CANNABIS MONEY LAUNDERING CONTROLS TO BECOME MORE COMPLEX AS LEGALISATION GROWS IN NORTH AMERICAOctober 15th, 2017
BY DANIEL SEKULICH, in Toronto; LIZ NEWMARK, in Brussels; ED ZWIRN in New York; and SARAH GIBBONS, in London WITH the introduction of Bill C-45 into the Canadian House of Commons earlier this year, and its securing a second reading vote in June (see https://openparliament.ca/bills/42-1/C-45/), Canada’s government has moved closer to removing millions of dollars of dirty money from its economy.
Of course, it is not doing this by increasing policing and the number of suspicious transaction reports, but by liberalising what is now a criminal activity, the growing, processing, sale and consumption of cannabis for recreation.
By doing so, it plans to be the first G20 country to legalise and regulate the recreational use of cannabis nationwide by July 2018. And the government has said a key goal of the proposed Cannabis Act is to stem the funds currently flowing through criminal hands from the growing, distribution and sales of marijuana products. The annual value of the Canadian recreational marijuana has been estimated by accounting firm Deloitte as being up to CAD8.7 billion (USD7 billion), a figure also mentioned in ‘The Final Report of the Task Force on Cannabis Legalization and Regulation’, released by the Canadian government in November 2016 – see https://www.canada.ca/en/services/health/marijuana-cannabis/task-force-marijuana-legalization-regulation/framework-legalization-regulation-cannabis-in-canada.html.
According to the federal justice minister Jody Wilson-Raybould who has been steering the bill through the Canadian parliament: “By reducing demand in the illicit market, the proposed regime would also cut the profits of criminal organisations that are benefiting greatly from the current regime.”
However, while cash-based transactions are the norm in the current illicit cannabis world, the Royal Canadian Mounted Police (RCMP) would not comment to the Money Laundering Bulletin on how it planned to help ensure legal businesses dominated the sector with licit and declared funds once the drug is legalised.
Corporal Annie Delisle, speaking for the national police agency, would only say that, “The RCMP will work with the Government of Canada to ensure – to the best extent possible – that appropriate policies and safeguards are in place to prevent organised crime networks profiting from upcoming legalisation efforts.”
Beyond that, the RCMP would not comment further, at least until the legislation is formally approved, which may not happen until next year (2018).
A spokesperson for the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the country’s financial intelligence unit, was similarly coy, stressing that the agency would of course continue analysing information and disclose financial intelligence to police, law enforcement and national security agencies, to assist money-laundering investigations. She added, this national financial intelligence unit’s role is, “limited to administering the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.”
In this instance, this is not actually stating the obvious, however. This law will change under the Cannabis Act – which will amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act by saying that as far as cannabis is concerned, FINTRAC responsibilities will only apply to where cannabis traders breach the new act.
So, if dealing and processing cannabis is no longer a crime – it will cease to be a predicate offence for money laundering. However, the act gives the Canadian provinces the powers to decide how and who can sell this new legal substance and these rules might be strict. The provincial government of Ontario, for instance, is considering introducing a provincial government monopoly to sell cannabis to its residents. So private sellers breaching such rules would still be covered by federal money laundering rules.
And there is concern that the bill does not promote efforts to stamp out any continuing black market in the narcotic. In a debate ahead of the second reading vote, Calgary Conservative MP Tom Kmiec said: “When we look at the preamble of the law, it does not mention that as a goal. It is not a stated purpose of this legislation.”
The lack of new initiatives is no surprise to some. Indeed, the head of an anti-money laundering unit with a major Canadian financial firm, an expert on the situation who asked to remain anonymous, said that even while cannabis remains illegal, fighting the laundering of proceeds from trading in the drug is not a government priority. “Right now, there is no political will to combat money laundering in the [cannabis] business. Financial investigations are not ‘sexy’, and resources are limited, especially for police.” By way of example, he pointed to a major Canadian city (which he was reluctant to name) that has no fulltime, court-qualified forensic expert on its police staff, and with a non-existent budget for financial investigations.
But with cannabis trading offences, including selling to children, still covered my AML Canadian rules, “the clock is ticking,” he said, before effective AML systems and policies can be established that mesh with Bill C-45. “There’s a lot to be done before this comes into force.”
