Cannabis is big business.

The regulatory liberalisation of cannabis, in particular in respect of medicinal and wellness cannabinoids, has driven an expansion of the global cannabis market. According to Euromonitor International, the global cannabis market (both legal and illegal) is valued at around US$150bn. The legal cannabis market, currently estimated to be worth more than US$12bn, is expected to grow rapidly. Projections of its potential global value by 2025 range from US$40bn to US$70bn.

The global legal cannabis market could be worth up to

US$70bn

by 2025

Liberalisation has fuelled a surge in investor appetite for publicly-traded cannabis stocks. As of late 2019, there are 15 NASDAQ-listed cannabis stocks and many more listed on other international exchanges in different countries. A further wave of IPOs is anticipated alongside the continued growth of cannabis exchange-traded funds (ETFs).

Traditional companies have also been investing in the sector, with pharmaceutical companies seeking partnerships to develop medicinal cannabis as well as alcohol and tobacco companies investing in products made using cannabidiol (CBD), a non-psychoactive component of the cannabis plant.

However, the growth in the market is not without regulatory risk for investors. In April 2019, IG Group, Europe's largest online trading platform, began to divest its clients’ shares in cannabis stocks and tracker funds on the basis of legal advice on enforcement risk. As a firm, we are receiving increasing interest in advice on enforcement risk at a global level.

In this article, we briefly look at global cannabis regulation before focusing on English law and specifically the risk of cannabis-related activities viewed as money laundering offences under the Proceeds of Crime Act.

A brief overview of global laws

Whilst investment opportunities in cannabis-related businesses are readily available, even to retail consumers, the legal risk associated with such investments can often be complex and requires consideration of the regulatory regimes of multiple jurisdictions and how they interact. Those regimes themselves are subject to change as legislation tries to keep pace with this rapidly developing market. Crucially, the law in a number of jurisdictions has extra-territorial effect, adding further complexity to the risk analysis.

Cannabis is now legal for recreational use in Canada and Uruguay and is legal for medicinal use in over 20 countries, including Argentina, Australia, Chile, Germany, Greece, Israel, Italy, Norway, the Netherlands, New Zealand, Poland, Switzerland and Thailand, among others. Pilot programmes are also underway in Denmark and Ireland and more countries are expected to liberalise their regulations in the coming years.

Cannabis is now legal for medicinal use in

20+

countries

Yet despite the gradual reform of multiple state laws legalising cannabis for both recreational and medicinal use, US federal law still treats cannabis as an illegal controlled substance and investment in cannabis-related business carried out in the US therefore carries enforcement risk. Until there is greater legislative certainty, this conflict between state and US federal law will persist.

What is the legal view in the UK?

English law is unambiguous. Cannabis has been illegal since 1928. The only exception is the recent change for cannabis based products for medicinal use (CBPM). Registered doctors can now decide whether to prescribe CBPM where there is an unmet clinical need, although strict licensing is required, and significant prohibitions remain in place.

Beyond the CBPM exception, cannabis remains controlled as a class B drug under the Misuse of Drugs Act 1971 (MDA). The penalties for unauthorised supply, possession, production and cultivation of cannabis also remain unchanged. These can be very serious: unless carried out pursuant to a licence from the Home Office, the supply, production or cultivation of cannabis carries a maximum custodial sentence of 14 years under the MDA, while possession risks a maximum five-year sentence.

The risks do not end there. There is a significant additional risk of criminal exposure for UK companies that do not engage directly in cannabis-related activities, but instead deal with revenues derived from those activities under UK anti-money laundering legislation.

Partial legalisation

In November 2018, following a series of high-profile cases relating to difficulties in the prescription of CBD for British children suffering from epilepsy, the UK government amended the CPBM classification. This amendment gives doctors who are listed on the General Medical Council’s specialist register the option to issue prescriptions of CBPM, including CBD products, when they believe that their patients could benefit.

According to a recent United Nations report, Britain is the world’s largest producer and exporter of legal cannabis, accounting for 45 per cent of global production and 70 per cent of global exports. British-grown cannabis is cultivated on tightly controlled farms under licence from the Home Office.

