Dealing With Fraud & Scams in the Cannabis Space


The House voting to decriminalize marijuana is the latest example of legalized cannabis sales growing in popularity across the nation. Like any ‘budding’ industry, it also means more opportunities for online fraudsters. This can range from friendly/chargeback fraud — teens buying CBD products using a parent’s credit card — to scammers buying legitimate items and then returning a knock-off product in its place. 

CBD products have been actively selling online for years now and are not new to fraud, but with new cannabis merchandise and brands constantly coming to the market, it is becoming more of an issue. “Cannabis is more of an interesting animal,” Shoshanah Posner, Director of Business Development at NoFraud, said. “Typically, when it comes to regular retail, you do not care if someone buys a shirt from your site. You do not require ID and do not need to hide it from anybody, but cannabis is so regulated and only certain customers can purchase it. With the combination of true fraud that exists out there, there is a lot of potential for false declines.” 

Bring More Awareness to False Declines

Even though scammers definitely need to be taken care of, the problem many cannabis retailers have is that they are denying legitimate customers who can get caught in the net. While it may seem like they are paying with a fraudulent card, they are actually making a genuine purchase, but end up getting canceled with whatever fraud system the website has in place. To help determine whether or not an order is real or not, Posner offers some tips for cannabis retailers through years of research at NoFraud:

“A lot of fraud comes internationally. While some states have legalized cannabis, many countries have it banned, and it is easy to buy online rather than through a dealer, so we have seen a lot of international fraudsters trying to acquire marijuana. We have also seen a lot of classic fraud schemes such as hiding identity and shipping goods to drop sites, which happens very frequently. Triangular fraud is also common, which involves three parties: the innocent buyer, the fraudster, and the ecommerce merchant.”

What is Triangular Fraud?

Ultimately, the Fraud Triangle scheme works when fraudsters set up shops online and get ahold of customers wanting to purchase products. The easiest way to do this is by creating an Amazon listing, but it does not just have to be online. Once the fraudster gets a hold of orders, they use the ecommerce store as a free fulfillment house. When they get a legitimate customer wanting to make a purchase, they steal their credit card and then use that card to make purchases elsewhere. So when you are reviewing an order and you see a shipping address going to a freight order company or to a trailer home, that should raise a red flag. Unfortunately with Triangle Fraud, the order can come from all different places, so it can be harder to identify. 

Be Aware of Friendly Fraud

“We have seen this as well with CBD, but the part that makes it hard is the fact that a lot of times there will be friendly fraud, meaning merchants will get chargebacks from a child using a parents card — that is friendly fraud,” Posner said. “We have also seen customers masking their identities because they do not want any digital crumbs on the internet that they purchased this product. It is still considered a bit risque, even though it is becoming more normal, and there is a lot of masking of identities in general when it comes to CBD. This is also very common with legitimate fraudsters.”

Posner advises that when you are selling cannabis products, make sure you are only looking for legitimate fraudsters and not shy shoppers. It can be hard discerning one from the other, but that is why it is super important to have a good fraud prevention system installed so they can help retailers figure out the friendly fraud purchases and the legitimate fraud purchases. NoFraud has also seen interesting buying patterns where maybe a friend or a family member is purchasing a product for someone under 18, and so they will order multiple times with shipments going to different places. This adds even more confusion when trying to look at transactions and does require expertise. 

Hemper Lost Thousands to Online Fraud

Founded in 2015, Hemper designs, manufactures, and sells smoking accessories and subscription boxes for the cannabis industry. As a fast-growing ecommerce business, Hemper relied on Shopify, its ecommerce platform, to screen for fraud, but in the summer of 2018, the brand’s third party checkout system was being targeted by a massive card testing attack. By midsummer, their chargeback losses ballooned to $20,000 in one month. The company turned to the NoFraud app and once it was installed, the chargeback losses dropped dramatically down to $0 nearly every month. 

“With the industry growing as a whole, we expect every retail shop to have a nice lift in sales, so they will either need to make sure they have enough support in house to be able to vet these transactions that are in the gray zone and see if they are legitimate, or consider outsourcing to experts that are already familiar with the schemes out there. There are so many different types of schemes, and no merchant has seen everything,” Posner said.