By Douglas Fischer
Because most activities associated with medical marijuana businesses are still federal crimes, the legal issues facing entrepreneurs can seem daunting.
The following five tips present a good starting point for cannabis business owners – both those who run mature companies as well as those those just starting up – and investors to minimize their legal risks.
1) Whether you operate a dispensary, provide ancillary services or invest in marijuana-related businesses, you must create a defensible anti-money laundering compliance program
To avoid the risk that the government will try to seize your assets as proceeds of a crime, you will need to be able to affirmatively demonstrate that the businesses your funds support don’t cross into the eight stated government enforcement priorities (e.g, keeping marijuana out of the hands of minors).
The type of compliance program that each business requires depends on many factors, including the nature of the business, the types of customers it serves, its ownership structure and its financing structure.
While anti-money laundering compliance may seem complicated – and it certainly is – the best way to approach it is by considering this one question: “How can I show that my revenue is coming from legitimate activities?”
The answer is different for every business type.
Obviously dispensaries need to demonstrate that their sales comply with state laws. But it is less obvious that a vendor to a dispensary, such as a security service, might need the same proof to show that the dispensary’s proceeds (and, therefore, the vendor’s profits) aren’t tainted.
Anti-money laundering compliance is not only critical to avoiding seizure of assets or worse, it is also necessary to obtain banking services. Banks are closing marijuana-related businesses’ accounts not just because of legal risks, but also because of the costs associated with compliance.
If you can lighten the bank’s burden by providing credible proof of your compliance with anti-money laundering laws, then you stand a greater chance of gaining access to financial services.
2) Don’t be complacent, even if your business doesn’t handle marijuana directly
Federal law criminalizes many activities that are only barely related to the production or distribution of marijuana. For example, merely owning an interest in a property on which marijuana is grown can lead to seizure of that property and even incarceration.
Under certain circumstances, distributing supplies used to grow marijuana is a felony. So is the sale of drug paraphernalia.
Most critically, the Controlled Substances Act’s prohibition on “aiding and abetting” violations of the law means that anyone who arguably assists in the production or distribution of marijuana is at risk.
Even passive investors face potential liability simply for funding a marijuana-related business. This is true regardless of state laws decriminalizing marijuana or permitting medical marijuana.
This suggests that every marijuana-related business, not just those involved in growing and selling, must have policies and procedures to mitigate the risk of federal enforcement actions.
For example, if you lease property to growers or dispensaries, your lease agreements should contain provisions requiring the tenant to comply with state law and federal enforcement priorities, and you should conduct periodic audits to ensure your tenants’ compliance.
3) Use local and state laws as a starting – not ending – point
Where state laws are less rigid, businesses must go above and beyond to avoid scrutiny from the federal government.
The Department of Justice’s practice of not deploying prosecutorial resources against marijuana-related businesses complying with state laws is explicitly conditioned upon state and local governments implementing “strong and effective regulatory and enforcement systems that will address the threat [state-level legalization laws] could pose to public safety, public health, and other law enforcement interests.”
That means if you’re operating in a state with a loose regulatory system, such as California, the risk of federal intervention remains even if you are following state and local laws.
For an example, one need look no further than the Department of Justice’s continued prosecution of Harborside Health Center. If you operate in such a state, your practices for ensuring that federal enforcement priorities are not implicated may need to go beyond the requirements of state laws.
4) Keep a close eye on legal and regulatory changes
It is not sufficient to get good advice and act on it. Your business should have a strategy and procedure for monitoring potential changes to the law. And you should be part of local and national associations that can help influence those changes.
As rules change, businesses must quickly adapt their policies. For example, investors in marijuana-related businesses need to ensure that their due diligence remains current. Significant legal changes may necessitate fresh diligence even if diligence on an investment has been performed recently.
5) Remember the basics
Given the multitude of thorny issues unique to medical marijuana businesses, it’s easy to lose sight of the risks that every business faces.
Don’t let your focus on marijuana-related concerns distract you from taking critical steps such as using corporate structures and insurance policies to limit personal liability, adopting human resources policies to satisfy employment law, and employing accounting practices that conform with tax requirements.
Douglas Fischer is an attorney at Cadwalader, Wickersham & Taft’s Washington DC office.