Canadian cannabis and money laundering risks for UK business

Publication | August 2018

Introduction

Medical cannabis is already big business in Canada. With the production of recreational cannabis due to be legalised there in October 2018 that business is expected to continue to grow, with Deloitte estimating that the total legal cannabis market will generate some CAD4.34 billion in 2019. However, UK corporates and financial institutions wishing to invest or be involved in activity relating to Canadian cannabis businesses face a real obstacle: doing so could technically constitute a criminal offence under UK money laundering legislation.

The issue is exacerbated because, despite the growth of the Canadian cannabis industry, its legalisation in various US states, and London’s position as a global financial centre, there is currently very little guidance for UK businesses with regard to cannabis-related activity. The position of the UK National Crime Agency (NCA) and other regulators is not clear, even though this activity is clearly not what the UK Proceeds of Crime Act 2002 (POCA) was designed to criminalise.

Committing a criminal offence, even on a technicality, could give rise to a wide range of issues for both firms involved and their senior management as well as third parties dealing with them, including from a regulatory perspective.

The issue

POCA prohibits receiving, dealing with, or being concerned in a transaction which facilitates (by whatever means) the retention or movement of the “proceeds of crime”. Under POCA, “proceeds of crime” means any known or suspected benefit arising from criminal conduct. The offences are broadly drawn and there are few useful exceptions to them. There is a carve out for criminal conduct which is illegal in the UK but legal in the country in which it occurs (the so-called “Spanish Bullfighter” exception). Some UK companies have sought to rely on the Spanish Bullfighter exception in dealing with overseas cannabis-related businesses but the exception only applies to offences which in the UK would result in a maximum custodial sentence of 12 months or less, whereas the maximum sentence in the UK for supplying or being concerned in the production of cannabis is 14 years.

UK companies and financial institutions could potentially be penalised for entering into commercial transactions with cannabis businesses (for example insuring or investing in a cannabis-related business, or receiving funds from a cannabis-related business for services or goods provided). Those within the UK regulated sector (including banks, accountants, insurers, and lawyers acting on transactions) could also face sanctions for failing to report suspicions of money laundering related to dealings with cannabis-related businesses by means of a suspicious activity report. FCA and PRA regulated firms and individuals may also need to consider their broader regulatory obligations.

The issue extends beyond those dealing directly with cannabis-related businesses: UK entities which do not transact with those businesses, but, for example, receive funds by way of dividend or cash pooling from a Canadian group company which does so, could also be caught by POCA because they may receive or deal with monies which are arguably tainted (the concept of fungibility means that even a small amount of criminal property can taint a wider asset, for example money in a bank account). There would also be potential issues for banks and asset managers receiving or being involved in the movement of funds from individual investors or owners of cannabis-related businesses.

Examples of those who may be caught by POCA

  • A UK company wishing to invest in a cannabis-related business.
  • A professional advisor acting for a cannabis-related business or an investor in such a business.
  • A UK subsidiary receiving funds from a parent who has derived income from a cannabis-related business.

Seeking consent to proceed- a practical solution for UK companies and the NCA?

It is possible to obtain a defence to money laundering offences by making a disclosure (under s338 POCA) to the NCA prior to carrying out the relevant activity (commonly known as consent). However, the process does not provide a practical solution for ongoing business activity because it does not result in a blanket indefinite clearance for a particular type of conduct in the abstract (and so consent would need to be sought for every transaction with the delay, uncertainty and cost that would result).

Cannabis-related suspicious activity reports will also present a problem for the NCA as it is already flooded with reports: between October 2015 and March 2017 it received over 630,000 reports, including nearly 28,000 requests for consent. Given that more than 94% of requests for consent are granted (a request will be typically be refused when a criminal investigation is under way or will be started) it may be that the NCA would prefer to avoid an increase due to reports relating to dealings with cannabis-related businesses.

Guidance from the NCA on its position in relation to dealing with legal overseas cannabis-related businesses would be of great assistance. In the meantime anyone engaged (even indirectly) with such businesses will need to give careful consideration to the potential for inadvertently committing money laundering offences and the need for and practicalities of making disclosures.


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