Wilmer Cutler, Pickering Hale and Dorr LLP
The myriad—and conflicting—state, federal and international laws
governing the burgeoning marijuana industry have created a complicated
legal landscape for financial institutions. In the United States, most
states have legalized some form of marijuana use, but the manufacture,
sale and distribution of marijuana nevertheless remains illegal under
federal law. As a result, in providing financial products and services
to US marijuana-related businesses (MRBs), a financial institution could
risk violating the Controlled Substances Act (CSA), 21 U.S.C. § 841.
Moreover, engaging in or facilitating transactions that contain proceeds
from US marijuana sales could create liability under the money
laundering laws.
Further complicating matters, Canada became the first major world economy to legalize recreational marijuana in October 2018. Because the US narcotics laws generally do not apply to activity that is legal abroad, providing financial products and services to Canadian MRBs would not violate the CSA or implicate the US money laundering laws. However, that is not the case in many European countries. The European Union recently passed a law expanding the extraterritorial scope of member countries’ money laundering laws with respect to certain narcotics-related offenses. These laws could now criminalize the transfer of funds from activity that is legal in the foreign country (e.g., marijuana sales in Canada) if that activity would be illegal in the home country.
Below we discuss the fragmented legal and regulatory landscape governing the marijuana industry as well as notable recent developments and their implications for global financial institutions.
The US Narcotics Laws
In the United States, 46 states have legalized marijuana for medical and/or recreational use in some form. Medical marijuana is used to control seizures, ease glaucoma and combat the loss of appetite caused by chemotherapy, among other treatments. Notwithstanding these developments, the manufacture, sale and distribution of marijuana for any purpose continues to be a violation of the CSA even in states that have legalized its use at the state level. As a result, businesses that manufacture, sell or distribute marijuana in the United States are generally operating in violation of federal law.
The federal government, however, has issued directives that create uncertainty regarding the likelihood of marijuana-related prosecutions. Department of Justice (DOJ) officials in the Obama Administration had issued several memoranda, known as the “Cole memoranda,” deprioritizing federal criminal prosecutions involving state-regulated marijuana businesses based on a set of eight priority factors.1 On January 4, 2018, former Attorney General Jefferson Sessions rescinded that guidance and instructed federal prosecutors to determine “which marijuana activities to prosecute” based on the “well-established principles that govern all federal prosecutions.”2 Practically, this means that federal marijuana enforcement priorities will be determined by individual United States Attorneys’ Offices. Although Attorney General Sessions’ memorandum did not alter the status of marijuana under federal law—marijuana commerce remained illegal even after the Cole memoranda were issued—the rescission of the Cole memoranda increased the risk of prosecution for marijuana-related commerce. Attorney General nominee William Barr has not yet decided whether he would formally reinstate the Cole memoranda if he is confirmed, but he has announced that he “do[es] not intend to go after parties who have complied with state law in reliance on the Cole memorandum.
”3 The risk of prosecution with respect to medical marijuana is much lower because Congress has limited DOJ’s ability to use federal funds to enforce the CSA with respect to state-legalized medical marijuana businesses through the Rohrabacher-Blumenauer Amendment.4
The 2018 Farm Bill, Industrial Hemp and CBD
Industrial hemp and products derived from hemp, such as cannabidiol (CBD), create yet another source of uncertainty. In December, Congress passed and the president signed the long-awaited 2018 Farm Bill, which removes industrial hemp from the CSA’s definition of marijuana and expands legal cultivation of industrial hemp.5 CBD and other extracts derived from industrial hemp are no longer Schedule 1 drugs under the CSA.
The cultivation of industrial hemp and the manufacture and sale of CBD products, however, are still subject to state laws and regulations as well as Food and Drug Administration (FDA) regulation.
