Dispensaries defend cashless ATM smokescreen from fraud claims

PHOENIX (CN) — An international cannabis dispensary and its Arizona-based subsidiaries told a judge Friday that its use of cashless ATMs did not directly violate the rules of or deceive credit card companies that still prohibit cannabis purchases.

Fighting against fraud and racketeering claims in Arizona state court, Trulieve Cannabis Corp argued that fines imposed by Visa onto a Colorado bank, Pueblo Bank and Trust, should not be passed onto the dispensaries, and are instead the responsibility of the bank and the payment processing company that approved the cashless ATM transactions. The payment processor, Switch Commerce, claims that Trulieve deceived the institutions by masking the card payments as cash withdrawals.

“Trulieve knew the cashless ATMs were not proper," Switch attorney Marcus Fettinger said in opposition to the defendants’ motion to dismiss. “They knew it was for point of sale transactions and not cash withdrawals and that’s the fraud.”

Because cannabis is still federally illegal, major credit card companies like Visa prohibit their customers from purchasing cannabis with their cards. To get around the potential loss of business, dispensaries use cashless ATMS that disguise point of sale transactions as simple cash withdrawals, transmitting a code to payment processors and sponsor banks that are indistinguishable from regular cash withdrawals.

In April and May of 2024, Trulieve reported more than $700,000 in dispensed cash that actually served as direct revenue from in-store sales. Visa sent “secret customers” into stores from January 1 to March 30, 2024 — adding up $950,000 worth of fines against Pueblo for approving the so-called fraudulent payments.

Pueblo passed the buck to Switch Commerce, which paid $250,000 to Pueblo but sued Trulieve in February, claiming liability for the remaining $700,000, in addition to lost future revenue and unjust enrichment by collecting surcharges on improper transactions.

Representing the dispensaries in a Phoenix courtroom Friday morning, attorney James Smith countered that by Switch’s own admission in its complaint, it was the cashless ATM affiliates, not the merchants themselves, that disguised the misrepresented the transactions as cash withdrawals. He added that Switch was aware of the use of cashless ATMS before Visa levied the fines, but chose not to shut them down earlier.

“It made money on every transaction, so there’s no question why Switch continued processing these transactions,” Smith said.

Switch also accuses Trulieve of violating Arizona’s racketeering laws by conspiring with the cashless ATM providers, who are not named in the lawsuit, to deceive Switch and Pueblo and pin the blame on them while going around Visa’s regulations.

Smith dismissed the claim as a “regular business dispute,” suggesting that the only issues are contractual agreements between Visa, Pueblo and the defendants.

“Courts don’t use RICO to address ordinary business disputes,” he said.

Because Visa sent its own agents to make the purchases that led to the fines, James said Visa was never deceived to begin with, and called the roughly $50,000 per purchase “arbitrary.” He also argued that RICO cannot apply because there are too many degrees of separation between Visa’s apparent harm and the actions of Trulieve.

Of Switch’s lost earnings, he said “its injury is derivative of any supposed harm to Pueblo, which itself is derivative of any supposed harm to Visa.”

Fettinger countered that even though there were steps in between, the harm is still a direct result of Trulieve’s decision to use cashless ATMs. The direct event is the false messages from Trulieve to Switch painting sales as cash withdrawals.

James reemphasized that Switch was never deceived by the payments, having been aware before of the use of the cashless ATMs.

“The plaintiff can’t close its eyes, ignore red flags and proceed with the transactions,” he said.

Maricopa County Judge Dewain D. Fox didn’t indicate when he will rule on the motion to dismiss.

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