On Friday 18 September the FCA issued a statement, setting out its approach to assessing applications for listing made by cannabis-related businesses. The statement is short and will be followed in due course by a consultation on what guidance should be issued. At its heart, the FCA’s statement is an expression of how the Regulator interprets the U.K.’s Proceeds of Crime Act 2003 (POCA) in respect of funds generated by cannabis-related business. To that extent, the FCA’s comments have broader significance to the industry. They will be relevant to any financial institution or other business in the UK’s regulated sector, who are required both to have effective anti-money laundering systems and controls and to file suspicious activity reports. Central to those obligations and responsibilities is a need to identify the proceeds of crime, a task which has become problematic since the legalization of cannabis started to take root globally. It will also be relevant to the investment industry, who may have to consider the anti-money laundering and reputational risk of the cannabis industry as an asset class.
This post explains, in brief, the relevant legal background of POCA before setting out the substance and implications of the FCA’s statement. The statement, and its implicit interpretation of the law, may not be surprising, but it does reveal how the Regulator considers the application of POCAin respect of overseas medicinal cannabis businesses. The FCA’s statement makes plain that cannabis related businessesmay still represent a POCA risk. In assessing that risk the regulated sector will need to consider the regime of the jurisdiction in which the company is based, as well as the specific licensing and regulatory arrangements of the products its business is connected with, before conducting some level of comparative analysis with the UK.
Under POCA, property is considered ‘criminal property’ where it constitutes or represents a person’s benefit from ‘criminal conduct’. The definition of ‘criminal conduct’ focuses on the legality of conduct, assuming it had been committed in the U.K. Section 340 (2) reads,
‘Criminal conduct is conduct which-
(a) constitutes an offence in any part of the United Kingdom, or
(b) would constitute an offence in any part of the United Kingdom if it occurred there’
Accordingly, property can be ‘criminal property’ where it represents or constitutes the benefit of conduct which would have been unlawful had it been committed in the U.K.
Up until November 2018, cannabis was listed on Schedule 1 of the Misuse of Drugs Regulations 2001, and classified as having no therapeutic value. It could therefore not be lawfully possessed or prescribed for medicinal use. As a result, any activities relating to the production or sale of cannabis wereillegal in the U.K. and the proceeds generated by such activity, whether for medicinal or recreation use, were considered the proceeds of crime under U.K. law. It did not matter that those activities had been lawful in the jurisdictionin which they were performed.
In November 2018, ‘cannabis-based products’ were added to Schedule 2 of the Misuse of Drugs Regulations. They can now be prescribed for medicinal and therapeutic use where there is an unmet clinical need. A ‘cannabis-based product’ is defined under the legislation. The definition is limited to products which were produced for medicinal use in humans. The challenge for the Regulated Sector is assessing whether the underlying overseas activities, connected with the production and sale of cannabis-based products, would be considered criminal if they occurred in the U.K. Conducting this hypothetical assessment is challenging, especially given that the underlying regulatory and legal frameworks of the two jurisdictions will be different.
The FCA statement and its implications
In its statement, the FCA sets out its approach to cannabis-related businesses across three different categories: recreational cannabis; UK-based medicinal; and overseas medicinal. The position in respect of the first two categories is clear. The recreational use of cannabis remains unlawful in the UK, and hence companies whose business involves its sale or production for recreational purposes will not be admitted for listing; their revenues representing the proceeds of crime under UK law. An assessment of UK based medicinal companies is similarly uncontroversial: provided they abide by UK law and the applicable licensing regimes there should be no bar to their listing. Their funds will not constitute the proceeds of crime.
The FCA acknowledges that overseas medicinal companies are a “legally complex area” and makes clear that “there remains a risk that proceeds from overseas medicinal cannabis business may constitute ‘criminal property’ for the purpose of [POCA]. This includes where the company possesses a licence issued by an overseas medicines or pharmaceuticals licensing authority.” The statement suggests that an assessment of the POCA risk will require an understanding of the legal basis for the company’s overseas activities, including the nature of the local licensing regime and the specific licences the company holds.
Although the FCA’s statement comes with the promise of a future consultation, it does not provide much clarity. How does one assess whether and how POCA applies to overseas medicinal cannabis companies, i.e. whether their activitieswould be considered unlawful if performed in the UK? As a starting point, one assumes that the company’s activities must relate to products which fall under the definition of a‘cannabis-based product’; they will have to be produced for medicinal use. Thereafter, the FCA’s statement indicates that it will be necessary to conduct a comparative analysis between the regulatory basis and licensing arrangements of the overseas company’s products, and what would be required if such products were being produced and / or sold in the UK.
Such a nuanced and complicated approach to determining the application of POCA, and hence the engagement of the criminal law, is far from an acceptable position. In many circumstances where these issues arise, businesses can mitigate the risks by other means, for example by filing suspicious activity reports in respect of specific transactions, where an assessment of POCA’s application does not result in a clear answer.
However, for some regulated businesses, particularly those tasked with considering investment opportunities, the lack of clarity presents real challenges. These businesses should demand clearer and more prescriptive guidance for assessing the POCA risk presented by the medicinal cannabis industry.