Although some states had legalized hemp and CBD prior to the 2018 Farm Bill, industrial hemp and CBD products remain illegal (at least for now) at the state level in many states. Other states regulate CBD as a form of medical marijuana and allow its use by patients with prescriptions. And it remains to be seen how state regulation of industrial hemp and CBD may change in response to the 2018 Farm Bill.
Additionally, the FDA’s approach to regulating CBD is not yet clear. The FDA has indicated that it may regulate CBD as a pharmaceutical drug (subject to the FDA drug-approval process) rather than as a dietary supplement.6 And the FDA recently approved a childhood epilepsy drug, Epidiolex, whose active ingredient is CBD. The FDA has also issued warning letters addressed to CBD manufacturers and retailers who claim unproven health benefits from CBD, but it has not yet brought enforcement actions against CBD manufacturers.
The US Money Laundering Laws
The risk of providing products or services to marijuana-related businesses is not limited to narcotics laws. The US money laundering laws make it a crime to conduct a financial transaction with proceeds of “specified unlawful activity,” provided that a defendant has the requisite knowledge and/or intent.
See 18 U.S.C. §§ 1956, 1957. It is also a crime to transport, transmit or transfer funds internationally for the purpose of promoting a specified unlawful activity even if the funds are derived from a legitimate source. See 18 U.S.C. § 1956(a)(2).
As relevant in the context of marijuana commerce, federal, state and foreign narcotics offenses constitute specified unlawful activity. As a result, if an entity engages in a financial transaction knowing that the property involved represents the proceeds of some unlawful activity (e.g., US marijuana sales or foreign marijuana sales in other countries where marijuana remains illegal) and intends to promote the carrying on of unlawful activity, it may violate the US money laundering laws.
If a transaction exceeds $10,000, intent to promote the underlying activity is not required. See 18 U.S.C. § 1957. The government need only establish that the entity knowingly engaged in a monetary transaction in property derived from specified unlawful activity with a value greater than $10,000.
Implications for Financial Institutions in the United States
The complicated legal status of marijuana in the United States has potentially serious implications for financial institutions. A financial institution that provides products or services directly to a US MRB could be viewed as conspiring to violate or aiding and abetting a violation of the CSA because such services promote or facilitate the US MRB’s business. The potential money laundering risk arises where the financial institution receives or transfers funds from a US MRB that it knows are derived from the sale of marijuana. The money laundering risk is greater for transactions that exceed $10,000 because specific intent to promote the underlying criminal activity is not required; the government need only prove that the transaction contained crime proceeds and that the financial institution had knowledge or was willfully blind to that fact.
The money laundering risk is not limited to direct transactions with US MRBs. There may also be risk in providing products and/or services to businesses that support US MRBs, such as companies that manufacture fertilizer and packaging materials or even provide accounting or legal services.
Businesses that support US MRBs may engage in transactions with funds that contain proceeds from US marijuana sales (i.e., crime proceeds), and the receipt or transfer of such funds by a financial institution could expose a financial institution to liability under the US money laundering laws.
The risk of providing products or services to such supporting businesses is lower than for providing products and services directly to US MRBs, but financial institutions can further mitigate their risk by obtaining representations and warranties from supporting businesses to ensure that they are not transacting with crime proceeds.7
The risk also differs based on the products or services provided (e.g., consumer banking services, initial public offerings, secondary-market trading, and research and analysis). Products and services that are material (i.e., necessary) to a US MRB’s business create a greater risk that a financial institution could be viewed as aiding and abetting or conspiring to violate the CSA or promoting illegal marijuana sales in violation of the US money laundering laws. Activities that are further attenuated from the underlying marijuana sales—e.g., secondary-market trading of securities—make it less likely that a financial institution would have the requisite knowledge and/or intent to violate US narcotics or money laundering laws.
In fact, regulatory guidance suggests that financial institutions may provide certain banking services related to marijuana-related business. In 2014, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance based on the Cole memoranda that was designed to help banks reconcile the tension between state and federal narcotics laws. The FinCEN guidance created a three-tiered suspicious activity report filing system for marijuana-related activity. Notably, the FinCEN guidance does not prohibit financial institutions from providing banking services to state-licensed MRBs. Rather, FinCEN issued the “guidance [to] clarif[y] how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.
