The commercialization of cannabis has been decriminalized in certain countries. A recent example is the Canadian Bill C-45 of June 21, 2018, which legalizes the production of recreational use of cannabis and provides a framework for its production, commercialization and possession. Dutch authorities, having supervised the recreational use of cannabis for several decades, are now considering producing it themselves. Several American states have also legalized the medical and/or recreational use and/or commercialization of cannabis or other narcotics, although it remains prohibited at the federal level.
France has considered experimenting the therapeutic use of cannabis through a vote on October 25, 2019. However, the transport, production, manufacturing, commercialization, export and import of narcotic products are offenses related to drug trafficking sanctioned under articles 222-34 seq. of the French Criminal Code. Several financial institutions are considering taking up positions in this sector, which also remains subject to a high reputational risk. Against this backdrop, it is useful to consider the current legal risks and challenges related to investing in the cannabis sector.
French anti-money laundering legislation
In France, the offense of money laundering set forth in article 324-1 of the French Criminal Code is defined as the facilitation, by any means, of the false justification of the origin of the property or income of the perpetrator of an offense that has provided the perpetrator with a direct or indirect benefit. The fact of providing assistance in an operation of placement, concealment or conversion of the direct or indirect proceeds of an offense also constitutes money laundering.
The determining criterion relates to the legality of the activity from which the funds originate. Thus, although in France, cannabis-related activities are still considered an offense, it is not always the case in the jurisdictions in which the companies operate or invest or wish to do so. Indeed, pursuant to the principle of territoriality established in article 113-1 of the French Criminal Code, the activity of companies in the cannabis sector would be subject, at first glance to proceedings by the French authorities only if it took place within French territory. However, as further stated below, additional criteria apply, requiring, amongst others, enhanced due diligence.
Moreover, as of the date of the publication of this alert, the French Market Authority ("Autorité des Marchés Financiers", or "AMF") has only taken a position on the risks associated with the profitability of these types of investments.
Risks related to investing in companies in the cannabis sector
Target companies that do not operate in France, will be assessed on their legality if their practice related to cannabis (1) is legal in the jurisdiction where they operate, (2) is commercialized in compliance with local authorizations and regulations and (3) respects the risks and obligations associated with anti-money laundering regulation and laws.
However, the activity remains an activity at risk according to anti-money laundering standards and requirements, given, amongst others, (1) the existence of higher instances of cash as a payment method, concerns about privacy, and cross-border practices, and (2) French case law that applies the principle under which ”the offence of money-laundering is a general, distinct and independent offence"1; as well as the use of funds coming from foreign countries where their source is considered lawful, can be qualified as a money laundering operation in France2. An enhanced due diligence is additionally strongly recommended in all instances related to these types of investments.In conclusion, the mitigation of potential risks associated with these types of investments include, amongst others: (1) confirming the legality of the activity in the concerned jurisdictions, (2) verifying the authorizations and/or licenses of the targeted companies that must operate legitimately in their respective jurisdictions, (3) performing enhanced due diligence on the company, regardless of its connection to the cannabis sector, and, (4) assessing the overall reputational risk.
1 Crim., 24 février 2010, n° 09-82.857
2 Hence, in France, the offense of money laundering has been qualified even though the source of the gains was lawful in the country where it occurred. In fact, in 2017, in what is called the "ill-gotten gains" cases, Paris High Court sentenced the son of the President of the Republic of Equatorial Guinea for money laundering. This case is, since December 9, 2019, being held by Paris Court of Appeal.