*This article originally appeared on Cannabis Business Executive on June 25, 2019
When it was announced in April 2019, Canopy Growth Corp.’s conditional deal to purchase Acreage Holdings Inc. raised eyebrows not only because of its price tag (potentially exceeding US$ 3 billion in total consideration), but also because of the transacting parties’ apparent willingness to test the boundary of U.S. anti-money laundering law (“AML”). Canopy is a Canadian company; Acreage is American. Both are involved in their respective countries’ domestic cannabis industries.
The AML prohibits cross-border transportation, transmission, or transfer of monetary instruments or funds intended to “promote the carrying on” of certain activity that violates U.S. federal law, which, as of the date of this publication, includes the manufacture, distribution, and dispensing of cannabis.[i] This would seem to present a problem—which Canopy and Acreage acknowledged (at least tacitly) by structuring their transaction as Canopy’s purchase of the right and requirement to purchase 100% of the shares in Acreage if and when prevailing laws permit.[ii] Whether the Canopy-Acreage transaction passes AML muster remains to be seen. The deal does, however, highlight the complicated legal framework created by U.S. criminal law that currently surrounds (and sometimes impedes) the flow of cannabis-related funds between the U.S. and Canada. This article examines the contours of that framework by analyzing several hypothetical cross-border transactions where one or both parties are involved in the cannabis industry.
Background on Cannabis Laws
U.S. federal law criminalizes most activities related to cannabis. Under the Controlled Substances Act, it is illegal to manufacture, distribute, or dispense, or possess with the intent to manufacture, distribute, or dispense, cannabis.[iii] In contrast, the same conduct is permitted (subject to regulation) by the federal law of Canada. Many U.S. states, including California, also permit regulated manufacture, distribution, and dispensing of cannabis in defiance of federal law.
In most cases, the U.S. and Canada’s incongruous approaches to cannabis are able to co-exist. Subject to exceptions discussed below, a Canadian cannabis dispensary should have nothing to fear from U.S. federal law enforcement due, in part, to the “presumption against extraterritoriality,” a canon of statutory construction applied by U.S. courts. That canon reflects the non-controversial premise that, “in general, [U.S.] law governs domestically but does not rule the world.”[iv] “Absent clearly expressed congressional intent to the contrary, [U.S.] federal laws [are] construed to have only domestic application.”[v] If a statute is not extraterritorial—because it does not provide “a clear, affirmative indication that it applies extraterritorially”—it does not apply unless some conduct relevant to the statute’s focus occurred within the U.S.[vi]
The Controlled Substances Act is subject to the presumption against extraterritoriality. Its general prohibition against the manufacture, distribution, and dispensing of cannabis does not appear to contain a clear expression of congressional intent for extraterritorial application. As such, it should not apply to a Canadian dispensary that does not engage in conduct relevant to the statute’s focus (i.e., manufacturing, distributing, or dispensing cannabis) in the U.S.
However, the presumption against extraterritoriality does not defeat foreign application of all U.S. federal laws related to cannabis. To the contrary, 21 U.S.C. § 959(a) creates criminal liability for “any person” who manufactures or distributes cannabis “intending, knowing, or having reasonable cause to believe” that such cannabis “will be unlawfully imported into the United States or into waters within a distance of 12 miles of the coast of the United States.” Apparently to remove any doubt about its intended extraterritorial application, § 959(d) further states: “[t]his section is intended to reach acts of manufacture or distribution committed outside the territorial jurisdiction of the United States.” Accordingly, a Canadian dispensary that distributes cannabis with the knowledge, intent, or reasonable belief that the cannabis will be imported into the U.S. may well find itself in trouble with U.S. law enforcement.
Moreover, as noted above, the AML expressly applies to certain conduct that occurs outside of the U.S. It creates criminal liability for anyone who “transports, transmits, or transfers, or attempts to transport, transmit, or transfer, a monetary instrument or funds from a place in the [U.S.] to or through a place outside the [U.S.] or to a place in the [U.S.] from or through a place outside the [U.S.] … with the intent to promote the carrying on of specified unlawful activity.”[vii] The phrase “specified unlawful activity” is defined to include a range of conduct prohibited by federal law, including conduct that violates the Controlled Substances Act.[viii] Similarly, the AML criminalizes international transfers of funds in to or out from the U.S. where the funds at issue are derived from unlawful activity and (1) the transfer is intended to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of such activity; or (2) the value of the transaction exceeds $10,000 and the transaction involves a financial institution, such as a U.S. or foreign bank.[ix]
With those guiderails in place, let’s look at some hypothetical cross-border transactions.
1.“Clean” U.S. Money Invested in Canadian Cannabis Business
In the first scenario, let’s look at whether a U.S. person (or entity) can invest “clean” funds (i.e., funds not derived from unlawful activity) in a Canadian business engaged in the domestic cannabis industry without violating the laws referenced above. The short answer is that this transaction is most likely OK.
