The Law Commission has today published its report on the SARs regime following its consultation paper. Amongst wide-ranging recommendations to improve the regime, it has recommended that the government consider the need for guidance in relation to transactions involving the legal cannabis industry in Canada and elsewhere. Such guidance would certainly be useful to the many financial institutions, corporates and individuals trying to grapple with the difficult money laundering and other legal issues that arise in connection with dealings with cannabis related businesses operating lawfully outside the UK. It may also be welcomed by the National Crime Agency (NCA) which faces a deluge of SARs on this topic and being asked to condone activity which would give rise to a criminal offence in the UK.
As set out in our previous blog, despite the legalisation of certain cannabis related activities is some jurisdictions, such as in relation to recreational cannabis in Canada in November 2018, an issue arises because the UK Proceeds of Crime Act 2002 (POCA) broadly prohibits receiving, dealing with, or being concerned in a transaction which facilitates the retention or movement of the “proceeds of crime”. There is a carve out for criminal conduct which is legal in the country in which it occurs (the so-called “Spanish Bullfighter” exception) but this only applies to offences which in the UK would result in a maximum custodial sentence of 12 months or less, whereas the maximum sentence in the UK for supplying or being concerned in the production of cannabis is 14 years.
UK companies and financial institutions could therefore potentially be penalised for entering into commercial transactions with cannabis businesses (for example insuring or investing in a cannabis-related business, or receiving funds from a cannabis-related business for services or goods provided). Those within the UK regulated sector could also face sanctions for failing to report suspicions of money laundering related to dealings with cannabis-related businesses to the NCA (and FCA and PRA regulated firms and individuals may also need to consider their broader regulatory obligations).
The issue extends beyond those dealing directly with cannabis-related businesses: UK entities which do not transact with those businesses, but, for example, receive funds by way of dividend or cash pooling from a Canadian group company which does so, could also be caught by POCA because they may receive or deal with monies which are arguably tainted (the concept of fungibility means that even a small amount of criminal property can taint a wider asset, for example money in a bank account). There would also be potential issues for banks and asset managers receiving or being involved in the movement of funds, or other property such as shares, from investors in or owners of cannabis-related businesses, or for overseas companies with investments in cannabis companies investing in the UK.
Our experience is that this is causing a real headache for many of our clients because there is a risk of offences under POCA even though, as UK Finance put it, “common sense would suggest that reports about dealings with the proceeds of such lawful businesses would be of no actionable or intelligence value to law enforcement”.