However, investment in cannabis-related businesses requires analysis not only of the law in the jurisdiction where the investor is based or where production occurs but a detailed review of all the law applicable to the business having particular regard to jurisdictions whose laws may have extraterritorial effect.

45%

of global legal cannabis comes from the UK, making it the world's largest producer

What are the risks under the Proceeds of Crime Act

Even if recreational or medicinal cannabis are legal in one jurisidiction, this does not necessarily mean that investment in companies carrying out business in those jurisdictions will also be legal. For example, UK businesses which deal with revenues derived from cannabis-related activities are at risk of committing money laundering offences under the Proceeds of Crime Act 2002 (“POCA”).

In broad terms, a money laundering offence under POCA will occur if a person acquires, deals with, or arranges for another person to acquire or deal with, property that the person knows or suspects constitutes criminal property. Under POCA, cannabis-derived revenues are “criminal property” if they constitute a person’s benefit from criminal conduct or they represent such a benefit (in whole or part and whether directly or indirectly).

For this purpose, it does not matter if the criminal conduct (i.e. the offences under the MDA) is carried out in another country where it is legal, such as Canada. Normally, POCA provides an exception for activities that are legal in the country in which they are undertaken, but the MDA offences for production, cultivation or possession of cannabis fall outside that exception because they carry maximum custodial sentences of more than a year.

The breadth of these provisions means that a wide variety of activities and assets can potentially be caught within their scope, even when a company does not engage directly in cannabis-related activities. Scenarios that could potentially give rise to the criminal property definition include where a company owns real estate that is sub-let to tenants who engage in cannabis-related activities, such as cultivation. Even if the activity is carried out legally in the country where it occurs, rent or other revenues from the property could potentially constitute “criminal property” under the POCA regime. Investment need not be direct for there to be potential liability under POCA. Even where fund investments offered to the public or companies whose shares are admitted to trading on regulated markets, investment in such companies will still carry enforcement risk under POCA if the underlying activity itself is technically illegal under the MDA, if it were carried out in the UK.

How can companies avoid committing a money laundering offence in respect of cannabis-related revenues?

In these circumstances, the only way to secure a defence to potential money laundering offences would be to seek a “Defence Against Money Laundering” (“DAML”) from the National Crime Agency (“NCA”). This requires gaining the agency’s prior consent to any transaction that involves dealing with criminal property.

Our recent experience is that the NCA has been reluctant to engage fully on this topic and has not always been willing to confirm whether a DAML submission will provide a full defence to potential money laundering offences. In the absence of formal guidance from the Home Office and/or the NCA, it is difficult to predict when companies that find themselves in such an invidious position will be able to obtain greater clarity. 

Balanced against this, no company has yet been prosecuted under POCA for benefitting from medicinal cannabis revenues, although we do not know whether there are any current investigations. While it may be that this is an area where the NCA will not seek to enforce, there is no guarantee that this will be the case and no stated public policy to this effect.

Although a great deal of uncertainty remains, it is clear is that there are practical steps which companies can take to assess and reduce the risk of committing a money laundering offence in respect of cannabis-related revenues. These include:

  • Increasing the scope of standard due diligence to cover potential cannabis exposure in, for example, the consumer products and healthcare sectors, particularly in relation to deals with a US or Canadian nexus
  • Targeted contractual representations and warranties for counterparties with known cannabis exposure
  • Updating leases to include specific permitted use limitations on cannabis-related activities, particularly where those activities are legal under local laws.

Whether taking proactive measures of this kind is proportionate to the risk will depend on a given company’s exposure to cannabis-related activities and related revenues. However, as highlighted above, this exposure is not necessarily straightforward to assess. In the absence of specific guidance, we predict that more companies will start factoring the risks of cannabis-related exposure into their existing AML and due diligence processes.

Conclusion

In practice, most investments involve consideration of local law in multiple jurisdictions, particularly where large international investors are involved. Careful thought therefore needs to be given to the law in countries where, for example, each of the investors, the fund manager and/or the cannabis company carrying out the investment are based, the risks which arise under the laws of each relevant jurisdiction and how to manage those risks within existing operational frameworks.

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