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.