The Cannabis Business

Understanding Law, Finance, and Governance in America's Newest Industry

Charles S. Alovisetti, Cassia Furman

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000282603
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

As the largely illicit cannabis market transitions to a legal, regulated industry, the "canna-curious" and experienced industry participants alike are experiencing the harsh truth: Making a fortune in the legal cannabis industry is a challenge made even more difficult by a complex patchwork of state and federal laws.

The Cannabis Business clears the confusion around topics such as the distinction between hemp and cannabis and why it matters for consumers and regulators, why CBD isn't completely legal in the U.S., why and how states differ in their licensing processes, and how deal structuring is impacted by state regulations. Written by attorneys from the nation's leading cannabis law and policy firm, this comprehensive primer on all things cannabis law is a must-have for anyone seeking to understand the major practical legal issues facing the cannabis industry in the U.S.

Part I
Understanding the National Landscape and Risks

1 Federal Law and Policy Overview – Cannabis

Charles S. Alovisetti and Carl Werner

Introduction

Before reviewing any of the issues unique to the practice of cannabis law, it is important to understand the current federal law landscape. In short, despite dramatic changes at the state and local levels that have occurred over the past decade, cannabis, with very few narrow exceptions, remains illegal at the federal level. Despite this illegality, however, federal law enforcement has largely followed a policy of non-enforcement with respect to businesses that are compliant with state law.

Federal Black Letter Law

The Controlled Substances Act

In the United States, 33 states and Washington, D.C. have legalized medical cannabis, and 11 states in addition to Washington, D.C. have legalized cannabis for recreational purposes or “adult-use.” At the federal level, however, cannabis currently remains a Schedule I drug under the Controlled Substances Act of 1970 (CSA).¹ Under U.S. federal law, a Schedule I drug or substance is considered to have a high potential for abuse, no accepted medical use in the U.S., and no recognition of safety for its use under medical supervision. Thus, cannabis-related practices or activities including the importation, possession, use, cultivation, manufacture, sale, or distribution of cannabis remain illegal under U.S. federal law.

The CSA is an expansive piece of legislation, and its provisions go beyond merely criminalizing the production of cannabis. For example, under § 843(b) of the CSA, it is illegal to use a communication facility to facilitate a drug crime, and § 843(c) makes it illegal to place any advertisement that seeks to either sell or distribute a Schedule 1 substance. It is also illegal, under § 854(a), to invest the proceeds of drug crimes in any business engaged in interstate commerce. In addition, some activities that investors typically have viewed as ancillary, such as leasing property to a cannabis business, are a direct violation of the CSA under § 856, which makes it unlawful to lease, rent, use, or maintain any place, that has the purpose of manufacturing, distributing, or using any controlled substance.

Secondary Liability – Aiding and Abetting and Conspiracy

Because virtually all cannabis-related activities are illegal at the federal level, it is illegal to aid or abet such activities or to conspire or attempt to engage in the same. An individual may be liable for aiding, abetting, counseling, commanding, inducing, or procuring another person to commit a federal offense, or he may be punishable as a principal.² If an individual is charged with aiding and abetting a controlled substance possession or distribution offense, the government must prove that the defendant (1) had knowledge of the drugs, (2) had knowledge that the principal intended to distribute or possess drugs, and (3) purposefully intended to aid others in committing the crime alleged.³

Additionally, a person or entity may be liable under the CSA for attempting or conspiring to commit any offense.⁴ Under a conspiracy theory, a corporation and participating individuals may be liable for conspiracy among multiple corporate officers, directors, or employees.⁵ Even if corporate officials do not themselves commit the acts, they may be liable for foreseeable offenses committed by co-conspirators in furtherance of a common scheme.⁶ In addition to aiding and abetting and conspiracy charges, an individual with an investment or business relationship with a cannabis company could also be charged with being an accessory after the fact. Under 18 U.S.C. § 3, someone who, after a federal crime has been committed, “receives, relieves, comforts or assists the offender in order to hinder or prevent his apprehension, trial or punishment” can be prosecuted as an accessory after the fact.⁷

Secondary Liability – Financial Crimes

U.S. federal money laundering laws, specifically 18 U.S.C. §§ 1956 and 1957, criminalize monetary transactions involving the proceeds of “Specified Unlawful Activity,” which includes any violation of the CSA. The first of these statutes, 18 U.S.C. § 1956, criminalizes participation in financial transactions when the person or institution participating knows that the property or monetary instrument involved in the transaction is the proceeds of a “Specified Unlawful Activity;” and where the institution either intends to promote the specified unlawful activity or has knowledge that the transaction is designed to conceal elements of origin or ownership with respect to the proceeds of such specified unlawful activity.⁸ Financial transactions between investors and regulated cannabis businesses would likely violate this provision.

The second money laundering statute, 18 U.S.C. § 1957, is a broader provision and criminalizes financial transactions over $10,000 conducted through financial institutions when the funds transferred are the proceeds of criminal activity.⁹ Although § 1957 prosecutions carry a lower maximum potential sentence than § 1956, § 1957 is broad enough to encompass virtually all major financial transactions within the regulated cannabis industry. In summary, the use of financial institutions to conduct financial sanctions within the cannabis industry is usually a criminal act if the amount of the transaction exceeds $10,000.

The Bank Secrecy Act (BSA) sets out requirements for financial institutions that are meant to assist in the detection and prevention of money laundering.¹⁰ Under the BSA, financial institutions must keep records of certain cash transactions, report suspicious activity, and file reports, called “Suspicious Activity Reports” (SARs), if they believe a transaction involves proceeds from illegal activity.

As a result of the federal money laundering statutes and the requirements of the BSA, banks and other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering, aiding and abetting, or conspiracy.

Secondary Liability – RICO

Another potential violation of federal law that is linked to cannabis-related activities is the Racketeer Influenced Corrupt Organizations Act (RICO).¹¹ Under RICO, if a party commits at least 2 out of 35 specified predicate crimes, this constitutes a “pattern” and, therefore, a RICO violation. While RICO was intended to be used against organized crime, the list of predicate crimes includes dealing in a controlled substance and money laundering. Because of this, anyone who invests in, acquires, or maintains an interest in, conducts, or participates in the affairs of a cannabis company could be charged under RICO.

In addition to the criminal penalties under RICO, the statute creates a private right of action for anyone “injured in his business or property” because of a RICO violation. A successful civil RICO suit entitles a plaintiff to treble damages. There have been several high-profile civil RICO lawsuits largely driven by anti-cannabis advocates brought against ancillary service providers in the industry. Some of these cases have been dismissed,¹² some have settled,¹³ and others have failed¹⁴ due to an inability to prove damages, but the legal threat to ancillary and plant-touching companies remains.

If a prosecutor wanted to charge cannabis operators or investors or even businesses providing services to cannabis companies (including lawyers, bankers, and accountants), several statutes are available to be used as the basis for prosecution.

Secondary Liability – Immigration Law

Any non-U.S. citizen can be denied entry into the United States and may potentially receive a lifetime ban for direct or indirect involvement with the U.S. cannabis industry. A statement issued by the U.S. Customs and Border Patrol (Customs) in October 2018 stated that in accordance with the U.S. Immigration and Nationality Act,

[a] Canadian citizen working in or facilitating ...