Janell Thompson and Katarina Maloney say choosing the "wrong" name for their company was all it took to run afoul of banks and be labeled as co-owners of a high-risk business.
That name is HempHealthInc.com, an online business that sells cannabis-related products but is not a medical marijuana dispenser. Its name has led to trouble with banks and processors blocking accounts or refusing to provide merchant services because of the potential risk involved, Thompson said.
Thompson and Maloney operate businesses under the names Hookahzz LLC and JKWholesale Inc.
After two years, JPMorgan Chase closed the company's business accounts without specifying a reason, Thompson said, whereas PayPal cited the sale of hemp-related products for not doing business with JKWholesale (PayPal's terms prohibit the sale of drug paraphernalia, including the sale of tobacco and prescription drugs where prohibited by law). The company did not use Chase Paymentech for card services in the past.
"We know we are caught in Choke Point, but we are not medical marijuana or anything illegal," Thompson said. "We are completely clear legally, but the banks and PayPal don't differentiate it, mainly because of the word hemp in our name."
Operation Choke Point is the title of a Justice Department investigation in which various online businesses, such as money lenders and pharmacies, came under tighter scrutiny for working with high-risk clients. It made many banks and lenders quick to block accounts and end relationships with any entity that might fall under Choke Point scrutiny.
In this environment, acquirers quickly began working to self-regulate to avoid becoming "targets" of federal officials investigating potentially unsavory businesses. Trade groups and other industry organizations even established guidelines designed to prevent fraudulent credit-card transactions and keep prosecutors away.
HempHealthInc./JKWholesale ultimately obtained a merchant services account with SignaPay a few weeks ago for payment processing, Maloney said.
"We are hoping to stay with them now," Maloney added. "All we have been doing lately is putting out fires."
SignaPay determined that HempHealthInc. was not a high risk business after further conversations with the owners, said SignaPay spokesperson Michelle Jenkins.
"Rather than just make a decision not to approve them [based on the name], the additional conversations with this particular client gave us the information that they are, in fact, not a high risk area."
Thompson and Maloney felt they were clear from Choke Point scrutiny with their business until they added hemp products to their inventory.
After starting Hookahzz LLC as an e-cigarette and vaping business, they looked to differentiate JKWholesale Inc. by advocating the healthy facets of hemp and CBD, or cannabidiol, a component of cannabis they say provides a wide range of therapeutic benefits and is the medicinal ingredient that helps cancer patients. CBD is not an FDA-approved medical product, which may have triggered the Choke Point blocking of the Hookahzz LLC accounts.
CBD comes from industrial hemp, and thus it is not illegal to sell, Thompson said.
"We don't really want to change our name, because we want to be truthful about what our product is," Maloney added.
It is difficult for financial institutions to accept high-risk businesses after doing a risk-reward calculation that takes into account the "extremely high" costs for non-compliance, said Angela Angelovska-Wilson, a financial services and banking lawyer at Reed Smith LLP.
"I'm not trying to justify the bank's behavior, but in my view it is a normal human reaction to look at 'hemp' and just say maybe they do need other compliance," Angelovska-Wilson said.
Similarly, Angelovska-Wilson said she would advise businesses trying to enter the Bitcoin arena to drop "Bitcoin" from the company name because banks would not support the alternative currency product.
"You can stand up for the principle of it, but there are consequences," she added. "It's not unusual for small businesses to get caught in a bureaucracy, no matter what the bureaucracy is, whether it is the banks or the Justice Department."
HempHealthInc.com had to travel a road similar to what other high-risk businesses are navigating to secure a payment processor.
Gun sales have long been an area considered "hands off" by most payment processors and gateway providers because of its potential for controversy, though some gateway companies view it as a niche market as long as the company has a license and operates legally.
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Corrected February 6, 2015 at 3:56PM: This story has been updated to include comments from payment processor SignaPay.