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Key considerations for UK investment in the legal cannabis industry abroad (November 12, 2019)

15/01/2020

In the UK, cannabis is illegal for recreational (but not authorised medicinal) use under the Misuse of Drugs Act 1971.

In the U.S., the use and possession of cannabis (“marijuana”) is illegal under federal law under the Controlled Substances Act 1970. However, certain states have enacted legislation permitting exemptions for various uses, including medical and recreational.

In Canada, it is legal to produce, distribute, sell and possess cannabis (for all purposes including medical and recreational) subject to complying with the Canadian Cannabis Act.

Whilst there is no specific prohibition on UK investors to invest in cannabis-related entities, where the activity is legal in its jurisdiction but not legal in the UK, they risk committing money laundering offences under the Proceeds of Crime Act 2002 (POCA).

However:

Various defences may be available under POCA.

The legality of the investment can be safeguarded by making an authorised disclosure to the National Crime Agency (NCA) and receiving consent to proceed with the specific proposed activity (be it selling existing investments, holding them and receiving dividends, or making new investments).

Correct structuring of an investment is key to ensuring that the investment can be made lawfully.

That said, the legal position is not clear cut. There is very little guidance for UK businesses with regards to cannabis-related activity and significant discrepancy in opinion within the UK investment community as to the boundaries of legal risk and compliance. The position of the National Crime Agency and other regulators is not clear, and in June 2019, the UK Law Commission published a report highlighting the need for guidance on transactions involving the legal cannabis industry in Canada and elsewhere.

In the meantime, UK investors will need to remain alert to the risk that returns from the Canadian or U.S. cannabis industries may be considered proceeds of crime, obtain detailed advice and make disclosures, if necessary, in accordance with their risk appetite.

POCA

POCA contains various money laundering offences relating to the direct handling of the proceeds of crime. A person commits an offence if he or she:

Conceals, disguises, converts, transfers the proceeds of crime or removes criminal property from the jurisdiction of England and Wales (s327) (the basic money laundering offence).

Enters into or becomes concerned in an arrangement which he or she knows or suspects facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person (s328) (the aiding and abetting offence).

Acquires, uses or possesses criminal property (s329) (the handling stolen goods offence).

“Criminal property” is defined as property which constitutes a person’s benefit from criminal conduct or which represents such a benefit (in whole or in part, directly or indirectly).

These definitions bring cannabis, including cannabis grown and distributed legally abroad, within the scope of POCA, thereby potentially creating issues for UK investors.

The SOCPA or “Spanish Bullfighter” Exception

The Serious Organised Crime and Police Act 2005 (SOCPA) provides an exception to the above offences (the “Spanish bullfighter” exception) in relation to conduct that is legal in other jurisdictions. A person does not commit an offence if:

  • They know or believe, on reasonable grounds, that the relevant criminal conduct occurred outside the U.K.,
  • The relevant criminal conduct was not, at the time it occurred, unlawful under the criminal law then applying in that territory, and
  • The relevant criminal conduct is not of a description prescribed by an order made by the Secretary of State.

For example, a bullfighter from Spain (where the practice is legal) could come to the UK (where it is not) and spend his earnings without fear of committing an offence under POCA.

However, the above exception regarding orders made by the Secretary of State brings cannabis-related businesses back within the scope of POCA; this is because conduct which would constitute an offence punishable by imprisonment for a maximum term exceeding 12 months in the UK does not form part of the Spanish bullfighter exception. The cultivation, possession, distribution (etc.) of cannabis all carry sentences of greater than 12 months.

Adequate Consideration

POCA contains a specific defence to the offence of acquiring, using or possessing criminal property, which is that a person does not commit an offence if they acquired their property for “adequate consideration”. Consideration would be “inadequate” for these purposes if it was significantly less than the value of the relevant property. Therefore, shares purchased in a public company for market value would not constitute criminal property. The right to the benefits derived from those shares, such as dividends and capital growth, should also be considered to have been purchased for adequate consideration, albeit this position has not been tested and confirmed in the UK courts.