”8 FinCEN has not revised the guidance following the repeal of the Cole memoranda.
Moreover, some states have encouraged the financial services industry to provide banking services to state-authorized MRBs. For example, New York Governor Andrew Cuomo directed the New York State Department of Financial Services to encourage New York state-chartered banks and credit unions to provide banking services to New York’s medical marijuana and hemp businesses.9 Several members of Congress have introduced legislation to enable state-licensed US MRBs to engage in relationships with banks and other financial institutions,10 and many have advocated for US MRBs to have access to the banking system.11
Canada Legalizes Recreational Marijuana
Canadian MRBs, however, do not pose these same risks under US law. Canada legalized recreational marijuana on October 17, 2018, becoming the world’s largest marketplace for legal marijuana.
Each of Canada’s provinces and territories is responsible for establishing its own rules governing how marijuana may be sold and where it may be consumed, but as a general matter, individuals 18 years and older may now consume marijuana, possess up to 30 grams of marijuana in public and grow up to four marijuana plants at home. Some provinces, such as British Columbia, have elected to operate government-run marijuana stores while others have granted licenses to private distributors.
Because the manufacture, distribution and sale of marijuana in Canada is now legal, MRBs that operate exclusively in Canada with no nexus to the United States are no longer engaged in specified unlawful activity—a predicate offense—under the US money laundering laws. Accordingly, providing the same products and services that could implicate the US narcotics or money laundering laws if provided to a US MRB would not violate US law if provided to a Canadian MRB. That is not necessarily the case under European law.
European Countries Expand the Scope of Their Money Laundering Laws
On October 23, 2018, the European Parliament and the European Council signed the Directive on Countering Money Laundering by Criminal Law (the Directive),12 which broadens the scope of extraterritorial activity that may serve as a predicate for a money laundering offense in European Union (EU) member countries. Currently, the laws of some EU member countries, such as Germany, provide that extraterritorial activity is generally not a basis for a money laundering conviction unless the activity is illegal both in the country where the activity takes place and in the EU member country. These laws apply what is known as the “double criminality criterion,” meaning that the activity has to be a crime in both relevant countries to constitute a predicate offense. The Directive prohibits EU member countries from applying the double criminality criterion in cases of illicit trafficking in narcotic drugs and psychotropic substances (including the cultivation of cannabis).
The elimination of the double criminality criterion means that proceeds from legal marijuana sales in Canada, which would be illegal if they occurred in the EU member country, could provide the basis for a money laundering conviction in the EU. EU member countries will be required to implement the Directive by December 3, 2020.
The United Kingdom’s money laundering law similarly provides that persons or institutions that receive payments derived from legal marijuana sales abroad commit a criminal offense, provided that they know or suspect the funds were derived from the sale of marijuana. In the United Kingdom, it is illegal to possess, grow or sell marijuana, and the Proceeds of Crime Act (POCA) defines “criminal property” by reference to whether the predicate activity is lawful in the United Kingdom (not where the activity occurred).13 Although there is a statutory exemption to POCA for certain predicate acts that are legal where they occurred, that exemption does not apply to marijuana possession, cultivation or sales given the prison sentences permissible for such crimes.
As explained above, because the manufacture, distribution and sale of marijuana in Canada is now legal, MRBs that operate exclusively in Canada with no nexus to the United States are not acting in violation of the US narcotics or money laundering laws. Providing products and services to Canadian MRBs could, however, provide the predicate for a money laundering violation in European Union member countries.
Summary
In sum, the risk of violating the US narcotics or money laundering laws by providing products or services to businesses involved in marijuana commerce depends on a number of factors, including (but not limited to):
Because different jurisdictions take different approaches to criminalizing activities involving MRBs, financial institutions should centralize risk-management decision making around marijuana-related issues with a knowledgeable group of legal, compliance and risk management personnel.
