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The Green SheetGreen Sheet

The Green Sheet Online Edition

January 27, 2014 • Issue 14:01:02

Colorado pot legalization highlights payments quandary

Despite enactment of Colorado's recreational marijuana use law on Jan. 1, 2014, payment processors of pot dispensaries in Colorado, and one other state, are in violation of federal law, because marijuana use remains illegal under federal law. However, since the Obama administration is looking the other way, merchant service providers apparently do not have to worry about the risks of fines and prosecution.

Payment attorney Paul Rianda believes the federal risks for ISOs that process payments in the high-risk but lucrative vertical market of marijuana dispensaries is negligible. "It seems like the risks for ISOs, barring them getting sued by the federal government, would be minimal," he said.

Rianda noted ISOs take on no more risk for pot dispensaries than they do for other high-risk merchant categories. Those risks can be negated by the benefits of processing for pot clubs and related organizations. "From the processing perspective, they are able to charge a premium for processing for these merchants," Rianda said. "So they get additional compensation.

"If one of them was shut down, it wouldn't really result in any chargebacks. People buy the stuff and they walk away with it. They don't get on memberships. They are not paying a monthly fee. They are not paying for something that's not going to be delivered."

A cautionary tale

Despite the federal government's current stance regarding cannabis sales in states where the service has been legalized, a little skepticism is still warranted because of what happened to Oaksterdam University. In April 2012, federal agents raided the pot dispensary and educational center in Oakland, Calif., causing turmoil for an enterprise that Oaksterdam thought was operating within the law.

While an attempt to legalize recreational marijuana use in California was defeated in 2010, the sale of pot for medicinal uses has been legal in the Golden State since 1996. Still, the feds raided Oaksterdam, purportedly to enforce the federal ban, even though the Obama administration promised in 2009 that federal prosecutors would not target marijuana patients or medical marijuana dispensaries, according to an April 2, 2013, article published in OaklandNorth, a news project of U.C. Berkeley's Graduate School of Journalism.

The article, After the raid: One year after federal agents raided Oaksterdam, what's changed?, said that Oaksterdam was still in operation, though at a much smaller scale. However, Rianda doesn't see such an action being repeated. "The tide's turned, and the feds aren't going to go ahead and enforce the law," he said. "We've got two states that it's legal in [Colorado and Washington state] and it will probably be legal in 30 in a couple years. And that's going to be the end of it."

Growth factor

The card brands have taken a cautious approach. While MasterCard Worldwide did not answer a request for comment from The Green Sheet, Visa Inc. released a statement that said, in part, "Given the federal government's position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers are best suited to make any determination about potential illegality."

Rianda said the card companies are conservative organizations that will not take definitive positions about pot dispensary processing until the issue is made "crystal clear" by the feds. "If the federal law somehow goes away, or if there is some kind of ruling that says that the state law is controlling on the subject, and where a state would say it is OK for recreational use, then I'm sure the card associations would follow along and say that they were fine with it," he said.

The legal marijuana dispensary market is expanding, with investors and pot cultivators recognizing that political and cultural trends seem to be in their favor. Rianda advised ISOs to focus on the business case that such processing offers. "You can't tell anybody, even in Colorado, that they're allowed under the law to go ahead and process for these people," Rianda said. "So it just becomes a business decision, if you're going to make enough money to justify the risk or not." end of article

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