The arrest of a German businessman on fraud charges last month at LAX is serving to highlight several of the most vexing problems afflicting the legal-cannabis industry.
Among the issues: a lack of access to banking, the challenge of making money in a business with slim margins, and, especially, the skeeviness that seems to pervade a business where a lot of companies are trying really hard to be good corporate citizens.
The feds nabbed Ruben Weigand at the Los Angeles International Airport during his flight’s layover on its way to Costa Rica, the Wall Street Journal reported on Monday. He was charged with one count of bank fraud. The investigation is ongoing.
Prosecutors say he was part of a scheme to fool banks into processing sales of legal pot, a business most banks have shied away from because cannabis remains illegal under federal law. At issue are transactions totaling more than $100 million, though prosecutors say that’s just a portion of the amount of illicit transactions.
“At the heart of the indictment is one of the country’s largest on-demand marijuana marketplaces, Eaze Technologies,” the Journal reported.
The San Francisco-based Eaze, formerly a pot-industry juggernaut thanks to its popular e-commerce platform, which facilitates home deliveries of weed, has not been charged with any crimes. But according to the Journal, the feds allege that Eaze executives are “co-conspirators” and that the company is cooperating in the probe “in hopes of leniency.” The newspaper reported that “a person familiar with the matter” said that none of the executives involved are still with the company.
In a statement, Eaze said it was “fully cooperating with the relevant authorities. Eaze transitioned to supporting new payment systems over a year ago, and this matter does not impact the current customer experience.”
Eaze works with area cannabis shops to facilitate transactions and deliveries. In October, it laid off about a fifth of its staff, and many of its retail partners began to flee to other platforms. Though it had stopped accepting credit-card transactions last year, one of its former partners, DionyMed Brands, filed a lawsuit, accusing Eaze of basically what the feds are now alleging: that the company created phony merchant accounts so the banks and credit-card processors wouldn’t catch on that they were facilitating cannabis sales.
The federal probe, it turns out, was launched before that lawsuit was filed. DionyMed—which had its own troubled history and no longer exists—eventually settled, as part of a weird arrangement whereby DionyMed sold some of its cannabis retail shops to Eaze.
Without the advantage of allowing credit card transactions, Eaze has to compete on the same level as all the other delivery platforms. And margins in that business are razor-thin. In recent months, Eaze, under new leadership, has entered the cannabis business with some of its own products, and last spring announced it had landed $35 million in new venture financing, with an option to draw on another $20 million.
The company hasn’t disclosed its valuation.
Of course, none of this would have been a problem if the cannabis industry, like every other legal business in the country, had access to the banking system.
As much as they would like to, banks won’t go anywhere near the cannabis business because it’s still illegal under federal law. Efforts in Congress to exempt banks from liability for doing business with pot merchants in legal states have so far failed. The SAFE Banking Act, for example, has passed the House, but is now languishing in the Senate Banking Committee, and it seems unlikely it will come up for a vote this year.
To get around the problem, many shops take various forms of payment cards and apps, but that’s a stopgap measure at best, since it involves each customer signing up individually. Most delivery transactions are still done with cash, which puts a major crimp in business: people tend to spend less when they’re using cash than they do when using credit, debit cards and electronic payment.
The feds have said other unnamed conspirators were involved in a “multinational transaction-laundering scheme,” and worked with Weigand and another “businessman”: Hamid “Ray” Akhavan. Their defense so far sounds ludicrous, at least at first blush: Weigand’s lawyers told the Journal that since the banks weren’t hurt by the transactions, and indeed actually made money, then there can’t have been fraud.
The irony of course is that the banks would love to have handled these transactions legitimately, if only they were allowed to.