With attention turning in the U.S. and elsewhere to how cannabis businesses are banked, John Binns, Partner at BCL Solicitors LLP, gets into the weeds of how UK banks have been addressing the issue, as well as the prospects for improvement
Few who have had any involvement in the UK with the proceeds of overseas cannabis businesses will not have been aware of at least the headline problem in this area – that UK law considers such things to amount to ‘money laundering’ under the Proceeds of Crime Act 2002 (POCA). That has traditionally been given as a blanket reason by many UK banks when perfunctorily turning away businesses from customers who want to invest in cannabis, and few have had the knowledge or the commercial clout to be able to come back with an answer. As anyone who has read a little beyond the headline will know, however, the ‘POCA problem’ is far from straightforward, and there are almost as many answers to it as there are lawyers prepared to offer a view. What, then, is a diligent investor to make of it all?
To recap, the root of the problem here is that POCA defines criminal conduct to include things that happen overseas and may be perfectly lawful there, but that would be unlawful in any part of the UK if they were to happen here. (Strictly speaking, there is an exception, but it has been removed for all but the least serious offences – incidentally, including the supply of drugs ‘paraphernalia’, such as vaping devices designed for cannabis use.) Because the sale (and import, etc.) of cannabis is unlawful under the Misuse of Drugs Act 1971 (the MDA), this is at least potentially a problem for overseas cannabis sales.
While for many this may sound like a definitive end to the analysis, fortunately, there are a number of potential routes to handle such proceeds lawfully. One of these is to consider the power granted under the MDA to create licensing regimes for controlled drugs, which of course has led in practice to the Misuse of Drugs Regulations 2001 (the MDRs), as recently amended to create a new category of Cannabis-Based Medicinal Products (CBMPs). With that in mind, there is clearly at least a potential argument that the overseas conduct of ‘selling cannabis’, if it happened in the UK, would be ‘selling cannabis under a Home Office licence’, so not ‘criminal conduct’ after all.
Taken to its full extent, of course, that would entirely solve the POCA problem for legitimate cannabis investors, and indeed for their banks. In practice, however, the banks (and other financial institutions) are understandably more cautious and will at least draw a line between sales of cannabis for recreational use on the one hand, and sales cannabis for medical use – the equivalent of CBMPs – on the other. For some, the fact that the UK regime under the MDRs is so restrictive limits the use of this argument to those overseas drugs that not only could, in theory, be licensed by the UK Home Office, but that would in practice be licensed by them (and, if necessary, authorised by the Medicines and Healthcare products Regulatory Agency (MHRA)).
There is an additional hurdle of course for U.S. cannabis sales, given the position under federal law. We have no real equivalent here for a practice that is licensed by one level of government while remaining unlawful under another, so the question of whether this affects the analysis and potentially puts the sale of the U.S. equivalent of CBMPs back into the category of ‘criminal conduct’, is an interesting one.
The other main route to deal with these proceeds lawfully, meanwhile, is to obtain consent under POCA by making a disclosure to the National Crime Agency (NCA), and awaiting the expiry of a statutory notice period of seven working days. While the NCA is understandably reluctant to give what may be perceived as active approval to these transactions, in practice there is usually little else they can do about them, and a practice has developed by which they ‘neither consent nor refuse’ – which in law, means the transaction is treated as having consent regardless.
Following the consent route is of course not straight- forward either, as it is important to make sure the disclosure is meticulously phrased to cover all of the transactions and parties involved, while not being so broad that it ceases to be legally effective (a request to handle any cannabis proceeds from now on, to take an extreme example, would doubtless be seen as an attempt to abuse the system). Nor does it quite solve the U.S.-federal issue, given the scope of POCA’s civil recovery provisions: at some point, it is at least conceivable that the UK courts could freeze the dividends from a U.S. cannabis business once they entered a UK bank account.
What all of this amounts to in practice, of course, is that the nature of and the potential solutions to ‘the POCA problem’ will vary a great deal depending on the particular facts in play, including the jurisdictions and the types of product involved, as well as the views of banks, investors and others who may be involved. While it is certainly true that some scenarios yield no obvious perfect solution, the idea that banks are prevented from engaging in cannabis at all due to POCA is simply untrue (though of course, a decision to turn such custom away as a matter of policy would be another matter). Rather, the key is to work through the specific scenario and the potential solutions with an approach informed by pragmatism, as well as knowledge of the law.