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CBD Demand is Causing a Rise in Transaction Laundering

One of the most pervasive threats to payment service providers is transaction laundering - which is often used to process credit card transactions for illicit pharmaceuticals or intellectual property infringement, but increasingly is used for cannabidiol (CBD) products. Since the change in legal status of certain forms of CBD as a result of the 2018 Farm Bill, LegitScript has seen an increase in online CBD merchants and, along with them, an increase in transaction laundering to facilitate illegal sales of the substance. Transaction laundering for CBD is an emerging threat that makes this burgeoning industry more complex and potentially riskier for the payments community.


A Legally Gray Product

There are a number of reasons for the increase in transaction laundering for CBD sales. Most notably, CBD exists in a gray area legally, which, in our experience, greatly increases a product's risk for transaction laundering. Although hemp-derived CBD was removed from the DEA's schedule of controlled substances, the FDA has not yet approved CBD as a food product or dietary supplement, and many states in the US still consider CBD a controlled substance. This creates opportunity for cybercriminals, who may be able to easily and legally obtain CBD, but then market it in ways that violate regulatory standards (such as labeling it as a dietary supplement) or selling it to unauthorized jurisdictions (such as states where it is considered a controlled substance). Payment service providers should always be aware of the risks inherent in products that exist in legally gray areas.


The Green Gold Rush

The sudden explosion of interest in CBD likely has merchants of all sorts - both legitimate and opportunistic - trying to cash in on this "green gold rush," which some expect to generate $22 billion by 2022. As demand for CBD products grows, the increasing profit potential may encourage unethical merchants to circumvent the fierce competition among legal sellers and instead market and sell CBD in illicit ways. Furthermore, this demand may drive manufacturers and merchants to look for cheaper, more competitive ways to source CBD, such as making synthetic CBD. Unregulated or unapproved forms of CBD entering the market may increase the risk of danger to consumers. Payment service providers onboarding CBD merchants should carefully vet their sources of supply.


Identifying TL Merchants

LegitScript's expert analysts recently identified a merchant engaged in transaction laundering for CBD sales who was posing as a nail salon merchant. See the illustration below to read how we caught the merchant.

Want to learn more about this burgeoning industry? Get our report on CBD, Hemp, and the 2018 Farm Bill. In it, we provide helpful resources and answers to common questions about the murky subject of hemp and CBD regulations.

FDA regulations and laws in local jurisdictions make navigating CBD sales complex and potentially problematic. Before payment service providers think about onboarding merchants selling CBD, it's important to be well-versed in legal regulation of the product and aware of potential restrictions by card brands. Partner with LegitScript to keep abreast of the latest trends around this controversial product.

Alongside the world's largest database of health-related products and ingredients, LegitScript has created a leading team of experts in highly regulated and complex sectors. This includes expertise related to marijuana, hemp, and CBD. Contact us to learn how we can help you.


David Khalaf is a writing, communications, and marketing professional with specialties in media, investigations, content strategy, and writing instruction. His 20 years of writing, media, and communications work have included two top-tier universities (USC and UCLA), print and digital magazines, consulting firms, and technology companies.

His current work involves content strategy and development at LegitScript, a company that helps the world's leading search engines, payment service providers, and internet platforms and marketplaces do business with legitimate, legally operating entities in more than 80 countries and 15 languages around the world. LegitScript specializes in risk and compliance for highly regulated industries including CBD/cannabis, online gambling, cryptocurrencies, drugs, financial trading, online adult, scams and fraud, and more.

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