If the AML position of the future cannabis trade in Canada seems opaque, it is crystal clear compared to the position in the USA, where the legislative waters are muddied by an ongoing rift between federal and states laws on the matter. By August, some 29 US states had passed laws allowing for some degree of recreational or medical marijuana sales, with nine states legalising possession and sale without medical justification.
But while this trend toward marijuana legalisation will undoubtedly spur the growth of an above-board industry catering to a heretofore illicit activity, the cannabis industry will continue, at least under current law, to remain one of the larger areas of money laundering activity in the United States.
This is because US federal law places marijuana on its Schedule I list of controlled substances, labelling it as dangerous as heroin and more harmful than cocaine, with no redeeming medical value. As a result, US-based marijuana companies operating legally in their state jurisdictions are not only unable to deduct ordinary business expenses on their federal income taxes, they cannot trade with customers out-state, or risk being convicted of mail fraud or other federal crimes.
More germane to the money laundering discussion, however, is the fact that these businesses face significant hurdles to accessing banking facilities, meaning that they – like their shadow market counterparts – must operate on an almost exclusively cash basis and risk prosecution under money laundering regulations if they try, as many do, to move their profits into bank accounts that do not have an obvious cannabis business connection.
“Businesses that touch the plant have limited access and face greater challenges in opening bank accounts,” said Matt Karnes of GreenWave Advisors, which tracks the legal marijuana industry in the USA. “Ancillary businesses generally have easier access but challenges are also present,” he said.
As befitting an illicit activity, there are no reliable statistics on the amount of money spent on marijuana in the USA each year, but some industry analysts have pegged the figure at USD70 billion, a figure which – if accurate – would dwarf the USD25.2 billion spent on distilled spirits in the US last year.
The bulk of this money is still in the shadow. Karnes said that legal American marijuana revenues came to around USD6.5 billion in 2016, and will hit around USD12.8 billion in 2018.
“Participants in the marijuana industry have always been cognizant of federal law enforcement action for violations of the Controlled Substances Act, which prohibits the manufacture and distribution of marijuana regardless of state laws,” noted Jodi Avergun and Douglas Fischer, of venerable New York law firm Cadwalder, Wickersham & Taft LLP, in a written note. “However, more sophisticated industry participants know that the greater risk comes from enforcement of AML laws against marijuana businesses, ancillary businesses and financial institutions.”
According to the attorneys, “every time a business that sells marijuana pays another party or deposits funds in a bank, the recipient of funds has knowingly engaged in a financial transaction with the proceeds of illegal activity,” subjecting this recipient to a possible fine of USD250,000 or twice the value of the transaction, as well as a prison sentence of up to 10 years. “Currently every business in the industry, including every investor, is violating AML laws,” argued the lawyers.
Beyond exposure to possible money laundering charges, US cannabis businesses, investors and banks make also find themselves on the hook under AML laws for deficiencies in their compliance programmes, including the requirement that all cash payments above USD10,000 be reported on Internal Revenue Service (IRS) Form 8300. Also, under the Bank Secrecy Act, banks are required to have systems in place to prevent money laundering, and have to monitor their clients for potential money laundering activity – that includes – at present – cannabis companies.
The recent shift of political power in Washington DC has also added an element of uncertainty. In 2013, the US Department of Justice (DOJ) set out the so-called Cole Memorandum, which sought to reassure the legal cannabis industry that the DOJ would refrain from prosecuting marijuana businesses if they operated legally under their state laws. This memorandum has resulted in some banks opening up marijuana business accounts, but has since come under question, with current Attorney General Jeff Sessions announcing a review of its provisions.
Steve Owens, founder and CEO of Adherence Compliance, one of the companies which provide software and ML compliance documentation programmes to businesses and banks throughout the state-legal marijuana sector, says that only some five banks in Colorado (one of the first states to fully legalise cannabis) and (significantly) none in California (which voted to legalise cannabis on the day that the USA elected President Donald Trump) accept marijuana business. “Maybe about 30 percent of these businesses actually have bank accounts,” he said. “The others are dealing with cash. These businesses with more cash are actually incentivised to money launder,” he suggested.
