Any business that provides services, products, or otherwise engages in business with the marijuana industry needs to understand and manage various unique legal and compliance risks associated with such business relationships.
By last count, the number of states permitting some form of medical or recreational marijuana—or both—was 23, plus the District of Columbia. As the marijuana industry continues to expand, so too do the number of more traditional businesses and industries that are doing business with the marijuana industry. Like any industry, the marijuana industry relies, at least in part, on other industries to operate. Many businesses have been formed specifically to service the marijuana industry, while other existing businesses devote only a portion of their efforts to servicing the marijuana industry. Either way, any business that provides services, products, or otherwise engages in business with the marijuana industry needs to understand and manage various unique legal and compliance risks associated with such business relationships. This article addresses some of those issues.
1. Remember that the Manufacture, Possession, and Distribution of Marijuana are still Illegal under Federal Law
While it may be true that certain marijuana activities are “legal” under a particular state’s law, federal law still prohibits the manufacture, distribution, and possession of marijuana. (21 U.S.C. § 841) In fact, the federal Controlled Substances Act (CSA) classifies marijuana as a Schedule I controlled substance. (21 U.S.C. § 812) Violations of the CSA can result in penalties that include fines, forfeiture, and imprisonment. (21 U.S.C. § 841(b); 21 U.S.C. § 846; 21 U.S.C. § 853)
It is not just the direct manufacture, distribution, and possession of marijuana that are of concern. Instead, there are a myriad of federal criminal laws that businesses offering services or products to marijuana-related businesses (MRBs) must be aware of. For instance, if a business provides services or products to a MRB, which in turn uses those services or products to manufacture, distribute, or possess marijuana, the business providing those services and products may be subject to criminal conspiracy or “aiding and abetting” laws, which carry the same penalties as direct violations of the CSA (21 U.S.C. § 846; 18 U.S.C. § 2). In addition, because proceeds of marijuana sales constitute proceeds of illegal activity, those proceeds — and any derivative thereof — may be subject to criminal or civil forfeiture and may also be subject to various federal anti-money laundering laws. (21 U.S.C. § 853 (criminal forfeiture statute related to controlled substance violations); 18 U.S.C. § 981, et seq. (civil forfeiture statute related to money laundering); 18 U.S.C. §§ 1956 and 1957 (federal anti-money laundering statutes)) It is also worth mentioning that it is not just the business or entity that provides services or products to MRBs that may be subject to these federal criminal laws and related penalties, but also the people in control of and associated with the business.
2. Understand the Federal Government’s Response to “Legalized” Marijuana
Although the CSA and other federal laws still prohibit the manufacture, possession, and distribution of marijuana, the federal government has not taken a draconian approach to enforcing federal drug laws in states where marijuana is legal. Instead, the Department of Justice (DOJ) has issued several memoranda to address its rather laisse faire approach to enforcing federal marijuana laws. In August 2013, the DOJ issued a memorandum that recognized that the DOJ has limited investigative and prosecutorial resources and, as such, it cannot investigate and prosecute every marijuana violation. (James M. Cole, “Guidance Regarding Marijuana Enforcement,” U.S. Department of Justice, Aug. 29, 2013, available here) Instead, the DOJ advised that its prosecutors, in determining whether to initiate an investigation or to charge an individual or institution with a violation of a federal drug-related crime, should focus on whether the conduct violates any of its eight enumerated “enforcement priorities.” (Id. at p. 1) Those eight priorities are:
1. Preventing the distribution of marijuana to minors;
2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
3. Preventing the diversion of marijuana from states where it is legal under state law to other states;
4. Preventing state-authorized marijuana activity from serving as a pretext for trafficking other illegal drugs or other illegal activity;
5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
6. Preventing drugged driving and the exacerbation of other adverse public health issues related to marijuana;
7. Preventing the growing of marijuana on public lands and other public safety hazards associated with marijuana on public lands; and
8. Preventing marijuana possession or use on federal property. (Id. at pp. 1-2)
According to the memorandum, if a particular state marijuana activity violates one of those priorities, then the DOJ is more likely to investigate and prosecute that activity than if the marijuana activity does not violate one of those priorities. (Id. at p. 2) Further, for those activities that do not violate an enforcement priority, the DOJ will primarily rely on states to enact and enforce thorough marijuana laws and regulations to ensure that state marijuana activity does not violate DOJ’s priorities. (Id) However, the memorandum expressly states that the guidance does not change federal law and cannot serve as a defense to any violation of federal law, even if the activity does not violate an enforcement priority. (Id. at p. 4)
In February 2014, DOJ released an additional marijuana-related memorandum. (James M. Cole, “Guidance Regarding Marijuana-Related Financial Crimes,” U.S. Department of Justice, Feb. 14, 2014, available here) That memorandum was released in connection with separate guidance from the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). (FinCEN Guidance, “BSA Expectations Regarding Marijuana-Related Businesses,” Feb. 14, 2014, available here) Collectively, the February 2014 DOJ and FinCEN memoranda focused on the financial industry’s anti-money laundering obligations in connection with banking marijuana proceeds. As is relevant here, DOJ’s 2014 guidance reiterated the importance of complying with its eight enforcement priorities outlined in its earlier 2013 memorandum. (DOJ’s 2014 Guidance, pp. 1-2) As it did in its earlier guidance, the DOJ expressly reserved the right to prosecute any violation of federal law and warned that its guidance was not a defense to such a violation. (Id. at p. 3)
Although the DOJ has reserved its right to enforce federal drug laws, in the two years following the issuance of its August 2013 memorandum, the DOJ and other federal agencies have largely permitted state marijuana-related activities to go unchecked as long as they are in compliance with the eight enforcement priorities. Therefore, although there is no guarantee that state sanctioned marijuana-related activity that strictly complies with the enforcement priorities will not be prosecuted, history dictates that such activity is relatively low risk. The key is to ensure, at a minimum, absolute compliance with the enforcement priorities and to have policies, procedures, and employee training in place to ensure such compliance.
Part two of this series will delve more into variations in state and local laws and understanding the risks involved.