Blindfolded in the Mist: The Complex Legality of Cannabis Financing in the UK and Abroad
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It’s no secret that entrepreneurs and investors around the world are waking up to the potential of the global cannabis market, which is expected to be worth over USD $272 billion by 2028, including a European market alone worth €123 billion.
As more and more countries legalize cannabis (principally medicinal) in various forms and to varying degrees, navigating the complex legislative landscape in each region is becoming a problem for the thousands of cannabis businesses now operating worldwide.
As far as the UK is concerned, the UK Home Secretary Sajid Javid’s announcement of the legalization of medicinal cannabis in October 2018 ensured the UK will not be left behind. However, the current legal framework leaves investors, and in particular financiers, unclear as to how to enter this growing market.
Historically, all cannabis related activities in the UK were illegal by virtue of their listing in Schedule 2 Part II B of the Misuse of Drugs Act 1971 (MDA). However, following support for a change in law, the Misuse of Drugs Amendment Regulations (2018) (Regulations) were introduced last year. Under the Regulations, certain medicinal cannabis products were rescheduled, enabling specialist doctors to issue prescriptions for cannabis-based medicines.
These changes, albeit limited, are a clear improvement, however, in the UK, it still remains illegal to cultivate, produce, supply and possess cannabis products without the appropriate licenses. This affects activity in the UK but also has ramifications for investment in otherwise legal overseas cannabis businesses, as it brings anti-money laundering legislation into play. Investment and the movement of funds from and to any cannabis-related business, regardless of whether it is legal in its home region, could potentially be classified as the proceeds of, or promoting, an unlawful activity.
This is due to the UK Proceeds of Crime Act 2002 (POCA), which has been widely criticized for its broadly drafted provisions and unintended ramifications. It appears that the cannabis industry may be another victim of its wide application.
Under POCA, it is a criminal offense to deal with criminal property. ‘Criminal property’ in this context means any property which a person has directly or indirectly benefitted from as a result of criminal conduct. Criminal conduct, in turn, is defined as any conduct which constitutes an offense in the UK. For instance, unlicensed cannabis cultivation.
As a result, not only could any unlicensed cannabis business operating in the UK fall within the scope of POCA, but also, due to POCA’s potential extraterritorial reach, any investment in an otherwise perfectly legal (in its jurisdiction of operation) cannabis-related business. This investment could then be considered assisting criminal conduct and any proceeds derived from such criminal conduct could be considered criminal property.
This veil of illegality over otherwise legal overseas activities has previously been recognized as being too broad in its potential application. Accordingly, changes were made to limit the unintended remit of POCA. The Serious Organised Crime and Police Act 2005 (SOCPA) specifically excludes activities that are legal in other jurisdictions such that the proceeds of this conduct will not constitute ‘criminal property’ in the UK (the Overseas Conduct Defence).
However, in order to limit the effect of this on potential money laundering offenses, new legislation was necessary and the Money Laundering: Exceptions to Overseas Defence Order 2006 (Order) was introduced. The effect of the Order in conjunction with SOCPA means that one of the requirements to fall within the SOCPA exemption, and so allow legal investment in businesses legal in their home jurisdiction but illegal in the UK, is that the activity carried out abroad must be punishable by a prison sentence of less than 12 months, had the activity occurred in the UK.
This seriously affects any investment into legal cannabis businesses as, pursuant to the Misuse of Drugs Act, the offenses of cultivation, production, and supply of cannabis products are punishable by a prison sentence of up to 14 years, whilst possession could carry a five-year sentence. As this is over the 12-month limit covered by the above Order, it brings cannabis activities back within the potential grasp of POCA, which is how the situation currently stands.
Similar problems exist in other jurisdictions. The continued illegality of cannabis at the federal level in the US also brings anti-money laundering legislation into play. Investment and the movement of funds from and to any cannabis related business could potentially be classified as the proceeds of, or promoting, an unlawful activity. Within the EU, money laundering legislation also potentially acts as an obstacle to the growth of the cannabis market. Notwithstanding movement by various member states to legalize medical cannabis, the recent EU Directive on Combating Money Laundering by Criminal Law 2018/1673, which has to be enacted by each member state by the end of 2020, provides extraterritorial reach for money laundering activities along similar lines to POCA.
This legal uncertainty has consequences. The growth of cannabis businesses, other than in Canada, has been hampered by their inability to secure financing to grow their businesses. One of the most basic requirements of any business is the ability to open a bank account and to transfer money. However, the banking system is hesitant to jump in.
The unwillingness of financial institutions to enter the market has forced many companies to transact in cash. This has obvious implications from a security and money laundering perspective, but also excludes the regulated banking sector from this booming market.
In the US, lenders can mitigate the risk of federal illegality by filing suspicious activity reports under the Bank Secrecy Act, but the bureaucracy involved means that many banks are choosing not to. In Oregon, a small financial institution reputedly filed 13,500 reports over two years in relation to its cannabis clients.
In the UK, it is also possible to sidestep the reach of POCA by making an authorized disclosure and obtaining the relevant consent. Suspicious activity reports can be submitted to the National Crime Agency (NCA). However, no blanket permissions can be granted by the NCA and beneficiaries are required to submit reports for each separate transaction. This is another cumbersome and administratively intensive solution to a problem that need not exist.
This continuing uncertainty is forcing many cannabis companies, particularly in the US, looking to raise finance to list on the Canadian rather than the UK or other European stock exchanges. This means that Canada is reaping the economic benefits of the global cannabis industry while other financial hubs are left behind.
In the UK, the chasm between the part-legalized cannabis market and the banking sector needs to be bridged before the industry can reach its full potential. Whilst it seems unlikely that UK authorities would pursue lenders and investors in the cannabis space, banks and investors need clarity and comfort. This can only come from the top. In the US, whilst cannabis has not yet been downgraded or declassified under the Controlled Substances Act, moves have been made to make it easier to raise finance. The Secure and Fair Enforcement Act (the SAFE Act) and the Strengthen the Tenth Amendment Through Entrusting States Act (the STATES Act), if enacted, will allow depository institutions and financial institutions to provide financial services to cannabis-related institutions that are regulated under their relevant State laws.
With the World Health Organization recently announcing its revised stance on cannabis and calling on governments to promote decriminalization in the sector, the moment is ripe for the UK and Europe to mold its legal infrastructure to allow financial institutions and investors get a piece of the action.