Anti-money laundering implications of investments in cannabis, CBD and other cannabinoids
This guidance has been prepared to alert members to their potential position under the Money Laundering , Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR 2017”) and the Proceeds of Crime Act 2002 (“POCA”) in relation to clients who have invested in Cannabis in jurisdictions where it has been legalised for medicinal and/or recreational use.
The guidance is based on ICAEW’s current understanding of the legal position, but does not constitute a legal opinion, so any members affected by this issue should seek specialist legal advice on their situation.
Legal status of investments in cannabis, CBD and other cannabinoids
There continues to be a considerable amount of commercial interest in investing in entities engaged in the production of cannabis. Whilst cannabis has been legalised for both medicinal and recreational purposes in Canada and elsewhere, it remains a controlled substance in the UK. Accordingly, the production and supply of cannabis is not legal in the UK except when licenced, or in the case of supply, prescribed by a medical professional who is authorised to do so.
There is a Home Office licencing regime in relation to the production of low THC (active hallucinatory agent) hemp plants (which are in the same family as cannabis (less than 0.2%) for industrial purposes (no distinction is made in relation to production between medicinal or recreational use). We understand that the terms of Home Office granted licenses are very narrow and may only be valid for a discrete period, requiring annual renewal.
Additionally, all products containing a controlled substance such as THC are illegal, unless the finished product meets the conditions below. These conditions are that the finished product:
- must contain less than 1mg in total (of the controlled substance); and
- must not be designed for administration of the controlled substance to either a human or an animal; nor
- must not be in a form (or combination) which readily permits the recovery of the controlled substance or in an amount which constitutes a risk to health (Misuse of Drugs Regulations 1971, Reg 2(1)).
It is worth noting that CBD products produced abroad (e.g. in the US) could have a higher percentage of THC than would be permitted in the UK market. Legal advice would be required on this point.
There are additional approval processes for certain CBD products. CBD extracts and isolates, together with any food or food products which include CBD as an ingredient, are designated as a “novel food”. These will only be licensed for use after evidence of their safety is produced and accepted. This scheme is administered by the Food Standards Agency.
The FCA has issued a draft new technical guidance note relating to the admission of cannabis-related businesses to the Official List. This guidance may be of interest to members as it sets out how the FCA will approach different kinds of involvement in cannabis from medicinal to recreational.
Relevance for members
The market for cannabis products is expected to be significant and to grow over the next few years. We understand that some member firms are receiving potential work opportunities involving the provision of advice to individuals and businesses which have or intend to invest in cannabis production or distribution in jurisdictions where this business is legal. This note sets out the anti-money laundering implications together with other factors which firms may wish to consider in determining whether or not to accept the work.
Anti-Money Laundering implications
Under POCA criminal property includes anything which arises from:
- activity which is criminal where it occurs, if it would be criminal in the UK; or
- anything which, though legal in the place where it occurs, would (broadly) be criminal in the UK.
Accordingly, the production and supply of cannabis, or products in which cannabis, CBD or cannabinoids form an ingredient, will give rise to proceeds of crime, unless the product or production would be capable of being licenced in the UK. This means that a member is at risk of committing a money laundering offence under POCA if they provide services to clients who are involved in this business area. There are also likely to be money laundering reporting requirements.
In many cases it may not be possible (without detailed technical and legal analysis) to determine whether the products supplied or produced by the overseas (typically Canadian or US) entities would meet the stringent conditions for licence in the UK. Without this analysis, it is advisable to assume that the licence conditions would not be met and that any monies (including dividends) derived from revenue or profits from sales of cannabis and CBD products by such businesses would therefore constitute proceeds of crime under POCA.
Members may come across this issue in a number of situations. The following examples are not exclusive:
- You are asked to provide inheritance tax advice on the transfer of assets which include investments in cannabis or CBD related businesses;
- A client seeks advice in relation to the purchase or sale of cannabis or CBD related businesses;
- The potential client is involved in the production, distribution or sale of cannabis or CBD products and is seeking accountancy services in connection with setting up a UK business, raising funds either in the UK or overseas or is seeking a listing in the UK (see also FCA guidance)
- it comes to the member’s attention that the client has received income (or other proceeds, eg disposal proceeds) from cannabis or CBD related activities (including indirect interests – eg dividend income).
When deciding whether or not to engage with a client or potential client in these circumstances you may wish to consider the following:
- Who is the client, what is their risk profile and what services do they require?
- Is the client looking to obtain the relevant licenses in the UK (and would therefore become a legal activity)?
- Where the client is a business involved in the production, distribution or sale (whether now or prospectively) of cannabis or CBD products, is the client itself aware of the regulatory environment and has taken relevant advice? Does it have the relevant licences or made applications to obtain them? Does its business plan and strategy appear to make commercial sense?
- What jurisdictions does the client operate in or otherwise have connections to? Does this include growing of Cannabis in countries with a reputation for production of other illegal drugs?
- Are you equipped to manage the associated legal and regulatory risks? – for example if a defence against money laundering (“DAML”) application has to be made (see below)
Any activity which members become engaged in, which may be construed as becoming involved in an arrangement which facilitates the acquisition, retention, use or control of the proceeds of crime may give rise to a money laundering offence unless prior consent (DAML) has been obtained from the National Crime Agency (“NCA”) to carry out that activity.
Anecdotally we are aware that the NCA appear to have a policy of exercising their discretion to neither grant nor deny consent when an application is made relating to investments in Cannabis, CBD and other Cannabinoids, in jurisdictions where such investment is legal. It therefore becomes the member’s decision whether to continue with the work, and assess whether in doing so they would be committing an offence under the MLR 2017.
There has been no indication from the NCA that they would look to prosecute a member who has engaged in such work, but the risk of prosecution remains. As the decision to prosecute or not is a matter of public interest, any policy on prosecution could change without any notice.
Members who have engagements with potential clients where their activities include transactions (in the broadest sense) related to the production or sale of cannabis, whether recreational or medicinal, must take care not to fall foul of the MLR 2017 or POCA. Members are advised to seek specific legal advice on their position if they intend to engage clients involved in any way in cannabis production or distribution.