The prospective relaxation of cannabis regulations in jurisdictions around the world offers UK businesses investment opportunities. However, investors should be wary of potential exposure under UK anti-money laundering (AML) legislation and consider taking appropriate safeguarding actions prior to any transaction.
Pot luck: cannabis law in different jurisdictions
In the UK, it is a criminal offence to produce or supply cannabis under the Misuse of Drugs Act 1971, punishable by up to 14 years in prison and/or an unlimited fine. There is a limited exception relating to supply for certain medicinal purposes which may be supplied under licence.
However, there is an emerging global trend towards looser cannabis regulations. In 2018, Canada legalized the production and supply of cannabis for recreational purposes under the Canadian Cannabis Act (production and supply for medicinal purposes has been legal in Canada since 2001). Other developed jurisdictions are expected to follow suit in the coming years.
Proceeds of Crime Act 2002
A discrepancy between cannabis laws in the UK and those in other jurisdictions creates a potential problem under UK AML legislation for UK businesses looking to invest in the legal cannabis industry abroad, or otherwise enter into arrangements with companies in the industry (for example, through the provision of debt finance or insurance).
Under the Proceeds of Crime Act 2002 (POCA), it is an offence for anyone to (broadly speaking) deal in or become concerned in an arrangement involving known or suspected “criminal property.” In addition, businesses in the regulated sector (such as financial institutions, law firms and accountancy practices) are subject to stricter reporting requirements under Section 330 of the POCA, and will be deemed to be committing an offence if they fail to report suspected money laundering undertaken by others, even if they are not involved in dealing with known or suspected criminal property themselves.
Property is “criminal property” under POCA if it constitutes or represents a benefit from criminal conduct. In turn, criminal conduct is conduct that either: (a) constitutes an offence in the UK; or (b) would constitute an offence in the UK if it occurred there (the so-called “dual criminality” test).
In other words, under the dual criminality test, what matters is whether the production or supply of cannabis is lawful in the UK. If not, then proceeds generated by a cannabis business may constitute criminal property, and dealing with or becoming concerned in an arrangement involving those proceeds could give rise to an AML offence under POCA, irrespective of whether the cannabis was produced or supplied in another jurisdiction where it was lawful.
As mentioned above, the supply of cannabis for certain medicinal purposes is permitted in the UK when licensed. Therefore, to the extent that: (1) an overseas business is licensed to produce or supply cannabis for medicinal purposes; and (2) a licence for those purposes would also be available in the UK, this may serve to avoid POCA issues in the first place, as the property would not, in those circumstances, constitute criminal property from a UK money laundering perspective.
In practice however, businesses may encounter practical difficulties in seeking to rely on this argument. For example, do the licensed medicinal uses of the cannabis fall precisely within the scope of the UK exception or are they only broadly similar? Is there sufficient information on the precise conditions for licensing in the overseas jurisdiction, and are those licensing conditions exactly the same in both jurisdictions?
There is no court or government guidance suggesting that a materiality threshold would be applied in these scenarios. In those circumstances, proceeding on the basis that the dual criminality test will not be met may be seen by businesses as an unacceptable AML risk without further safeguarding actions.
Is the “Spanish Bullfighter” defence available?
A defence is available under POCA in respect of criminal conduct, which is legal in the country in which it occurs, if the criminal conduct would attract a maximum custodial sentence of 12 months in the UK (known as the “Spanish Bullfighter” defence). As the production or supply of cannabis in the UK attracts a maximum custodial sentence of 14 years, the Spanish Bullfighter defence is not available in these circumstances.
Roll up: Lloyds of London circular A recent circular published by Lloyds of London takes a different view of POCA’s application. The circular suggests that adopting a purposive interpretation of POCA, providing insurance in respect of Canadian cannabis risks would not meet the dual criminality test, on the basis that POCA was not designed to preclude “wholly lawful conduct, such as the provision of insurance of business activity carefully legalized in another country”.
Businesses should treat this statement with caution. As mentioned above, the POCA regime expressly provides for a defence in circumstances where the relevant conduct is lawful in the country in which the conduct takes place, but the production, distribution and sale of cannabis falls outside the scope of this defence. Therefore, businesses may feel uncomfortable acting as if POCA will not apply in the absence of clear guidance from the courts or the government.
Doobie or not doobie: mitigating AML risks
Against that background, how can a business looking to invest or become concerned in an arrangement in respect of the overseas cannabis industry mitigate their AML risk?
The safest option will be to file a suspicious activity report (SAR) to the National Crime Agency with the aim of securing authorized consent for any transaction or arrangement. Authorized consent will provide a defence to an AML offence under POCA. This approach is likely to be particularly appropriate for one-off transactions or arrangements.
However, in circumstances where a longer-term investment or ongoing business relationship is anticipated, such as custodianship arrangements, the prospect of filing multiple complex SARs may not be practical. In these (and indeed in all) circumstances, it is advisable to conduct a thorough due diligence exercise in connection with the proposed transaction or arrangement. Although this will have to be tailored to the specific circumstances, it should generally take account of the following:
- The reputability of the target company, including whether the company and its senior management have previously been subject to criminal investigation or enforcement proceedings
- Whether there is any suggestion that the company is not operating within the terms of its licence
- Whether the target company has effective anti-bribery and corruption policies in place
- Whether the jurisdiction that has granted the licence is a developed jurisdiction with effective mechanisms for pre- and post- legislative scrutiny
Although due diligence in respect of a proposed transaction (no matter how comprehensive) will not alleviate the technical legal risk of committing a POCA offence, it may provide some practical comfort to businesses that the risk of an AML prosecution is low, in the absence of factors suggesting there is public interest in such a prosecution.