Further complicating matters, Canada became the first major world economy to legalize recreational marijuana in October 2018. Because the US narcotics laws generally do not apply to activity that is legal abroad, providing financial products and services to Canadian MRBs would not violate the CSA or implicate the US money laundering laws. However, that is not the case in many European countries. The European Union recently passed a law expanding the extraterritorial scope of member countries’ money laundering laws with respect to certain narcotics-related offenses. These laws could now criminalize the transfer of funds from activity that is legal in the foreign country (e.g., marijuana sales in Canada) if that activity would be illegal in the home country.
Below we discuss the fragmented legal and regulatory landscape governing the marijuana industry as well as notable recent developments and their implications for global financial institutions.
The US Narcotics Laws
In the United States, 46 states have legalized marijuana for medical and/or recreational use in some form. Medical marijuana is used to control seizures, ease glaucoma and combat the loss of appetite caused by chemotherapy, among other treatments. Notwithstanding these developments, the manufacture, sale and distribution of marijuana for any purpose continues to be a violation of the CSA even in states that have legalized its use at the state level. As a result, businesses that manufacture, sell or distribute marijuana in the United States are generally operating in violation of federal law.
The federal government, however, has issued directives that create uncertainty regarding the likelihood of marijuana-related prosecutions. Department of Justice (DOJ) officials in the Obama Administration had issued several memoranda, known as the “Cole memoranda,” deprioritizing federal criminal prosecutions involving state-regulated marijuana businesses based on a set of eight priority factors.1 On January 4, 2018, former Attorney General Jefferson Sessions rescinded that guidance and instructed federal prosecutors to determine “which marijuana activities to prosecute” based on the “well-established principles that govern all federal prosecutions.”2 Practically, this means that federal marijuana enforcement priorities will be determined by individual United States Attorneys’ Offices. Although Attorney General Sessions’ memorandum did not alter the status of marijuana under federal law—marijuana commerce remained illegal even after the Cole memoranda were issued—the rescission of the Cole memoranda increased the risk of prosecution for marijuana-related commerce. Attorney General nominee William Barr has not yet decided whether he would formally reinstate the Cole memoranda if he is confirmed, but he has announced that he “do[es] not intend to go after parties who have complied with state law in reliance on the Cole memorandum.
”3 The risk of prosecution with respect to medical marijuana is much lower because Congress has limited DOJ’s ability to use federal funds to enforce the CSA with respect to state-legalized medical marijuana businesses through the Rohrabacher-Blumenauer Amendment.4
The 2018 Farm Bill, Industrial Hemp and CBD
Industrial hemp and products derived from hemp, such as cannabidiol (CBD), create yet another source of uncertainty. In December, Congress passed and the president signed the long-awaited 2018 Farm Bill, which removes industrial hemp from the CSA’s definition of marijuana and expands legal cultivation of industrial hemp.5 CBD and other extracts derived from industrial hemp are no longer Schedule 1 drugs under the CSA.
The cultivation of industrial hemp and the manufacture and sale of CBD products, however, are still subject to state laws and regulations as well as Food and Drug Administration (FDA) regulation.
Although some states had legalized hemp and CBD prior to the 2018 Farm Bill, industrial hemp and CBD products remain illegal (at least for now) at the state level in many states. Other states regulate CBD as a form of medical marijuana and allow its use by patients with prescriptions. And it remains to be seen how state regulation of industrial hemp and CBD may change in response to the 2018 Farm Bill.
Additionally, the FDA’s approach to regulating CBD is not yet clear. The FDA has indicated that it may regulate CBD as a pharmaceutical drug (subject to the FDA drug-approval process) rather than as a dietary supplement.6 And the FDA recently approved a childhood epilepsy drug, Epidiolex, whose active ingredient is CBD. The FDA has also issued warning letters addressed to CBD manufacturers and retailers who claim unproven health benefits from CBD, but it has not yet brought enforcement actions against CBD manufacturers.