UK shareholders may potentially rely on the adequate consideration defence to permit them to

  • purchase shares in companies exposed to the cannabis industry,
  • receive dividends paid on those shares, and
  • sell those shares for a profit if the share price has risen since they were acquired, in each case without such conduct constituting an offence under s329. It must be noted, however, that in relation to points (i) and (iii), offences under s328 and s327 POCA (respectively) may still be committed. It is therefore imperative to ask when the relevant activity took place and consider any available defences accordingly.

Authorised Disclosure

A person does not commit an offence under POCA if they make an “authorised disclosure” and obtain the appropriate consent. This “authorised disclosure” takes the form of a suspicious activity report (SAR) that is typically submitted to the NCA.

The NCA may give “active” consent, or, if the NCA does not respond to an SAR within seven working days, then they are deemed to have given consent and the person may proceed.

Note, however, that an SAR cannot be used to obtain “blanket” permission.

To adhere to the SAR regime, an investor would technically have to submit an SAR each time they decide to take any action in respect of their “criminal property”, e.g. purchasing shares, receiving dividends or selling shares. Investors might therefore burden themselves with various reporting obligations as well as the NCA with excessive numbers of reports to process.

Timing of the Investment

According to the English cases of R v Loizou [2004], R v Geary [2010]  and  GH [2015], property must be “criminal property” at the time the alleged criminal activity was undertaken. Therefore, individuals who invest in companies that do not have a connection to the cannabis industry but subsequently change their business to include cannabis-related activity will not commit an offence until they begin to receive proceeds generated by that activity.

In  R v Geary, the Court of Appeal held that “property becomes criminal property only when a person obtains an interest in it as a result of, or in connection with, criminal conduct, that is, conduct which constitutes a criminal offence” and “criminal property must already have come into existence in order for an offence to be committed under section 328 or 329”. This means that a U.K. company or individual investing lawful money into a new cannabis venture would not be committing an offence under s328.

Territoriality

Whilst English law presumes that English criminal statutes do not extend to acts wholly undertaken outside the UK, the Court of Appeal decision  R v Rogers [2014]  significantly extended the scope of POCA to conduct that occurs entirely outside the UK, subject to the restriction that a significant part of the underlying criminality must have taken place in the UK and it had harmful consequences in the UK The effect of this is that, provided all actions are undertaken outside the UK, the sale of shares or assets and collection of dividends outside the UK would not constitute a crime in the UK.

However, were investors to move their returns into the UK they could be guilty of converting or transferring criminal property under s327 POCA, because the returns arise from an activity that, had it taken place in the UK would have been a criminal offence.

Therefore, the investment itself, the mere holding of the shares and the receipt of proceeds outside the UK are likely not to constitute offences under English Law.

Note however, that the position regarding U.S. cannabis-related entities (as opposed to Canadian) is more complex due to the status of federal law on marijuana, which provides for non-enforcement in certain states in respect of certain activities which remain illegal under federal law.

U.K. Public Policy

It is unlikely that POCA was designed to criminalise investments into businesses which operate legally in their jurisdiction, and it is considered unlikely that the UK authorities would actively seek to prosecute, but clearly, there is no guarantee.

Article sourced from

https://www-financialdirector-co-uk.cdn.ampproject.org/c/s/www.financialdirector.co.uk/2019/11/12/key-considerations-for-uk-investment-in-the-legal-cannabis-industry-abroad/amp/

Rober Wieder and Christina Mouktari discuss cannabis in the U.K., U.S. and Canada and defences and safeguards about cannabis.

by Robert Wieder Christina Mouktari | Faegre Baker Daniels LLP - November 12, 2019

Please note: This article does not constitute legal advice, nor may reliance be placed on it. The law is stated as of August 2019 and is continually evolving. Please refer to Robert Wieder for specific legal advice.