A review of Canadian, US and UK legislation in light of recent developments in the cannabis industry and their impact from a banking, insurance and money laundering perspective.
Canadian federal legislation introduced the Cannabis Act which came into force on October 17, 2018. The Act legalizes the recreational use of cannabis in every province in Canada. It put into place a new, strict framework for controlling the production, distribution, sale and possession of cannabis in Canada. The federal Act:
- restricts youth access to cannabis;
- prohibits promotions that are designed to encourage youth to use cannabis;
- imposes serious criminal penalties on individuals who break the law, such as importing or exporting cannabis illegally, or providing cannabis to youth;
- establishes strict product-safety and quality requirements;
- reduces the burden on the criminal-justice system;
- provides for the legal production of cannabis;
- allows adults to possess and access regulated, quality-controlled, legal cannabis; and
- enhances public awareness of the health risks associated with cannabis.
Each province and territory has its own rules for cannabis, including determining how cannabis is distributed and sold within their jurisdiction. The provinces make law with regard to:
- legal minimum age;
- where stores are located and how stores are operated;
- where adults can buy it;
- where adults can use it; and
- how much adults can possess.
In Ontario, for example, the legal age of use is 19 and individuals can only possess up to 30 grams of cannabis. People can purchase cannabis through the provincial government-operated online store or the eventual retail stores (dispensaries) that are set to open in the coming years.
One of Health Canada’s responsibilities is to provide for the licensing and oversight framework for the legal production of cannabis. Under this framework, a person is required to obtain a license issued by Health Canada. The Cannabis Tracking and Licensing System is the primary manner in which license applications are submitted. The classes of licenses, some of which contain subclasses, are as follows:
- cultivation (including subclasses for micro and standard cultivation or nursery);
- processing (including subclasses for micro or standard processing);
- sale for medical purposes;
- analytical testing; and
At this time, it is unlawful to sell cannabis-infused products such as beverages and edibles. However, it is anticipated that the sale of cannabis-infused beverages and edibles will become legal in late-2019. Beverage companies are already in the midst of discussions with Canadian cannabis producers to develop beverages that are infused with cannabidiol, commonly referred to as "CBD".
Compliance and Enforcement
Enforcement for criminal offences is overseen by Canadian law enforcement. Penalties are set in proportion to the seriousness of the offence as set out in the Act and the Criminal Code. Sanctions range from warnings and tickets for minor offences (ie. possession over the limit) to criminal prosecution and imprisonment for more serious offences (taking cannabis over Canada’s borders). The importation or exportation of cannabis into or out of Canada is prohibited unless some form of authorization is obtained from the Minister of Health, who can only authorize lawful cannabis producers to export cannabis to another country for medical purposes.
The prohibition on transporting cannabis across the Canadian border applies even if an individual is authorized to use cannabis for medical purposes, or if the individual is travelling to or from an area where cannabis has been legalized. If an individual is entering Canada and has cannabis in their possession in any form, it must be declared to the Canada Border Services Agency.
Canadians are not permitted to take cannabis across the United States border, whether by land or air, given that its recreational use is still illegal in the United States at the federal level. Furthermore, Canadian airlines have warned customers of possible diversions of domestic flights to airports in the United States. Airlines have advised passengers that diversion to an airport in the United States, where possession of cannabis is not legal, could lead to unanticipated legal issues for which they will not bear responsibility.
Canadians travelling with cannabis within the country are responsible for learning the laws of the province or territory they are travelling to. For example, in Ontario, an individual may bring lawfully obtained or purchased cannabis from another province or territory into Ontario.
Health Canada regulates the parties authorized to conduct activities such as cultivation, processing, analytical testing, research, sale for medical purposes, and importing and exporting. Compliance monitoring includes conducting inspections, gathering and analyzing information, carrying out compliance-verification activities and collaborating with other regulatory agencies as appropriate.
Canadian cannabis companies can face obstacles in trying to obtain financing from major financial institutions who must comply with Canada’s anti-money laundering legislation. Such entities are required to comply with know-your-client requirements and report on certain types of transactions (ie. large cash transactions). This can be challenging for an industry whose product has only recently become legal.