The US Money Laundering Laws
The risk of providing products or services to marijuana-related businesses is not limited to narcotics laws. The US money laundering laws make it a crime to conduct a financial transaction with proceeds of “specified unlawful activity,” provided that a defendant has the requisite knowledge and/or intent.
See 18 U.S.C. §§ 1956, 1957. It is also a crime to transport, transmit or transfer funds internationally for the purpose of promoting a specified unlawful activity even if the funds are derived from a legitimate source. See 18 U.S.C. § 1956(a)(2).
As relevant in the context of marijuana commerce, federal, state and foreign narcotics offenses constitute specified unlawful activity. As a result, if an entity engages in a financial transaction knowing that the property involved represents the proceeds of some unlawful activity (e.g., US marijuana sales or foreign marijuana sales in other countries where marijuana remains illegal) and intends to promote the carrying on of unlawful activity, it may violate the US money laundering laws.
If a transaction exceeds $10,000, intent to promote the underlying activity is not required. See 18 U.S.C. § 1957. The government need only establish that the entity knowingly engaged in a monetary transaction in property derived from specified unlawful activity with a value greater than $10,000.
Implications for Financial Institutions in the United States
The complicated legal status of marijuana in the United States has potentially serious implications for financial institutions. A financial institution that provides products or services directly to a US MRB could be viewed as conspiring to violate or aiding and abetting a violation of the CSA because such services promote or facilitate the US MRB’s business. The potential money laundering risk arises where the financial institution receives or transfers funds from a US MRB that it knows are derived from the sale of marijuana. The money laundering risk is greater for transactions that exceed $10,000 because specific intent to promote the underlying criminal activity is not required; the government need only prove that the transaction contained crime proceeds and that the financial institution had knowledge or was willfully blind to that fact.
The money laundering risk is not limited to direct transactions with US MRBs. There may also be risk in providing products and/or services to businesses that support US MRBs, such as companies that manufacture fertilizer and packaging materials or even provide accounting or legal services.
Businesses that support US MRBs may engage in transactions with funds that contain proceeds from US marijuana sales (i.e., crime proceeds), and the receipt or transfer of such funds by a financial institution could expose a financial institution to liability under the US money laundering laws.
The risk of providing products or services to such supporting businesses is lower than for providing products and services directly to US MRBs, but financial institutions can further mitigate their risk by obtaining representations and warranties from supporting businesses to ensure that they are not transacting with crime proceeds.7
The risk also differs based on the products or services provided (e.g., consumer banking services, initial public offerings, secondary-market trading, and research and analysis). Products and services that are material (i.e., necessary) to a US MRB’s business create a greater risk that a financial institution could be viewed as aiding and abetting or conspiring to violate the CSA or promoting illegal marijuana sales in violation of the US money laundering laws. Activities that are further attenuated from the underlying marijuana sales—e.g., secondary-market trading of securities—make it less likely that a financial institution would have the requisite knowledge and/or intent to violate US narcotics or money laundering laws.
In fact, regulatory guidance suggests that financial institutions may provide certain banking services related to marijuana-related business. In 2014, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance based on the Cole memoranda that was designed to help banks reconcile the tension between state and federal narcotics laws. The FinCEN guidance created a three-tiered suspicious activity report filing system for marijuana-related activity. Notably, the FinCEN guidance does not prohibit financial institutions from providing banking services to state-licensed MRBs. Rather, FinCEN issued the “guidance [to] clarif[y] how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.
”8 FinCEN has not revised the guidance following the repeal of the Cole memoranda.
