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More than puff and smoke: poised for cannabis boom? it would be best if you minded your AML

25/03/2021

Recreational cannabis investment continues to be a minefield for solicitors and other regulated professionals in the UK.

  1. In February 2021, the listing of the first medicinal cannabis company in London was met with great excitement.
  2. And David Beckham-backed skincare company that uses cannabis plant compounds are preparing to list.

Revenue from legal foreign cannabis businesses was identified as an emerging proceeds of crime risk. The vulnerability is clear, but the description inapt. On 28 January 2021, the SRA published the AML and CTF risk assessment for the legal sector.

Concern about money laundering exposure where a person in the UK acts in a legalised cannabis transaction is not new.

It first arose in 2018 when Canada became the second country in the world, after Uruguay, to legalise recreational cannabis, and UK entrepreneurs and investors moved in on lucrative opportunities.

The issue is that the predicate offence to money laundering is determined by UK criminal law.

If a cannabis-related business generates a benefit, then a money laundering exposure potentially arises in the UK where recreational cannabis supply, manufacture and distribution is illegal.

The benefit, when mixed with funds or other property, taints the lot.

Benefit is configured widely and will capture a dividend, the acquisition of a share or even the consequential increase in value of the investing company.

Although the business may be legal elsewhere, possession or handling the benefit in or through the UK can amount to dealing with proceeds of crime and trigger a reporting obligation to the National Crime Agency. Whether this is the case is fact-specific.

  1. In some scenarios, no money laundering offence contrary to sections 327–329 of POCA will be engaged because the transactional activity, on closer inspection, is or will be wholly outside of the jurisdiction.
  2. In others, the acts of professionals in London might be preparatory only and not sufficient to amount to facilitating an action of money laundering contrary to section 328 POCA.
  3. Further, the activity central to the business might not actually be illegal under UK law, even if it bears a cannabis label.
    1. As a general point, there is scope for medicinal cannabis under UK law.
    2. Additionally, not all substances produced by the cannabis plant are illegal.
    3. Some businesses will not be involved in the supply of illicit substances, and therefore, no money laundering issue will arise.

An analysis is required of the facts in each case because the consequences of not discharging the reporting obligation and obtaining a defence against money laundering (DAML) or appreciating proceeds of crime issue can be significant.

As reflected in guidance published by the ICAEW,

whilst there has been no indication that the National Crime Agency would look to prosecute a business or professional who has been involved in cannabis-related ventures, the risk remains.

A failure to report is also a professional disciplinary matter.

Further, for companies and individuals seeking FCA approval, any direct or indirect involvement in cannabis investments often requires careful representations.

In September 2020, the FCA published a statement on its approach to the listing of cannabis-related businesses. The statement signalled that the market is open in the UK, but POCA risk is something that will be focused on.

Businesses seeking listing can expect

  • Not just to have their activities scrutinised
  • But also that of their Board and beneficial owners whether they are here or in another jurisdiction.

The fact that the activity is legal elsewhere does not clear the way to listing in the UK.

The FCA intends to consult on guidance to assist cannabis-related businesses, which will be published in due course. This is something to watch in 2021.

In the interim, meaningful guidance from the National Crime Agency on cannabis transactions and SARs is overdue.

Both the Law Commission and now the SRA have raised the “technical” engagement of money laundering offences on the back of legalised cannabis ventures overseas as a concern for professionals.

In 2019, the Law Commission called on the government to provide clarity on the enforcement position, but those with interest in this area are still waiting.

The ball is in the National Crime Agency’s court to provide guidance, extending to whether it considers SARs dealing with legalised cannabis ventures hold intelligence value and the general approach when they cross their desk.

The ICAEW guidance notes that “anecdotally” the National Crime Agency tends not to refuse or confirm a DAML where the underlying transaction concerns legalised cannabis.

The sub-text is that it does not wish to be seen to condone business activity that, strictly, is illegal in the UK but is not bothered about actually investigating it.

In practice, regulated professionals can rely on the deemed consent provision in section 335(5) POCA after the expiry of seven days from the submission of a SAR.

This outcome, however, is not satisfactory.

Clarity is required when it comes to activities that attract the long arm of the criminal law. Anticipating how an authority will act should not depend on an anecdote. Thorough Customer Due Diligence and examination of the proceeds of crime position is vital.

As the SRA has identified, there is exposure for professionals. Investment opportunities are plentiful, but it is essential to step carefully.

Sourced from  https://qm.brightlinelaw.co.uk/7/

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