It is essential reading for anybody who has invested, or is considering investing, in lawful cannabis businesses, whether directly or indirectly, including through investment products or exchange-traded funds. It will also be of interest to directors, heads of compliance, chief risk officers and money laundering reporting officers of, and the holders of similar positions with, regulated entities.
KEY TAKEAWAYS
The key takeaways from this article can be summarised as follows:
- Investing in a business that carries on lawful overseas cannabis activities can cause significant legal issues for an investor, or its representatives or advisers, in the Isle of Man.
- The proceeds of lawful overseas cannabis activities have the potential to form the basis of a money laundering offence. These offences are very broadly framed and can be committed by people who do not use or possess those proceeds.
- If a company commits such an offence, the criminal liability could also extend to its directors and other officers, including its registered agent.
- If you are in any doubt about the legal position, seek legal advice.
- If you or your business might inadvertently be exposed to the issues described in this article, there are some practical steps that can help to mitigate the risk.
THE LEGAL POSITION OF CANNABIS IN THE ISLE OF MAN
Cannabis is a “class B” controlled drug, and importing, exporting, producing, possessing, supplying or cultivating it is an offence punishable by up to 14 years in jail.
The Isle of Man Government passed legislation in 2021 permitting the cultivation, production, supply, possession, importation and exportation of certain medicinal cannabis products under licence. At the time of writing in June 2022, the first such licences had just been issued – a licence for a pharmacy to import and dispense certain cannabis-based products for medicinal use and an “approval in principle” for a company to cultivate, extract, manufacture, import and export medicinal cannabis.
It remains illegal to cultivate, produce, supply, possess, import or export cannabis for recreational use.
ISLE OF MAN ANTI-MONEY LAUNDERING LEGISLATION
In the context of the accelerating liberalisation of the global cannabis industry, it could reasonably be assumed that investing in a business that carries on activities that are legal in a G7 country, often by buying shares in companies that are listed on major exchanges, such as Nasdaq or the Toronto Stock Exchange, would not cause any issues in the Isle of Man. However, the position is not that straightforward.
The law relating to the treatment of the proceeds of lawful overseas cannabis activities is complex. We have summarised it in more detail below. However, put at its simplest, any benefit from overseas cannabis activities has the potential to constitute criminal property in the Isle of Man, even if those activities are lawful where and when they take place. As such, any person in the Isle of Man (including companies and other entities, not just individuals) risks committing serious criminal offences if it has any exposure to the sector. If you are in any doubt about the legal position, the safest thing to do is to seek legal advice.
THE OFFENCES
The Proceeds of Crime Act 2008 (POCA) sets out the primary Isle of Man money laundering offences. They include acquiring, using, possessing, concealing, disguising, converting or transferring criminal property or removing criminal property from the Isle of Man, as well as entering into or becoming concerned in an arrangement with knowledge or suspicion that it facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person.
The offences are broadly drafted. The “becoming concerned in an arrangement” offence, in particular, makes it clear that a person can commit a money laundering offence without even using or possessing criminal property – merely becoming concerned in an arrangement can be enough.
The common requirement of all of the offences is that there must be “criminal property”, so the next stage of the analysis is to decipher what this means.
“CRIMINAL PROPERTY”
Criminal property is property that the person accused of committing a money laundering offence knows or suspects to be a person’s benefit from criminal conduct. Lawful overseas cannabis activities are “criminal conduct” for this purpose, even though they are lawful where they occur, since they would constitute an offence in the Isle of Man if they occurred here.
The definition of criminal property in the context of an overseas cannabis business is not limited to its profits. The salary of an employee of such a business would be criminal property, for example. It is not even limited to cash. So, for example, the shares in a foreign cannabis company would be criminal property.
There is a defence to the POCA money laundering offences if the relevant conduct takes place outside the Isle of Man and is legal where and when it occurs. However, this defence does not apply if the relevant conduct would be subject to a maximum custodial sentence of over 12 months if it occurred in the Isle of Man. Since all cannabis offences carry custodial sentences of over 12 months under Isle of Man criminal law, the overseas conduct defence would not apply to lawful overseas cannabis activities.
So, to summarise, any property that constitutes or represents a person’s benefit from lawful overseas cannabis activities has the potential to constitute criminal property for the purposes of the POCA money laundering offences, and a person who is accused of committing such an offence will not be able to rely on the overseas conduct defence.
If the relevant offence is committed by a company, POCA could potentially also extend criminal liability to the company’s directors and other officers, including its registered agent.
HOW COULD THIS IMPACT MY BUSINESS?
