Two consultants for marijuana delivery business Eaze Technologies Inc. were found guilty last month of conspiracy to commit bank fraud for hiding cannabis transactions from banks which are barred by federal law from doing business with cannabis companies.
During the three-week federal trial, prosecutors from the U.S. Attorney’s Office for the Southern District of New York alleged that the defendants, Hamid “Ray” Akhavan and Ruben Weigand, assisted a wide-ranging international scheme using shell companies, payment processing companies, fake websites, and other means to hide cannabis-related transactions from banks’ anti-money laundering and fraud detection tools. The men helped to disguise orders as non-cannabis products including beverages and dog food which led banks to process over $150 million of transactions from 2016 to 2019. Akhavan and Weigand were among some 140 co-conspirators which included former credit-card and Eaze executives.
Similar allegations of bank fraud were made against Eaze in a 2019 civil lawsuit filed by Herban Industries CA LLC based on California’s unfair competition laws. Herban Industries’ complaint claimed Eaze “created or partnered with Cyprus- and U.K.-based shell corporations that purport to sell these seemingly innocuous [non-cannabis] products but in fact exist solely or primarily to misrepresent the nature of the underlying transactions.” As a result, Eaze sales were alleged to be approximately 300 percent higher than those of rival cannabis delivery service Chill, with which Herban Industries shares common ownership. At the time, Eaze denied processing credit card payments, and the lawsuit ultimately settled on undisclosed terms.
During last month’s trial, however, former Eaze CEO James Patterson testified to being part of the scheme to pass Eaze transactions through fake companies to prevent credit card issuers from reporting suspected cannabis transactions to Mastercard and Visa, who might otherwise remove Eaze’s merchant accounts from their networks. Patterson, who resigned from Eaze in 2019, pled guilty to conspiracy and entered a cooperation agreement prior to the subject action. Eaze cooperated with the investigation and was not charged.
FORMER EAZE CONSULTANTS FIGHT BACK
Attorneys for Akhavan and Weigand argued that the card networks and banks tacitly approved of the cannabis sales, stating: “We believe the evidence established that the banks were and remain complicit in the processing of marijuana payments by credit and debit cards.” Moreover, the alleged bank fraud had no victims as the customers knew exactly what they were paying for and the banks suffered no losses. In fact, the indictment suggested that at least some of the overseas merchant banks knew what was happening, having charged high fees on the transactions due to the high risk associated with cannabis transactions. Nevertheless, after deliberating for approximately six hours, the jurors returned with guilty verdicts. Both defendants are scheduled to be sentenced on June 25.
The lawsuit highlights the precarious position of the cannabis industry on the margins of the mainstream banking system. Although the subject transactions occurred in California and Oregon where medical and adult-use cannabis sales are legal, licensed cannabis businesses must operate independently of the conventional FDIC-insured banking system as long as cannabis remains federally illegal.
Nicole is a California cannabis lawyer and specializes in data privacy, cybersecurity, and labor and employment. Nicole works with licensed cannabis and hemp operators throughout the country to comply with their obligations under the law and to develop risk management best practices.
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