Moreover, some states have encouraged the financial services industry to provide banking services to state-authorized MRBs. For example, New York Governor Andrew Cuomo directed the New York State Department of Financial Services to encourage New York state-chartered banks and credit unions to provide banking services to New York’s medical marijuana and hemp businesses.9 Several members of Congress have introduced legislation to enable state-licensed US MRBs to engage in relationships with banks and other financial institutions,10 and many have advocated for US MRBs to have access to the banking system.11
Canada Legalizes Recreational Marijuana
Canadian MRBs, however, do not pose these same risks under US law. Canada legalized recreational marijuana on October 17, 2018, becoming the world’s largest marketplace for legal marijuana.
Each of Canada’s provinces and territories is responsible for establishing its own rules governing how marijuana may be sold and where it may be consumed, but as a general matter, individuals 18 years and older may now consume marijuana, possess up to 30 grams of marijuana in public and grow up to four marijuana plants at home. Some provinces, such as British Columbia, have elected to operate government-run marijuana stores while others have granted licenses to private distributors.
Because the manufacture, distribution and sale of marijuana in Canada is now legal, MRBs that operate exclusively in Canada with no nexus to the United States are no longer engaged in specified unlawful activity—a predicate offense—under the US money laundering laws. Accordingly, providing the same products and services that could implicate the US narcotics or money laundering laws if provided to a US MRB would not violate US law if provided to a Canadian MRB. That is not necessarily the case under European law.
European Countries Expand the Scope of Their Money Laundering Laws
On October 23, 2018, the European Parliament and the European Council signed the Directive on Countering Money Laundering by Criminal Law (the Directive),12 which broadens the scope of extraterritorial activity that may serve as a predicate for a money laundering offense in European Union (EU) member countries. Currently, the laws of some EU member countries, such as Germany, provide that extraterritorial activity is generally not a basis for a money laundering conviction unless the activity is illegal both in the country where the activity takes place and in the EU member country. These laws apply what is known as the “double criminality criterion,” meaning that the activity has to be a crime in both relevant countries to constitute a predicate offense. The Directive prohibits EU member countries from applying the double criminality criterion in cases of illicit trafficking in narcotic drugs and psychotropic substances (including the cultivation of cannabis).
The elimination of the double criminality criterion means that proceeds from legal marijuana sales in Canada, which would be illegal if they occurred in the EU member country, could provide the basis for a money laundering conviction in the EU. EU member countries will be required to implement the Directive by December 3, 2020.
The United Kingdom’s money laundering law similarly provides that persons or institutions that receive payments derived from legal marijuana sales abroad commit a criminal offense, provided that they know or suspect the funds were derived from the sale of marijuana. In the United Kingdom, it is illegal to possess, grow or sell marijuana, and the Proceeds of Crime Act (POCA) defines “criminal property” by reference to whether the predicate activity is lawful in the United Kingdom (not where the activity occurred).13 Although there is a statutory exemption to POCA for certain predicate acts that are legal where they occurred, that exemption does not apply to marijuana possession, cultivation or sales given the prison sentences permissible for such crimes.
As explained above, because the manufacture, distribution and sale of marijuana in Canada is now legal, MRBs that operate exclusively in Canada with no nexus to the United States are not acting in violation of the US narcotics or money laundering laws. Providing products and services to Canadian MRBs could, however, provide the predicate for a money laundering violation in European Union member countries.
Summary
In sum, the risk of violating the US narcotics or money laundering laws by providing products or services to businesses involved in marijuana commerce depends on a number of factors, including (but not limited to):
-
Whether the business is engaged in the manufacture, sale, or
distribution of recreational or medical marijuana in the United States;
-
Whether a foreign business operates in or has a nexus to the United
States or operates solely in a jurisdiction where marijuana is legal,
such as Canada; and
-
Whether the business provides products or services to MRBs and/or receives funds that may be derived from US marijuana sales.
Because different jurisdictions take different approaches to criminalizing activities involving MRBs, financial institutions should centralize risk-management decision making around marijuana-related issues with a knowledgeable group of legal, compliance and risk management personnel.
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