This article first appeared in The FCPA Blog

After several states in the U.S. and Canada legalized cannabis and cannabis derivatives over the last few years, the legalized cannabis industry in North America has managed to attract investment from the UK. But it is the profits made by British investors from these speculations that could create some pressing problems.

An excellent article by Angela Bilbow for Commercial Dispute Resolution (CDR) draws attention to the potential pitfalls of the fiscal elements of the investment and ongoing legitimization process around the cannabis industry.

Globally, there is a never-ending cascade of information and research extolling the use of cannabis and its derivatives as a medical treatment for various illnesses and conditions. Having spoken to experts in the field over the years, it seems tolerably clear that cannabis derivatives have a place in the medical prescription toolbox (although for young people it seems that cannabis should not be used).

What alerted me to this CDR article and the message it carried was the developing similarity between the integration of funds into mainstream banking that have their derivation in the cannabis industry, and the policy position of both the U.S. federal and the UK’s national banking systems.

In the United States for example, there is a conflict between the lawfulness of cannabis at the state and federal levels. We now have a situation where businesses legally selling cannabis in certain states are being barred from placing the funds derived from that (legitimate) business into federal banking systems.

This has resulted in scenarios where those in the legalized industry have had to resort to tactics including burying their cash in the ground, as they are unable to place it into the banking system. Enormous sums of cash are transported around the city of Denver every day to be deposited into old-fashioned vaults. Cannabis cultivators and retail sellers have to pay their employees and rent in cash. This is a public safety hazard.

Ironically, U.S. tax laws stipulate that even if income is derived from a criminal activity, then it is still liable to taxation. This has seen legitimized cannabis suppliers having to attend their local tax offices with holdalls of cash to honor their tax obligations as they cannot simply write a cheque or make an electronic transfer, due to their being barred from using a bank account. So, despite the lawfulness of the cannabis trade at a state level, and overriding criminality at a federal level, the federal authorities are still demanding a slice of the profits.

The CDR article estimates that the global cannabis industry will be worth $65 billion in the next five years, so we are talking about a significant industry. However, Ms. Bilbow has quite rightly identified the same potential conflict between UK investors’ profits and dividends from the overseas legalized cannabis industry, and the placement of the proceeds of cannabis sales into the UK’s banking systems, due to possible breaches of the Proceeds of Crime Act 2002 (POCA).

The way that UK law works is that is that the proceeds from any activity that would be considered a crime in the UK would also be a crime committed abroad, even if the activity was in fact lawful in the country where it took place. Depending on the circumstances of the activity in question, this may render the proceeds of the legalized cannabis trade as criminal property, thereby opening up a Pandora’s Box of potential assertions of money laundering when the resultant profits are placed into the UK banking system.

It is odd that pioneering countries such as the United States and Canada, which lead the way globally in so many ways, cannot balance the cannabis legalization process with the regulatory factors covering the integration of profits into their respective national banking systems.

It matters not whether your personal views on the subject conflict with those of your neighbor. The fact is that this is a burgeoning, multi-billion-dollar industry. It has created jobs and added value to local economies. To render the profits from a business which is lawful in the place of its origin as criminal is difficult to justify on public policy grounds. All that is required is for countries embarking down this path to get their respective houses in order, by amending the legislation that causes conflict.

It is reassuring that the UK experts Ms. Bilbow approached for comment believed that although such profits were likely to contravene the POCA, this would be on a debatable and almost technical level, and that prosecutions would be unlikely as they would fall outside the realm of public interest.

These experts go on to list a number of possible “workarounds” in order to prevent investors falling foul of the POCA, all of which make sense. The issue being that investors shouldn’t be finding themselves in this situation in the first place. Although the experts’ observations are encouraging, the fact remains that conflicts in the criminal law exist, technical or otherwise, and they need to be addressed by UK legislators, as well as those in the USA and Canada.

With thanks to Tony McClements, Senior Investigator at Martin Kenney & Co, for his assistance with this post. He served for 33 years with UK police forces and has specialized in Fraud & Financial Investigation since 1998. He is also a lecturer in these subjects at the University of Central Lancashire (UCLAN).

Martin is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases. In 2014 he was the recipient of the ACFE’s highest honor: the Cressey Award for life-time achievement in the detection and deterrence of fraud. In 2017, 2018 and 2019 he was chosen as a global elite “Thought Leader” by Who’s Who Legal and also selected as the number one offshore asset recovery lawyer worldwide over the same period.