Given the international nature of the drugs business, these liberalisation moves in north America will inevitably have an impact on the global trade in cannabis and its derivatives, notably in jurisdictions which already have light controls on their use.
The reforms mean “additional scrutiny is paramount” in one such country – the Netherlands – and indeed and across the European Union (EU), Alex Niculae, of the The Hague-based EU law enforcement agency Europol told the Money Laundering Bulletin.
Indeed, controls on cannabis-related dirty money within the European Union (EU) are already complicated by the fact that “cannabis legislation is inconsistent within the EU,” he stressed, adding: “This can offer criminals the possibility to take advantage of the ‘grey’ buffer areas” between activity that is legal in one country, but illegal in another.
The only way for law enforcers to stem possible black market capitalisation within the cannabis trade in Europe is to act against “the production, supply and distribution chain through strong international police and judicial cooperation,” notably using organisations like Europol and Eurojust, the EU’s network of prosecutors, he suggested.
As for the Netherlands, in 1976, following the country’s Baan Commission’s recommendations, cannabis users can possess up to 5 grams of marijuana without prosecution, leading to many ‘coffeeshops’ selling the drug, especially in Amsterdam. However, these reduced substantially from 846 in 1999 to 614 in 2013, very likely because the Dutch government changed its controls from January 2013, meaning that these retailers can only sell cannabis legally to residents of the Netherlands.
A spokesperson for the EU executive the European Commission, said the Dutch government could and maybe should increase controls as regards money laundering within this sector. He argued that Dutch cannabis dealers could be labelled by their national authorities as ‘designated businesses’ charged with making suspicious transaction reports under the EU’s fourth Anti-Money Laundering (AML) directive, that entered into force June 26. This is because of the link between cannabis sellers and their organised crime suppliers, who are not covered by the Netherlands’ decriminalisation provisions.
Under the latest AML directive, EU member states are encouraged, based on a risk assessment, to include businesses that “engage in activities particularly likely to be used for money laundering,” in their national AML legislation, the Commission spokesperson explained.
The law also tightens risk assessment and transparency obligations, facilitating information exchange between different countries’ FIUs to help combat money laundering.
More pressure on the Dutch to act may follow. The Commission also published a supranational risk assessment (SNRA) on June 26 to help member states identify money laundering and terrorist financing risks. See https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-1060803_en
This report states the Commission is considering an initiative to enhance transparency of cash payments. It also wants “specific traders in high-value goods” to be added to member states’ AML/CFT [combating the financing of terrorism] regime,” noting “a threshold of EUR15,000 raises concerns”.
But when contacted, the Netherlands’ FIU (FIU-Nederland) declined to comment. A Dutch government statement simply emphasises it collaborates with other countries to combat international drug trafficking and organised crime and to harmonise drug trafficking penalties.
Portugal is in a similar position, as it draws a very clear distinction between its approach to drug consumption and trafficking, with the former decriminalised since 2001 and the latter still vigorously pursued with arrests made on a daily basis, and related financial activity covered by Portugal’s anti-money laundering laws.
Pedro do Carmo, assistant national director of the Polícia Judiciária, said: “When it comes to drug trafficking or any kind of selling, the system hasn’t changed. It’s still a crime – we still pursue drug traffickers, take them to trial and they can be jailed.
“There’s absolutely no difference since 2001 – not only when it comes to the law, but also how the law is applied.
“Money’s still the same too – it’s still a crime to launder money that’s come from drug trafficking.
“We do pursue that crime and go after the profits from drug traffickers from their crimes.”
He said the national FIU, the Unidade de Informação Financeira, is “very engaged” in tracking down illegal money transfers, including those related to drugs.
“With money laundering, you have a number of crimes prior to the laundering such as corruption or terrorism which we also prosecute,” he said.
“Investigations into ML have confirmed that the proceeds from drug trafficking are most likely to involve the attempted placement of cash into the financial system.”
Polícia Judiciária figures said seizures of hashish (mostly from Morocco) were up 12% year-on-year in 2016.
“The decriminalisation of the drug use had an impact on the consumption level, on the relationship between the authorities and the consumers and between the consumers and the health authorities, but it did not have – as much as we can say and it’s been several years – no impact on the traffic, namely in the purchase and sale of substances,” added do Carmo.