regulations regarding banking, financial institutions, payment systems, foreign currency exchange, money transmission, anti-money laundering, anti-terrorist financing, sanctions…, privacy and security, consumer protection, and trademarks and copyright for each country in which the Member operates.
All the major card brands have repeatedly made it clear that they will not allow credit card transactions for the marijuana industry. The card brands will not allow transactions that are illegal under federal law to be processed on their payment networks.
In recent news, Mastercard was reported to have put out a statement reminding financial institutions that they will not support illegal transactions on their network:
“In accordance with our policies, we instructed the financial institutions that offer payments services to cannabis merchants and connects them to Mastercard to terminate the activity,”
We also know that there is currently no accepted Merchant ID (MID) or Merchant Category Code (MCC) for any U. S. cannabis business. Visa card brand rules also state that “mis-coding transactions on a POS system…. violates Visa network rules…”
So even if you could find a workaround for accepting credit cards, or find a way to process a transaction without using the card brand networks, you can’t put the purchase on the card. Any transactions using a card or communicating over their network violate card brand rules.
So, as you can see, all these laws, rules, and regulations, when added together, create quite a roadblock for any cannabis business that wants to expand their payment options beyond cash payments. That doesn’t mean there aren’t payment solutions that allow you to reduce your reliance on cash and take advantage of electronic payments, all while remaining compliant.
What can cannabis merchants do right now to accept electronic payments?
Fortunately, even without federal change, there are truly transparent and compliant payment options for the cannabis industry available. As long as there is complete transparency in the chain of custody throughout the entire transaction process.
Cannabis business owners must find ways to run their business efficiently. And that means the ability to accept payment types reliably. The key to doing that is to find financial services that work with your industry. By doing so, you will effectively avoid prosecution and avoid government scrutiny.
In states where growing, processing, and selling marijuana is legal, Aacadia Payments has worked hard to bring compliant solutions that work for cannabis merchants.
We have over 30 years of experience in high-risk payment processing and are a leader in providing legitimate cannabis payment solutions.
This was only made possible because the bank, processor, Federal Regulators, and legal team worked together to create a compliant solution that abides by FinCEN guidelines.
We have established solid strategic alliances with banks and government agencies by conducting transparent and honest business practices. And cannabis merchants should, too.
In the current times of excess scrutiny, it is imperative that cannabis businesses stay diligent in their operations. Stay within the law and be transparent in all financial dealings.
Currently, there are only two cannabis payment options that are reliable and compliant.
Debit transactions that require the use of a pin and ACH transfers are both viable electronic payment options for merchants. As long as they transmit the transactions solely over approved debit networks.
Are you having trouble opening a cannabis business bank account? Our relationships include banking partners that operate the proper programs and are prepared to support cannabis businesses.
At Aacadia, we’re committed to providing our merchants with only the best financial services. We hold ourselves to the highest standard, and live by our promise to provide merchant services the “way they should be”: Dependable, Legitimate, and Service Oriented.
With Aacadia, you can expect no shortcuts or illegal methods when it comes to handling your cannabis merchant account. Banking and cannabis payment services work together to create a safe business climate for all. They can also help establish trust in your business practices among customers.
It is more important now than ever before for cannabis merchants to work within the requirements of banking and money transfer laws for payment processing.
Accepting payments lawfully and reliably lends to the longevity of your business. But it also benefits and supports the efforts of the cannabis industry as a whole.
Savvy cannabis business owners understand this. As a cannabis business owner, there’s no reason to risk your business or your profits by settling. It’s time to set yourself up for success with the legitimate payment solution you deserve.
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