The table below contains certain hypothetical scenarios that could expose various types of local business to POCA risk.
| Banks | These might hold cash deposits derived from lawful overseas cannabis activities (e.g. dividends or salaries paid by foreign cannabis companies). This could result in them using and having possession of criminal property. |
| Investment businesses | These might deal in, arrange deals in, actively manage or take custody of shares in companies that engage in lawful overseas cannabis activities, which could result in them using and having possession of criminal property or becoming concerned in an arrangement that they know or suspect facilitates the acquisition, retention, use or control of criminal property. |
| Fund administrators | These might administer funds that have direct or indirect exposure to companies that engage in lawful overseas cannabis activities, which could result in them becoming concerned in an arrangement that they know or suspect facilitates the acquisition, retention, use or control of criminal property. |
| Trust and corporate service providers | These might provide services to trusts or companies that invest in, or otherwise receive income from, lawful overseas cannabis activities. To illustrate the scale of the potential issues, take for example an Isle of Man company that owns a property that is leased to a tenant that is engaged in lawful cannabis activities in Canada. The tenant’s rental payments could constitute criminal property, which could result in (a) the Isle of Man company acquiring, using or having possession of criminal property and (b) the CSP becoming concerned in an arrangement that it knows or suspects facilitates the acquisition, retention, use or control of criminal property. The receipt of professional fees from the Isle of Man company could also result in the CSP using and having possession of criminal property. |
| Life insurers | These might receive premium payments derived from lawful overseas cannabis activities, which could result in them using and having possession of criminal property. The funds underlying their policies might have direct or indirect exposure to companies that engage in lawful overseas cannabis activities, which could result in the insurers becoming concerned in an arrangement that they know or suspect facilitates the acquisition, retention, use or control of criminal property. |
| Gaming companies | These might receive player deposits derived from lawful overseas cannabis activities (e.g. dividends or salaries paid by foreign cannabis companies). This could result in them using and having possession of criminal property. |
| Accountants/tax advisers | These might advise clients that are engaged in, or that have investments in, lawful overseas cannabis activities, or they might advise clients that are engaged in entirely unrelated activities but that have derived some or all of their wealth from lawful overseas cannabis activities, which could result in them becoming concerned in an arrangement that they know or suspect facilitates the acquisition, retention, use or control of criminal property. Their receipt of professional fees from those clients could also result in them using and having possession of criminal property. |
| Trading/holding companies | These might invest, directly or indirectly, in companies that engage in lawful overseas cannabis activities, which could result in them using and having possession of criminal property. |
The scenarios in the table above are not exhaustive. The potential money laundering offences in relation to lawful overseas cannabis activities are exceptionally broad, and any exposure to the sector should be considered very carefully.
CAN WE TAKE ANY STEPS TO AVOID POTENTIAL LIABILITY?
If you or your business might have inadvertently become exposed to the legal risks described in this article, you can take some practical steps to help mitigate the risk. In view of the broad range of scenarios that can give rise to the issues discussed in this article, there is no one-size-fits-all solution. We can help you to consider the best steps for you or your business to take in view of your particular factual circumstances.
More generally, businesses that are required to comply with the Isle of Man’s anti-money laundering legislation must perform KYC and ongoing and effective monitoring, including appropriate scrutiny of transactions and other activities to ensure that they are consistent with their customer risk assessments. This should help to identify any potential exposure to the issues described in this article. Those businesses are also required to maintain a business risk assessment. It would be prudent to consider whether the business risk assessment should be updated to reflect any potential exposure to the issues described in this article.
WHAT IS THE POSITION IN OTHER SIMILAR JURISDICTIONS?
The Jersey equivalent of POCA has been amended to specifically exclude the production, supply, use, export or import of cannabis or any of its derivatives from the definition of “criminal conduct”, provided that the relevant conduct (a) occurs outside Jersey in one of a number of approved jurisdictions and (b) is lawful where and when it occurs. The approved jurisdictions are those that apply equivalent money laundering controls to Jersey and reflect international anti-money laundering/counter terrorist financing standards.
The Guernsey Policy & Resources Committee issued an information notice in 2020, which stated that the proceeds of lawful overseas cannabis activities would not be captured by Guernsey’s equivalent of POCA. However, the position is not as clear-cut as in Jersey, and the Guernsey information notice acknowledged that the issue had not been tested in court.
CAN THE ISSUES BE RESOLVED?
It is understandable for local businesses and investors to assume that they can invest in, or work with others that invest in, businesses that carry on cannabis activities that are legal in the G7 country where they occur without committing serious criminal offences in the Isle of Man as a result.
The current position casts the net of serious criminality far too broadly and is unsustainable. The simple fix for the issues described above would be to amend POCA in a similar manner to the amendments that have been made in Jersey.
Before making such an amendment, the Isle of Man Government would need to consider its commitments under international law. International drug control conventions require signatory parties, including the Isle of Man, to criminalise the acquisition, possession or use of property that is known to be derived from a drugs offence. However, the amendment that we advocate in this article would only extend to property that is derived from activities that are lawful where and when they occur, so it would be fully consistent with the Isle of Man’s international law obligations.
Addressing these issues would not only permit Isle of Man persons to gain exposure to a rapidly growing global industry; it would also encourage businesses to relocate to the Isle of Man if they are looking to diversify into the market for non-medicinal cannabis products in countries and states where they are legal. And it would be consistent with the overwhelming public support for lighter regulation of the sector that has been evidenced by a number of recent consultations.
For further information, please contact:
Garry Manley, Partner, Appleby
gmanley@applebyglobal.com