There are a number of issues to note when insuring cannabis risks. For example, with respect to personal lines insurance, will cannabis plants be considered “personal property” or will claims for plant theft and damage fall under the “tree, shrub, and plant” portions of a homeowner’s policy? Personal cultivation is a peril that is currently excluded in a standard homeowner’s policy and can no longer be covered by the “criminal activity” exclusion. In-home cannabis production comes with inherent risks, which can result in increased water consumption or damage, mould and fire damage claims.
Cannabis products present interesting product-liability insurance questions in that the effects of cannabis are not uniform nor widely-known. Cannabis is excluded under the Canada Consumer Product Safety Act. While producers and processers must be licensed and appoint quality-assurance persons to test cannabis products, there may be health and behaviour hazards that have yet to present themselves until widespread consumption and its effects are ascertained.
With regard to commercial insurance, there are over 100 licensed cannabis producers in Canada. Producers require specialized property and equipment. How will plants and finished products be treated in insurance coverage? In addition, the transportation of cannabis creates potential for loss exposure with cannabis currently being transported directly from licensed producers to the end user by Canada Post, or private courier companies. There is a potential for increased risk of theft and damage to product while in transit. Specialized cargo coverage will be required.
Canadian consumers must by wary of their personal information being accessed through cyber-attacks as Cannabis companies may face privacy breaches. The Ontario Cannabis Store has already suffered a privacy breach in which the company’s delivery tracking tool was used to gain access to the personal information of 4,500 customers.
In the United States, the legal landscape reflects a federal-state divide. Though federal law criminalizes even the possession of marijuana and considers the substance highly addictive and lacking in medicinal properties, many of the states have decriminalized marijuana, and almost all states have legislatively approved marijuana for medicinal use. While banks and credit-card companies have been wary of providing services to businesses dealing in cannabis for fear of running afoul of money-laundering laws and banking regulations, there are fewer concerns for insurers. Indeed, in California—the largest state in the union—the state's Insurance Commissioner has actively recruited insurers to begin issuing insurance policies specially approved for cannabis growers and retailers; today, at least five different California-admitted insurance carriers are offering policies specifically designed for the needs of cannabis businesses.
As of 2019, almost half of the 50 US states have either legalized or decriminalized marijuana, and almost all have permitted its medicinal use. Possession and commercial sale of marijuana has been deemed legal in 9 US states: Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, and Washington. By the end of 2019, almost one quarter of Americans will be able to legally purchase marijuana in their home state. Furthermore Vermont, District of Columbia, and the Northern Mariana Islands have legalized marijuana possession but not commercial sales. An additional 11 states—Connecticut, Delaware, Illinois, Maryland, Minnesota, Missouri, New Hampshire, New York, North Carolina, Ohio, Rhode Island—plus the US Virgin Islands have decriminalized possession of small quantities of marijuana, so that simple possession may not be punished by jail time. And, other than Idaho, Nebraska, and South Dakota, every state has recognized marijuana's medicinal benefits and legalized cannabis or CBD oil in some form.
But the distribution and even possession of marijuana is still technically a crime under federal law. The Controlled Substances Act, signed into law in 1970, instituted a comprehensive regime of regulation and oversight, including the implementation of a five-schedule system that groups drugs together based upon accepted medical uses, the potential for abuse, and their psychological and physical effects on the body. Since the law was passed, marijuana has been designated a Schedule I drug, the category designated for those drugs that have high potential for abuse, lack of any accepted medical use, and absence of any accepted safety for use in medically supervised treatment. The federal Drug Enforcement Agency ("DEA") is empowered to reschedule drugs, and it has received numerous petitions dating back to 1972 to adjust marijuana's classification, but, after a comprehensive evaluation process, the DEA has rejected four separate petitions demanding reclassification. The DEA requested that the Food and Drug Administration analyze the issue, but the Schedule-I categorization was reaffirmed in August 2016.
