A Green Wave in a Challenging Economic Tide?

The Growth of the Australian Cannabis Market and Managing Money Laundering Risk

Publication July 31, 2019


Introduction

The global cannabis market is growing at an unprecedented rate due primarily to the legalisation of medicinal cannabis. However, recreational cannabis, which has been legal in Canada since October 2018, is also playing an increasing role in the sector. It is an industry that is predicted to be worth AUD$63 billion within five years. With New Zealand set to have a non-binding referendum on legalising the personal use of cannabis in 2020 there is likely to be further demand in our region. So what impact does this have for Australia?

The market in Australia is primarily driven by two factors:

  1. The Narcotic Drug Amendment Bill 2016, which amended the Narcotics Drugs Act 1967 (Cth), enabled the cultivation of cannabis for medicinal and related research purposes. It was passed by Australia’s Federal Parliament on 29 February 2016.
  2. Australia is blessed with both large amounts of natural sunlight and agricultural land which provide ideal conditions for growing cannabis on a commercial scale.

The above has resulted in substantial investment in the Australian cannabis industry. This has been driven from jurisdictions such as Canada that now have greater demand given the legalisation of recreational cannabis. This has posed challenges for financial institutions and companies in the cannabis sector given the differing laws in place across jurisdictions. It has led to questions about whether funds associated with the recreational cannabis market may be considered to be the proceeds of crime. This has occurred in parallel to increased scrutiny for anti-money laundering in the Australian financial services sector and a more recent push for regulators to prosecute.

Proceeds of Crime and the Potential for Money Laundering in Australia

The Narcotic Drug Amendment Bill 2016 amended the Narcotics Drugs Act 1967 (Cth) and allows for cultivation through a national licensing scheme. This scheme for medicinal cannabis is compliant with international obligations. However, recreational cannabis cultivation and use remains illegal in Australia, which poses potential money laundering issues where funds have been derived from or may be invested in recreational cannabis.

Money laundering involves the hiding, disguising or legitimising of the true origin and ownership of the proceeds of crime. The money laundering offences are defined in Part 10.2 of the Criminal Code Act 1995 (Cth) (Criminal Code) and encompass a wide range of criminal activity. Similar offences exist in Australia’s State and Territory criminal legislation.

Under the Criminal Code, ‘proceeds of crime’ is defined as any money or other property wholly or partly derived or realised, directly or indirectly, by any person from the commission of an offence against a law of Australia or a foreign country that may be dealt with as an indictable offence. Consequently, there is a technical argument that any funds derived from the recreational cannabis sector in Canada are illegal under Australian law. Although legal under Canadian law, if the funds stemming from the Canadian recreational cannabis sector are subsequently invested in or are transacted through Australia, they could be classified as proceeds of crime.

The above situation, however, is a mechanical and rigid interpretation of the law. Canada as both a member of the Commonwealth and a country with strict adherence to the rule of law is unlikely to be a target for enforcement action from Australian authorities if the conduct is legal under Canadian law (which medicinal and recreational cannabis with a license is). However, there remains a residual risk given that such a situation has not been tested under Australia law and is always subject to the specific set of circumstances of each proposed transaction.

Payment Risk

A more pertinent risk is of payments being blocked both in Australia or overseas on policy grounds. Some financial institutions choose not to transact in relation to cannabis whether or not it is legal. This is particularly the case where intermediary banks or foreign currency are involved. For example, the US Federal Government still prohibits cannabis through the Controlled Substances Act (USA) despite its use medicinally being legal in most US States. Consequently financial institutions outside of the US, whether or not they are bound by US law, have shown a tendency to be cautious, given the importance of the US as a global financial market.

Additionally intermediary banks in financial locations such as Singapore and Dubai, where there are comparatively stringent laws related to cannabis, pose a risk. Even where a jurisdiction is not directly involved in an initial transaction consideration should be given about whether a key customer or supplier could ultimately be involved in the flow of funds through the supply chain. This will become more relevant for Australian financial institutions should New Zealand legalise recreational cannabis given their close proximity. Again while the legal risk remains remote the potential for the blocking of payment and the resulting loss of business or frustration of contract needs to be considered.

Prudent Steps to Manage or Mitigate Money Laundering Risk

Under Australian law defences to money laundering can be made by arguing that the necessary states of mind for the offence, namely whether it is intentional, reckless, negligent, were not present at the time of the offence. Typically this is achieved by arguing that reasonable steps have been taken to avoid or mitigate potential money laundering. For example section 236 of the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 (Cth) provides a defence to criminal and civil proceedings if proven that the defendant took reasonable precautions and exercised due diligence. Specific examples in the context of cannabis include:

  • Due diligence is conducted or documents are obtained that confirms that a party to a transaction holds a medicinal cannabis licence in Australia or an equivalent regime.
  • Due diligence is conducted as to whether the source of funds and/or source of wealth of parties to the transaction are connected to recreational cannabis.
  • Where a party involved in a transaction has funds derived from recreational cannabis, these funds should be ring-fenced to avoid ‘tainting’ otherwise ‘clean’ funds from the medicinal cannabis sector.

All cross-border transactions involving cannabis, especially those involving recreational cannabis, should be reviewed for compliance under Australian law.


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