CBD: The Blunt Facts and Evolving Industry Views from Merchants to Acquirers to Regulators

Transcription

1 CBD: The Blunt Facts and Evolving Industry Views from Merchants to Acquirers to Regulators MERCHANT ACQUIRERS COMMITTEE 2018 Mid-West Regional Meeting November 13, 2018 Andrew Bigart Partner, Venable LLP Todd Halpern Partner, Venable LLP

2 DEA REGULATION Controlled Substances Act Schedule I Unless specifically excepted or unless listed in another schedule, any material, compound, mixture, or preparation, which contains any quantity of the following hallucinogenic substances, or which contains any of their salts, isomers, and salts of isomers whenever the existence of such salts, isomers, and salts of isomers is possible within the specific chemical designation (23) Marihuana (31) Tetrahydrocannabinols

3 CONTROLLED SUBSTANCES ACT Marihuana all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination

4 Hemp Farming Act of 2018 (S. 2667) Sen. Mitch McConnell Amend CSA Definition of Marijuana to exclude Hemp : the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis. (also excludes THC in hemp from definition of tetrahydrocannabinol )

5 Dietary Supplement FDA REGULATION Food, Drug & Cosmetic Act Does NOT include a product containing: an article that has been (1) approved as a new drug; or (2) authorized for investigation as a new drug for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, unless the product was first marketed as a dietary supplement or as a food.

6 FDA REGULATION Warning Letters to CBD Dietary Supplement Marketers

7 GW Pharmaceuticals FDA REGULATION Food, Drug & Cosmetic Act FDA approved Epidiolex (CBD) New Drug Application in June 2018 Clinical trials announced at least as early as 2006, and possibly earlier

8 FDA REGULATION CBD Prohibited in Food: Food, Drug & Cosmetic Act

9 FDA REGULATION Food, Drug & Cosmetic Act CBD in Cosmetics: Yes, but Labeling claims Ingredient / product safety

10 Legal Framework for Processing MRBs So long as marijuana and CBD remain illegal at the federal level, many banks, credit unions, processors, and other financial institutions (FIs) will continue to remain wary of providing services to the industry, no matter how many states legalize the sale and use of marijuana. Remember at the end of the day, processing for marijuana-related businesses ( MRBs ) and sellers of CBD is likely to violate federal law and card brand rules. Acquirers, processors, and ISOs need to understand these risks before providing financial services including processing services to these types of merchants.

11 Card Brand Rules Visa s rules provide that illegal transactions are prohibited and that merchants and payment facilitators can be permanently banned for submitting illegal transactions. Visa Rules and Visa cards may not be accepted, and the Visa logo may not be displayed, on any website or application that offers products that claim or imply a similar efficacy as prescription drugs, controlled substances, or recreational/street drugs, irrespective of claims of legality. Visa Rule Visa s Director of Brand Protection, Elizabeth Scofield, has explained that Visa follows federal not state law with respect to cannabis in the U.S. MasterCard rules prohibit customers from engaging in illegal actions and give MasterCard the option to terminate immediately any customer that engages in or facilitates any illegal activity. MasterCard Rules 3.7 and Merchants are prohibited from submitting illegal transactions to acquirers, and customers are prohibited from submitting illegal transactions to the MasterCard network. MasterCard Rule

12 A Little History on Federal Guidance for Providing Financial Services to MRBs DOJ issued the Cole Memos In 2013 and 2014, DOJ issued the Cole Memos advising US Attorneys on marijuana enforcement under the CSA. The Cole Memos directed DOJ attorneys to focus on targets whose conduct interferes with any one or more of eight enforcement priorities, such as preventing the distribution of marijuana to minors. FinCEN issued Guidance In 2014, the Financial Crimes Enforcement Network ( FinCEN ) issued guidance clarifying how FIs can provide services to MRBs consistent with their anti-money-laundering (AML) obligations. The FinCEN guidance establishes unique suspicious activity reporting (SAR) procedures for MRBrelated accounts, including the filing of limited, priority, and termination SARs, depending on specific circumstances. DOJ rescinded the Cole Memos On January 2, 2018, Attorney General Sessions rescinded the Cole Memos and issued new guidance advising prosecutors to weigh all relevant considerations when deciding whether to prosecute a case, including federal law enforcement priorities, the seriousness of the crime, the deterrent effect of prosecution, and the cumulative impact of particular crimes on the community.

13 So Where Does That Leave Industry? While the Cole Memos have been rescinded, FinCEN has not changed its guidance, and the Secretary of the Treasury has stated that FinCEN has no intention of changing its guidance until a better solution is found for handling marijuana-related transactions. A handful of banks are providing services to dispensaries in states where marijuana is legalized, but these services are primarily limited to providing business checking and related banking services. We are not aware of any processors that are providing payment card processing services in compliance with federal law and the card brand rules. Various processors / ISOs advertise processing services for MRBs and CBD companies, but it is not clear whether these services are being provided in compliance with card brand rules and with full disclosure to the underlying bank / processors involved in the process. Various companies have set up closed loop systems that sell prepaid access or stored value to facilitate purchases at dispensaries. Remember lying to a bank is a federal crime!

14 The Basics of Processing for MRBs What should an acquirer, processor, or ISO do to minimize risk if it decides to provide financial or payment processing services to MRBs (including CBD companies)? Management Oversight Management should perform a risk assessment of taking on MRBs and ensure an appropriate compliance structure is in place. Management must closely monitor risks and compliance. Legal and Compliance KYC process and CDD must be more sophisticated with increased risk SAR filing requirements will increase MRBs customers and their transactions should be reviewed more closely at account opening and more frequently throughout the term of their relationship. Understanding anticipated transactions and implementing a tailored suspicious activity monitoring system.

15 Account Opening and Due Diligence The FinCEN guidance explains that the decision to open, close, or refuse any particular account should be made by each bank based on its business objectives and an evaluation of the risks associated with offering a particular product or service. FIs and processors should conduct customer due diligence that includes: Due diligence and reviews of MRB lines of business, corporate structure, operations, and licensing; MRB advertising and marketing; sales practices; and business and supplier relationships; Understanding MRB prior banking relationships, and other current banking relationships; Monitoring transactions for suspicious activity, including transactions between corporate and personal accounts; Suspicious activity reporting, including limited, priority, and termination SARs (which will also increase significantly with MRBs); and Site visits and confirmation of information provided by MRBs in response to periodic account reviews. Note that separate from the risk of dealing with an MRB, the selling of CBD still implicates various FDA / FTC issues relating to advertising and marketing.

16 Suspicious Activity Reporting The FinCEN guidance establishes unique suspicious activity reporting (SAR) procedures for MRB-related accounts. Marijuana Limited SAR: Filed when FI provides financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one the of the Cole Memo priorities or violate state law. Marijuana Priority SAR: Filed when FI reasonably believes, based on its customer due diligence, that an MRB implicates one of the Cole Memo priorities or violates state law. Marijuana Termination SAR: Filed when FI deems it necessary to terminate a relationship with an MRB in order to maintain an effective anti-money laundering compliance program, it should file a SAR and note in the narrative the basis for the termination.

17 Transaction Laundering Avoid Red Flag Processing Activities Laundering transactions by processing payments for a business through an account opened under a fictitious business name (or straw account) Use of Dummy Websites Using fake websites and other false information to disguise nature of product being sold / processed (such as CBD oil) Load Balancing Opening multiple accounts through multiple banks and ISO channels to load balance volume and chargebacks 17

18 Questions? Andrew Bigart Partner, Venable LLP Todd Halpern Partner, Venable LLP