American financial institutions have been wary of providing their services to marijuana growers or dispensaries. Reports indicate that most major banks—including Bank of America, Wells Fargo, and Chase—close accounts when they discover that a customer is involved with growing or selling marijuana. Visa refuses to accept transactions that are known to involve sales of marijuana. Wells Fargo even closed an account for a candidate running for Florida agriculture commissioner on a platform of expanding access to medical marijuana; the bank explained that the candidate had admitted that she had anticipated accepting donations from lobbyists in the medical-marijuana industry, and that the bank's policy is "not to knowingly bank or provide services to marijuana businesses or for activities related to those businesses." Some local credit unions have begun to provide checking accounts for the marijuana industry, but they do so risking a crackdown from federal law enforcement.
The concerns of banks and credit-card networks are justified based upon the law as written, as federal law generally forbids such institutions from participating in transactions with money known to be derived from cannabis sales. Under U.S. law, money laundering—defined as engaging in a financial transaction knowing that the transaction involves proceeds from an illegal activity with the intent to promote or perpetuate that unlawful activity—is a felony. The Bank Secrecy Act and its regulations require banks to report any suspected illegal activity, including transactions aggregating $5,000 or more that involve funds derived from illegal activities, which would include sales of marijuana. Furthermore, federal asset-forfeiture laws are clear that federal law enforcement may confiscate any proceeds or property derived from violation of the Controlled Substances Act, including marijuana sales.
However, these fiscal institutions appear overly cautious, as the federal government has shown little appetite to prosecute any businesses—even marijuana growers and commercial dispensaries—so long as they comply with state laws and regulatory guidance. During the Obama administration, Deputy Attorney General James M. Cole issued an August 29, 2013 memorandum for all federal prosecutors that declared that the Department of Justice would focus on issues such as preventing drugged driving, distributing of marijuana to minors, selling of marijuana into states where it is illegal, and growing or possessing marijuana on federal lands. Outside of these priority areas, the memorandum stated that federal prosecutors would defer enforcement of minor possession offenses and even distribution between consenting adults to state and local prosecutors. The memo explicitly stated that, though previous DOJ guidance suggested that federal prosecutors should not utilize federal resources to focus enforcement efforts "on seriously ill individuals, or on their individual caregivers," the new priorities "should not consider the size or commercial nature of a marijuana operation" as a factor that would justify federal intervention. Relying upon the principles outlined in the Cole Memo, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) announced guidelines that "clarifies how financial institutions can provide services to marijuana-related businesses consistent with their [Bank Secrecy Act] obligations," with the stated of goal of "enhanc[ing] the availability of financial services for, and the financial transparency of, marijuana-related businesses."
Though the Cole Memo has technically been rescinded, there does not appear to be any appetite for the Department of Justice to interfere with the states' regulatory regimes. President Trump's appointment of Attorney General Jeff Sessions—who once stated during a Senate hearing that "Good people don't smoke marijuana"—presaged a crackdown on medicinal and recreational marijuana, and, in January 2018, Sessions rescinded the Cole memo. However, the much-feared crackdown on legitimate growers and dispensaries never materialized. Instead, federal prosecutors teamed up with local law enforcement agents to prosecute malfeasants who flouted the states' laws, including raids in California and Washington state that targeted illegal and unlicensed cannabis growers financed by dark money from China. And it appears that Jeff Sessions' successor, Attorney General Bill Barr, will also not advance the crackdown against dispensaries or retailers; in written responses to questions from US Senators during his confirmation hearing, Barr stated “I do not intend to go after parties who have complied with state law in reliance on the Cole Memorandum.”
Congress, too, appears to have an interest in preventing federal intervention for those states that have legalized marijuana. Since 2014, legislators have regularly approved a budget provision—known as the Rohrabacher-Farr amendment—which forbids the Department of Justice from spending funds to interfere with the implementation of state medical cannabis laws.
