Deep in the weeds: How to solve the legal problem of investing in cannabis

A growing controversy exists which is being discussed with increased frequency by commentators concerning the restrictions on UK firms that wish to invest in the overseas cannabis industry. 

The controversy arises from the uncertainty regarding the legality of investing in a foreign company, based somewhere that cannabis is legal. 

In the UK, cannabis and synthetic cannabinoids are categorised as Class B drugs under Part II, Schedule 2 of the Misuse of Drugs Act 1971 and the Proceeds of Crime Act 2002 (POCA). So while cannabis is becoming legal in a growing number of countries, funds generated due to investment in the recreational cannabis sector may be classified as proceeds of crime in this country.  

Such investments could potentially mean that an investor risks committing a substantive money laundering or other criminal offence, or could face other regulatory consequences. 

Meanwhile, fund managers and investors run the serious risk of violating POCA, not just from their initial investments, but from any revenues — including the increased share price or profit from the sale of such assets — that are derived from cannabis enterprises.  

Even the US is struggling to legitimately bank the proceeds of lawful cannabis enterprises.  

Green danger

The modern cannabis industry’s funding and investment mirrors the greater convolution of the financial trading world in which it occurs. Cannabis entities are now found on public indices or incorporated into diverse investment portfolios. 

For a UK-domiciled investor, this can result in profits from cannabis investments — no matter if they occur at arm’s length — being regarded as “criminal property” under POCA. Profits derived from investments in entities involved in the production, sale, and use of cannabis products, including ancillary services that cannabis monies pass through, may therefore result in a UK investor breaching this country’s anti-money laundering laws. 

And for British-based banks that hold the accounts through which the proceeds pass, or which receive money from investors who profit from legitimate overseas cannabis holdings, the same risks arise. 

Furthermore, UK entities which do not transact with foreign cannabis businesses, but (for example) receive funds by way of a dividend or cash pooling from a company which does, could also be caught by POCA, because they may receive or deal with monies which are arguably tainted (even the slightest amount of criminal property can taint a wider asset, such as money in a bank account). 

Prepare your defences

So what can British investors and entities do to protect themselves?

A form of affirmative defence against money laundering does exist under POCA. An entity concerned about the origin of funds it anticipates handling may make an “authorised disclosure” via a Suspicious Activity Report (or SAR) to the National Crime Agency (NCA) regarding the relevant anticipated act, and seek consent from the NCA as to how to proceed. 

But taken to its logical extreme and lacking any other option, investors, bankers, and other professionals who in some way are the recipients of gains or revenues generated from investments in cannabis-related entities would be compelled to repeatedly submit SARs to remain compliant. 

This would likely result in the burden of creating an entire department within their organisation dedicated entirely to drafting and filing proactive SARs, and then tracking the NCA’s response to each individual filing. It is an easy exercise to extrapolate the volume of filings that could be anticipated from any one active trading company or fund manager with daily shifts buying and selling within multiple portfolios. 

As the NCA has up to seven working days to respond to any single proactive SAR filing, and trading can occur hundreds if not thousands of times in a given day or week, it can be foreseen that by the time a response has been received from the NCA, the monies in question may likely have been traded multiple times — magnifying the number of resultant laundering violations. 

Enter the idea of an independent monitor

One alternative answer may lie in the appointment of an independent third-party monitor.

An appointed monitor could take on the role of being responsible for identifying all cannabis-related investments, the tracking and isolation of any profits or proceeds emanating from those investments, and the ring-fencing of the resulting monies or value, in order to remove the possibility of the inadvertent co-mingling with other investment proceeds or funds. 

Further investments in cannabis-related vehicles would not be precluded by the entity being monitored, but profits from cannabis investments could not be re-invested; they would need to be held in the monitored account.  

This notion anticipates that, sometime over the next few years, legislation that legalises such investments would occur, thus allowing the independent monitor to release the cannabis-derived gains back to the investor or fund manager.

The monitor would also be able to identify investments that are connected to cannabis revenue, and could then segregate those investments and confirm that the proceeds are not commingled with other investment revenue. 

Any revenues derived or interest earned would need to be placed in a special fund. For example, if a stock or holding went up in value, it would need to be placed in the fund. This could become complicated for large investment firms that regularly conduct trading in large volumes, because the connection to the cannabis industry is very broad.  

But, like having a neutral trustee in a bankruptcy or asset forfeiture proceeding, a third-party monitor would assume responsibility for making sure that the cannabis investment assets do not violate POCA. This is a concept that might be worth considering.

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