Cannabis has recently become a much talked-about topic, especially in Guernsey, with the local media regularly drumming up excitement about the latest proposals to grow the plant in order to sell it to the medical world. Private banks, asset managers and trusts in the offshore world are eyeing up this new asset class and stand to make considerable gains, but the road to profits is paved with danger, writes Julia Schaefer.
With new markets opening up and new drugs being licensed in the UK on a regular basis, there appears to be a steady trend towards liberalisation of cannabis for medicinal purposes, and with it huge investment opportunities. Around the world, the recreational, non-medicinal use of cannabis is also being increasingly liberalised, and vast new markets for such use are creating even more opportunities, and a frenzy for the right investments through direct or indirect holdings.
For Guernsey companies in particular, these developments present exciting new opportunities. They are also, however, littered with pitfalls and potential serious negative consequences.
Cannabis as a medicinal drug is licenced under very specific circumstances in Guernsey, although there is no clear definition of what constitutes medicinal cannabis. The use of cannabis as a recreational drug remains illegal. For anti-money laundering ("AML") purposes, this has implications in relation to investing in cannabis-based products or companies which produce them or are part of the production chain around the world, in countries where both uses are legal.
Cannabis, cannabis resin and cannabinol (and its derivatives) are controlled drugs under Schedule 1 to the Misuse of Drugs (Bailiwick of Guernsey) Law, 1974 (MOD Law).
Cannabinol (and its derivatives) are Class A drugs and cannabis / cannabis resin are Class B drugs under the MOD Law. The relevance of this is the severity of penalties for handling the drug, with Class A drugs being more serious. However, the definition of "controlled drug" under the relevant legislation includes every class. Cannabis resin and cannabinol (and its derivatives) are referred to collectively in this article as 'cannabis'.
Importation and exportation1, production and supply2, and possession3 of controlled drugs are prohibited in Guernsey. The MOD Law also contains a specific prohibition and offence for the cultivation of cannabis plants4. Contravention of any of these provisions is a criminal offence. All of these prohibitions are subject to exemptions or permission granted by ordinance / order or a license.
Cannabis can be legally imported / exported, produced and supplied, prescribed, and possessed in Guernsey in highly restricted and limited ways only. If cannabis were to be supplied in Guernsey, both the supplier and either the importer or the cultivator of the cannabis plant would require a separate licence.
Although the Guernsey statutory regime is wide enough to (technically) allow a licence or authorisation to be issued for the production and/or use of recreational cannabis, at the moment it would be contrary to public policy. Recreational use, therefore, looks likely to remain unlawful in Guernsey for some time yet.
The difficulty arising is that the cultivation and use of recreational cannabis is becoming legal in an increasing number of foreign jurisdictions, with an explosive industry enticing investment opportunities. According to the Guernsey AML law, however, the fact that investment in certain activities or companies would be legal in the jurisdiction they are carried out, does not necessarily make the investment legal for the purposes of Guernsey law.
That is because the definitions of "criminal conduct" in the relevant Guernsey law is such that, even if the conduct is lawful in the overseas jurisdiction in which it was committed, the conduct will be criminal conduct under Guernsey law if it would be unlawful in Guernsey.
For AML purposes, this means that where a company or individual holds, for instance, shares in a company involved in the cultivation of Cannabis for recreational purposes, under Guernsey law any proceeds generated from that company would be regarded as the proceeds of crime, because the underlying activity of growing cannabis for recreational purposes would be deemed unlawful.
That may be the case even where only a small part of the investment is in a (potentially) illegal activity, owing to the wording of the Guernsey AML Law.
The relevant provisions are contained in s.38(2) Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 (the "Law"), which reads:
"38 (2) A person is guilty of an offence if, knowing or suspecting that any property is, or in whole or in part directly or indirectly represents, another person's proceeds of criminal conduct, he
- Conceals or disguises that property, or
- Converts or transfers that property or removes it from the Bailiwick."
Legally, the relevant words are "suspecting" and "in whole or in part". A mere suspicion that funds derive from the proceeds of crime is enough to engage the Law, and no additional hurdles such as reasonable doubt, etc. are relevant. It is therefore a low threshold, which is only further defined in case law as "more than merely fanciful".
Further, "in whole or in part" implies that there is no de minimis provision in Guernsey law. Where there is a suspicion that is more than fanciful that funds derive from recreational crops of cannabis, no matter how small, the entirety of funds are potentially derived from criminal activity under the Law. So even if even one plant produced for recreational cannabis becomes mixed with 1000 plants for medicinal uses, the entire crop would be tainted by the "recreational" plant. This is a concerning and important consideration in respect of countries where it is legal to cultivate plants for both recreational and medicinal use.
In order to avoid the potential intermingling of acceptable and potentially criminal funds, investors would therefore require assurances that any cultivators of cannabis plants for both recreational and medicinal use (and the proceeds therefrom) are kept separate and provably ring-fenced. In practice, the only way to ensure that no intermingling is taking place would be to either only deal with produce derived from wholly medicinal crop, or where any recreational and medicinal use businesses are arranged in wholly separate and distinct entities.
Where an entity is concerned that criminal conduct has already occurred, reporting requirements are imposed in Guernsey under the Disclosure (Bailiwick of Guernsey) Law, 2007 (the "Disclosure Law"). This states that if a person or financial services business knows, suspects or has reasonable grounds for suspecting that another person has engaged in money laundering, or that property is derived (directly or indirectly) from the proceeds of criminal conduct, they must make a required disclosure as soon as possible to the relevant enforcement agency. The failure to do so is a serious criminal offence, to which there are only very limited defences.
There is a defence to the acquisition, possession or use of proceeds of criminal conduct by making a disclosure to the relevant enforcement agency before committing the conduct, provided that consent is then given to undertake the conduct. It is also a defence if a person receives criminal property for adequate consideration. However, the provision by a person of goods and services which they know, or suspect, may help another to carry out criminal conduct, is not consideration.
Further, unlike in the UK, there is no mechanism in Guernsey whereby the relevant enforcement agency is deemed to consent to a transaction if they take no action within a specified period after receiving a suspicious activity report. The Guernsey enforcement agency can simply refuse to provide its consent, and then do nothing more - it is then incumbent upon the person affected to commence a private law action in the courts.
Guernsey's AML regime also encompasses a number of seizure and forfeiture powers. Where a person is charged with a criminal offence, the Guernsey court has the power to issue a restraint or charging order over suspected proceeds of the crime (which can be cash or other assets). Confiscation can be ordered after conviction.
Upon application from an enforcement agency to the court, a non-conviction based civil confiscation regime is also in operation in the Bailiwick. As the process is a civil one, the standard of proof is the lower civil one - that is, on the balance of probabilities as opposed to beyond reasonable doubt.
There are, undoubtedly, huge opportunities in the expanding cannabis market. Careful assessment of the individual investment is, however, essential. Guernsey's current AML regime offers no scope for mistakes, and the consequences of getting things wrong can be most serious. Compliance officers and the businesses they represent do not want to be in the position of having to justify their actions in court, but rather ensure that they never find themselves before the court at all.
An original version of this article was published by Compliance Matters, December 2019.
1. s2 MOD Law.
2. s3 MOD Law.
3. s4 MOD Law.
4. s5 MOD Law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.