Seeing the writing on the wall, even federal courts have begun enforcing insurance policies that cover dispensaries, even for property-damage claims arising from losses to cannabis crops. Originally, courts were wary of compelling insurers to indemnify insureds for their lost pot. For example, in Tracy v. USAA Casualty, the District of Hawaii held that—even though Hawaii law permitted individuals to grow marijuana for medical purposes—the insured homeowner was not covered for theft of 12 marijuana plants stolen from his property. The court explained that the Controlled Substances Act superseded Hawaii's medical-marijuana laws, and that "this Court cannot enforce the provision because Plaintiff's possession and cultivation of marijuana, even for State-authorized medical use, clearly violates federal law." However, more recent decisions have found that marijuana crops are insurable and have cited the continued erosion of federal law enforcement's interest in prosecution of marijuana laws. In Green Earth Wellness Ctr. LLC v. Atain Specialty, the insured owned a retail medical marijuana business and an adjacent growing facility in Colorado. Green Earth Wellness filed a property claim when a nearby wildfire caused smoke and ash to overwhelm its ventilation system and damaged its marijuana plants. The insurer argued that the policy's exclusion for damage to "Contraband" barred coverage, but the court held that "conflicting signals that the federal government has given regarding marijuana regulation and enforcement" rendered the term "Contraband" ambiguous as applied to marijuana. Suggesting its concern that indemnifying the insured for its marijuana plants would violate federal law, the insurer also requested "assurances from th[e] court" regarding whether doing so would run afoul of public policy. Citing "a continued erosion of any clear and consistent federal public policy in this area," the court held that Atain was required to comply with the terms of its own policy.
With state and federal legislators and even federal courts beginning to recognize the shift toward nationwide legalization of marijuana, insurers have begun to issue policies specifically designed to cover risks for cannabis growers and retailers. California, in particular, appears to be a ripe area for insurers, with a massive market and an insurer-friendly regulatory environment. With an estimated population of 40 million, California is the largest state in the country and the fifth largest economy in the world by GDP. Some analysts predict annual sales of $6 to $7 billion in annual cannabis sales, and legislators are currently mulling reducing the 15 percent sales tax upon cannabis sales to 11 percent. In 2017, California's Insurance Commissioner Dave Jones launched an initiative to encourage commercial insurance companies to write insurance designed for the cannabis industry. In October 2017, he held a first-in-the-nation public hearing to identify insurance gaps faced by the cannabis industry. Since that time, California's Department of Insurance has approved cannabis-industry targeted insurance policies and programs including a product-liability and product-recall program, lessor's risk coverage, workers' compensation insurance, and surety bond programs. Today, admitted insurers offering cannabis-industry-focused programs include North River Insurance Company,  United States Fire Insurance Company,  White Pine Insurance Company, Golden Bear Insurance Company, California Mutual Insurance Company, Continental Heritage Insurance Company, and Atlas General Insurance Services. Furthermore, the Commissioner has approved the American Association of Insurance Services' Cannabis Business Owners Policy, which provides a package policy containing both property and liability coverage for qualifying California cannabis dispensaries, storage facilities, distributors, processors, manufacturers, and other businesses participating in or supporting the California cannabis industry.
England & Wales
Cannabis production has been back in the news in the UK. First, commentators asked if UK legislators would follow the lead of their Canadian counterparts in rethinking the criminalisation of recreational cannabis use. The answer from the government has been a resounding no. Then, medicinal cannabis attracted attention following two tragic cases of young boys with severe epilepsy who had been successfully treated with cannabis oil but found themselves unable to receive it from doctors in the UK. This did prompt government action. As of 1 November 2018, "cannabis-based products for medicinal use in humans" can be lawfully prescribed.
These developments leave UK corporates and investors wishing to invest or be involved in cannabis related ventures in a difficult position. Investing in or underwriting a Canadian cannabis company, for example, wouldn't appear to attract criminal liability under the Misuse of Drugs Act 1971 because section 20 only applies to defendants assisting or inducing the commission of an offence under the relevant foreign law. Following Canada's change in law, this will no longer be a concern.
Instead, it is the fruits of investment in cannabis production that are now set to cause headaches for UK investors and underwriters.