Although the AML applies to the movement of funds out of the U.S., no offense appears to have been committed here because the funds were neither derived from, nor transferred with the intent to promote the carrying on of, specified unlawful activity. As discussed above, Canadian law allows for a domestic cannabis industry, and U.S. laws to the contrary should not apply in Canada. Accordingly, barring an unlikely (and textually unsupported) finding that Congress intended to outlaw the manufacture, distribution, and dispensing of cannabis that occurs wholly outside of the U.S., there would be no “specified unlawful activity” to promote and, therefore, the transaction should not violate the AML.
The above analysis is subject to a significant caveat. The risk of criminal liability arising from this transaction would increase significantly if the Canadian business receiving the investment intended, knew, or reasonably believed that it was manufacturing or distributing cannabis bound for the U.S. Federal law expressly criminalizes such conduct wherever it occurs.
2. Cannabis-Derived U.S. Money Invested in Canadian Cannabis Business
Now, let’s look at a slightly modified version of the first scenario. We will again assume that a U.S. person or entity wants to transfer money to a Canadian business engaged in the domestic cannabis industry. However, unlike the first scenario, this one involves funds derived from the U.S. cannabis industry (perhaps because the transacting party in the U.S. is a Californian cannabis manufacturer). Can this transaction proceed without running afoul of the AML? The short answer is that this transaction very likely violates the AML.
The AML is triggered because the transaction involves the transfer of funds out of the U.S. The criminality of the conduct occurring in Canada has not changed between this scenario and the previous one; the activity to be promoted in Canada should not qualify as specified unlawful activity. However, the origin of the investment funds changes the analysis.
Federal law generally criminalizes the American cannabis industry. Thus, it is fair to assume that the investment funds in this scenario are derived from unlawful activity. In turn, the AML prohibits transactions involving the proceeds of unlawful activity where (1) the intent of the transaction is to strip the funds of the indicia of illegality (i.e., to launder them) or (2) irrespective of intent, the value of the transaction exceeds $10,000 and it involves a financial institution. While this hypothetical scenario may not provide sufficient information to conclude that either of the preceding offenses have been committed, it is not difficult to imagine a set of facts that would satisfy their elements. For example, if the transaction involves a bank wire worth more than $10,000, an AML violation will very likely be found.
3. Canadian Money Invested in U.S. Cannabis Business
What happens if we switch the direction of the funds in the second scenario so a Canadian investor transfers funds to an American business engaged in the domestic cannabis industry (e.g., in California)? The short answer is that this transaction also appears to violate the AML.
The AML prohibits cross-border transfers of funds into the U.S. intended to promote the carrying on of specified unlawful activity. Here, the California cannabis dispensary is carrying on a specified unlawful activity to the extent its conduct violates the Controlled Substances Act. As such, the transaction would almost certainly violate the AML.
By the way, the result should be the same whether the Canadian investment funds were derived from the domestic cannabis industry or from activity that is lawful on both sides of the border (e.g., dairy farming). Funds derived in Canada from the Canadian cannabis industry should not qualify as the proceeds of unlawful activity for the reasons discussed above. Accordingly, for AML purposes, Canadian funds derived from dairy farming should be no “cleaner” than funds derived from cannabis. In this scenario, the origin of the funds does not matter (or, at least, does not offer a defense) since the purpose of the transfer is to promote activity that is unlawful in the U.S.
4. Canadian Cannabis-Derived Money Invested in U.S. Lawful Business
Lastly, let’s look at a situation where a Canadian person or entity wants to invest funds derived from the Canadian cannabis industry in an American company engaged in a federally legal business. This transaction should avoid AML liability.
An AML analysis is necessary since the transaction involves the movement of funds into the U.S. However, as noted above, so long as the underlying cannabis-related conduct does not directly impact the U.S. (because, for example, it involves cannabis intended to be unlawfully imported into the U.S.), the Canadian investment funds should not qualify as proceeds of unlawful activity for purposes of the AML. Further, if the incoming funds are clean, and they are not intended to promote the carrying on of a specified unlawful activity, which this scenario assumes to be true, the AML should not be violated.
Obviously, the above scenarios are just thought experiments to illustrate the potential AML ramifications of cross-border transactions. They are over-simple and they rely (heavily) on the assumption that the transacting parties are in material compliance with all other applicable laws. And none of the analyses attempt to account for the potential tax and immigration law consequences of the hypothetical transactions. Anyone contemplating an investment in any country’s cannabis industry is strongly encouraged to.
[i] 18 U.S.C. § 1956(a)(2)(A), (c)(7); 21 U.S.C. §§ 812, 841(a)(1).
[ii] The companies’ joint press release identifies three conditions precedent to Canopy completing its acquisition of Acreage: (1) change in U.S. law “such that cannabis production and sale becomes federally legal in the [U.S.]; (2) approval of the companies’ respective shareholders; and (3) approval of the Supreme Court of British Columbia.
[iii] 21 U.S.C. §§ 812, 841(a)(1).
[iv] RJR Nabisco, Inc. v. European Cmty.,136 S. Ct. 2090, 2100 (2016) (internal quotations omitted).
[vi] Id. at 2101.
[vii] 18 U.S.C. § 1956(a)(2)(A).
[viii] 18 U.S.C. § 1956(c)(7).
[ix] 18 U.S.C. § 1956(a)(2)(B), § 1957(a).