KYB, Shell Companies And Pot Payments Gone Rogue

Fraud comes in many flavors, and a payments-related lawsuit arising from the growing business of legal, recreational marijuana is proof of that point.

That new industry is growing, and new services, including online ordering and delivery, are rising to meet consumer demands for legal pot. But federal law still views marijuana as an illegal substance, which prevents most financial institutions, payment card networks and other providers from taking part in those sales. According to a new lawsuit, though, one company allegedly found a way around that.

In a new lawsuit, legal cannabis operation Herban Industries accuses cannabis delivery platform Eaze of seeking to gain an “unfair competitive advantage in the California cannabis delivery market (by) directing, coordinating, and participating in a scheme to defraud credit and debit card companies and financial institutions into processing cannabis transactions in violation of a host of criminal laws.” According to the lawsuit, Eaze allegedly got around that problem by processing payments thru a series of off-shore shell companies. According to the complaint, Eaze customers would be told that charges of their cannabis purchases would appear on their credit card statement as coming from other businesses that sell items such as face cream and dog toys.

Whether those allegations are proven true or not, the case at least provides an example of some of the risks and problems that can occur, and challenges faced by legitimate companies determined to stay firmly on the right side of the law. The good news? Technology can help prevent such fraud, particularly that associated with beneficial ownership of company and using shell companies in support of fraudulent activities.

In a new PYMNTS discussion, Karen Webster and Zac Cohen, general manager at Trulioo, used that lawsuit as a stepping off point to talk about how criminals get past anti-money laundering and other laws designed to keep payments honest, and what above-the-board firms and operations can do to stop it. The discussions served as yet another view in preventing the fraud and other types of malfeasance that serve to brake growth of the global digital economy.

Onboarding Stage

One of the toughest parts of Know Your Business (KYB) compliance is understanding that the bad guys mimic what the good guys already do. Navigating corporate ownership can be complex, particularly for companies that have operations outside of their domestic markets and set up separate entities for many legitimate reasons. That means, Cohen said, that the fight against such crime begins, well, at the beginning.

“The most rigorous due diligence is done during the onboarding stage,” Cohen said, referring to the creation of new merchant accounts. The job involves review, checking and verification of an applicant’s organizational structure, client relationships and other tasks to make sure the company is, indeed, legitimate, and that the new business meets regulatory requirements.

Skillfully created and placed shell companies, of course, can greatly complicate such matters. In fact, Cohen used the release of the Panama Papers to drive home the point about the prevalence of tax evasion, money laundering and other financial crimes throughout the world — and the risk to payment services providers who fail to do their proper homework when working with clients, either new or existing ones. “Technology and process have to be at the forefront of the strategy,” he told Webster.

Another big challenge is corporate registries — the source of vital due diligence information but governed by different standards and rules depending on the country involved. As Cohen pointed out, the data in those registries can be very messy, as data standards are not consistent throughout the world.

“How do we appropriately verify the due diligence of organizations that are deeply complex and international?” Cohen asked. “it’s not a simple task, but it’s one we [Trulioo] are dealing with.”

Business Advantages

But as Cohen told it, businesses do have some big advantages — ones that could pay big dividends over the long haul. For one, the technology is generally advanced enough to provide robust and monitoring of situations that lend themselves to fraud and other related forms of digital criminality, he said.

Not only that, but businesses and even governments have a shared goal. “Ultimately, we are in it together,” he said. “We all have the same end goals, and that’s growing the digital economy and being rid of fraud.” The trick is find ways to cooperate and collaborate to achieve those goals — even by sharing data and best practices — without compromising proprietary strengths.

“The technology is there for a seamless global and fraud-free experience,” Cohen said, “and it needs to be taken advantage of.”