The UK's money laundering laws are found in the Proceeds of Crime Act 2002 (POCA). It is a large and famously draconian piece of legislation that spans matters including confiscation of the proceeds of crime post-conviction and recovery of the proceeds of crime via civil proceedings. The principal money laundering offences are found in sections 327 to 329 of POCA, and they criminalise doing virtually anything with criminal property (if you know or suspect it to be so).
Criminal property is property which "constitutes a person's benefit from criminal conduct", or "represents such a benefit (in whole or part and whether directly or indirectly)"; and the "alleged offender knows or suspects that it constitutes or represents such a benefit" (s. 340(3)). Criminal conduct, crucially, is conduct which "would constitute an offence in any part of the United Kingdom if it occurred there" (s. 340(2)).
Cannabis production remains a criminal offence in the UK (contrary to s. 4(2) and s. 6(2) Misuse of Drugs Act 1971), unless specifically authorised by a licence issued by the Secretary of State under the Misuse of Drugs Regulations 2001. It is these Regulations that have been amended to allow for the production of cannabis for medicinal purposes in the UK.
Therefore, a dividing line emerges. Is producing cannabis products for medicinal use in humans abroad criminal conduct for the purposes of POCA? Plainly, the UK licensing regime does not apply abroad, so cannabis production abroad cannot, by definition, be authorised by the Secretary of State. POCA doesn't provide an answer to this issue, but it is to be hoped that law enforcement agencies in the UK would take a common sense approach to investments in locally regulated medicinal cannabis businesses abroad.
Investing in cannabis production for recreational use abroad is more problematic. The production (and indeed supply and possession) of cannabis for recreational use remains criminal in the UK. So section 340(2) means it remains "criminal conduct" for the purposes of POCA. Any property that represents a benefit from the criminal conduct is, in turn, likely to be criminal property.
Investors and insurers will therefore be concerned by the possibility of committing various species of the principal money laundering offences: in particular, converting or transferring criminal property (s. 327(1)); entering into or becoming concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person (s. 328(1)); and acquiring, using or possessing criminal property (s. 329(1)).
Since May 2006, sections 327, 328 and 329 have all been limited by the effect of a new sub-section in each, which provides:
Nor does a person commit an offence under subsection (1) if—
(a) he knows, or believes on reasonable grounds, that the relevant criminal conduct occurred in a particular country or territory outside the United Kingdom, and
(b) the relevant criminal conduct—
(i) was not, at the time it occurred, unlawful under the criminal law then applying in that country or territory, and
(ii) is not of a description prescribed by an order made by the Secretary of State.
The effect of this new sub-section could have been to take large amounts of conduct that is decriminalised abroad out of the scope of POCA. However, the Secretary of State's Order under sub-section (b)(ii) has vastly reduced the scope of the provision. Under the Proceeds of Crime Act 2002 (Money Laundering: Exceptions to Overseas Conduct Defence) Order 2006/1070, any conduct which would constitute an offence punishable by imprisonment for a maximum term in excess of 12 months is "prescribed." The Explanatory Memorandum to the Order said "Proceeds from conduct which is lawful under local law would continue to fall within the money laundering offences if it constituted a serious offence here."
Needless to say, production, supply and possession of cannabis for recreational use are all punishable by more than 12 months in prison.
None of the other limitations (or defences) to the principal money laundering offences are likely to help either. An authorised disclosure to the NCA (sections 327(2)(a), 328(2)(a) and 329(2)(a)) can only provide a defence in relation to a specific act or transaction, rather than carte blanche. And the defence to acquiring/using/having possession of criminal property for "adequate consideration" (s. 329(2)(c)) can't be used if one knows or suspects one is helping another carry out criminal conduct (the definition of which takes one back to s.340(2)).
Lloyd's has taken the view that writing Canadian cannabis risks does not amount to an offence under s. 328 POCA (their bulletin is silent on sections 327 and 329). But until the National Crime Agency or other authorities provide stronger comfort to businesses in the UK, the issue will remain one of concern.