Getting Into The Weeds: Isle Of Man Regulation Of Global Cannabis Investments – – Worldwide


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The global cannabis industry has grown rapidly in recent years
as a number of jurisdictions have liberalised cannabis regulation
and trade in cannabis products.

The global cannabis market is predicted to experience a compound
annual growth rate of 15% to 30% over the next five years, and
shortly before this article went to press the Isle of Man
Government announced that the local regulator had issued the first
“approval in principle” to cultivate, extract,
manufacture, import and export medicinal cannabis.

With all of this in mind, it is easy to see why the sector
attracts so much interest. However, the international regulatory
relaxation does not mean the sector is without legal risk for
investors in the Isle of Man.

This article considers the legal and regulatory risks to
investors in the Isle of Man, as well as their advisers,
representatives and service providers, before going on to consider
the position in other similar jurisdictions.  It concludes by
proposing a simple legislative amendment that would remove those
risks.

It is essential reading for anybody who has invested, or is
considering investing, in lawful cannabis businesses, whether
directly or indirectly, including through investment products or
exchange-traded funds.  It will also be of interest to
directors, heads of compliance, chief risk officers and money
laundering reporting officers of, and the holders of similar
positions with, regulated entities.

KEY TAKEAWAYS

The key takeaways from this article can be summarised as
follows:

  • Investing in a business that carries on lawful overseas
    cannabis activities can cause significant legal issues for an
    investor, or its representatives or advisers, in the Isle of
    Man.

  • The proceeds of lawful overseas cannabis activities have the
    potential to form the basis of a money laundering offence. 
    These offences are very broadly framed and can be committed by
    people who do not use or possess those proceeds.

  • If a company commits such an offence, the criminal liability
    could also extend to its directors and other officers, including
    its registered agent.

  • If you are in any doubt about the legal position, seek legal
    advice.

  • If you or your business might inadvertently be exposed to the
    issues described in this article, there are some practical steps
    that can help to mitigate the risk.

THE LEGAL POSITION OF CANNABIS IN THE ISLE OF MAN

Cannabis is a “class B” controlled drug, and
importing, exporting, producing, possessing, supplying or
cultivating it is an offence punishable by up to 14 years in
jail.

The Isle of Man Government passed legislation in 2021 permitting
the cultivation, production, supply, possession, importation and
exportation of certain medicinal cannabis products under licence.
At the time of writing in June 2022, the first such licences had
just been issued – a licence for a pharmacy to import and
dispense certain cannabis-based products for medicinal use and an
“approval in principle” for a company to cultivate,
extract, manufacture, import and export medicinal cannabis.

It remains illegal to cultivate, produce, supply, possess,
import or export cannabis for recreational use.

ISLE OF MAN ANTI-MONEY LAUNDERING LEGISLATION

In the context of the accelerating liberalisation of the global
cannabis industry, it could reasonably be assumed that investing in
a business that carries on activities that are legal in a G7
country, often by buying shares in companies that are listed on
major exchanges, such as Nasdaq or the Toronto Stock Exchange,
would not cause any issues in the Isle of Man.  However, the
position is not that straightforward.

The law relating to the treatment of the proceeds of lawful
overseas cannabis activities is complex.  We have summarised
it in more detail below.  However, put at its simplest, any
benefit from overseas cannabis activities has the potential to
constitute criminal property in the Isle of Man, even if those
activities are lawful where and when they take place.  As
such, any person in the Isle of Man (including companies and other
entities, not just individuals) risks committing serious criminal
offences if it has any exposure to the sector.  If you are in
any doubt about the legal position, the safest thing to do is to
seek legal advice.

THE OFFENCES

The Proceeds of Crime Act 2008 (POCA) sets out
the primary Isle of Man money laundering offences.  They
include acquiring, using, possessing, concealing, disguising,
converting or transferring criminal property or removing criminal
property from the Isle of Man, as well as entering into or becoming
concerned in an arrangement with knowledge or suspicion that it
facilitates the acquisition, retention, use or control of criminal
property by or on behalf of another person.

The offences are broadly drafted.  The “becoming
concerned in an arrangement” offence, in particular, makes it
clear that a person can commit a money laundering offence without
even using or possessing criminal property – merely becoming
concerned in an arrangement can be enough.

The common requirement of all of the offences is that there must
be “criminal property”, so the next stage of the
analysis is to decipher what this means.

“CRIMINAL PROPERTY”

Criminal property is property that the person accused of
committing a money laundering offence knows or suspects to be a
person’s benefit from criminal conduct.  Lawful overseas
cannabis activities are “criminal conduct” for this
purpose, even though they are lawful where they occur, since they
would constitute an offence in the Isle of Man if they occurred
here.

The definition of criminal property in the context of an
overseas cannabis business is not limited to its profits.  The
salary of an employee of such a business would be criminal
property, for example.  It is not even limited to cash. 
So, for example, the shares in a foreign cannabis company would be
criminal property.

There is a defence to the POCA money laundering offences if the
relevant conduct takes place outside the Isle of Man and is legal
where and when it occurs.  However, this defence does not
apply if the relevant conduct would be subject to a maximum
custodial sentence of over 12 months if it occurred in the Isle of
Man.  Since all cannabis offences carry custodial sentences of
over 12 months under Isle of Man criminal law, the overseas conduct
defence would not apply to lawful overseas cannabis activities.

So, to summarise, any property that constitutes or represents a
person’s benefit from lawful overseas cannabis activities has
the potential to constitute criminal property for the purposes of
the POCA money laundering offences, and a person who is accused of
committing such an offence will not be able to rely on the overseas
conduct defence.

If the relevant offence is committed by a company, POCA could
potentially also extend criminal liability to the company’s
directors and other officers, including its registered agent.

HOW COULD THIS IMPACT MY BUSINESS?

The table below contains certain hypothetical scenarios that
could expose various types of local business to POCA risk.


















Banks These might hold cash deposits derived from lawful overseas
cannabis activities (e.g. dividends or salaries paid by foreign
cannabis companies).  This could result in them using and
having possession of criminal property.
Investment businesses These might deal in, arrange deals in, actively manage or take
custody of shares in companies that engage in lawful overseas
cannabis activities, which could result in them using and having
possession of criminal property or becoming concerned in an
arrangement that they know or suspect facilitates the acquisition,
retention, use or control of criminal property.
Fund administrators These might administer funds that have direct or indirect
exposure to companies that engage in lawful overseas cannabis
activities, which could result in them becoming concerned in an
arrangement that they know or suspect facilitates the acquisition,
retention, use or control of criminal property.
Trust and corporate service providers These might provide services to trusts or companies that invest
in, or otherwise receive income from, lawful overseas cannabis
activities.  To illustrate the scale of the potential issues,
take for example an Isle of Man company that owns a property that
is leased to a tenant that is engaged in lawful cannabis activities
in Canada.  The tenant’s rental payments could
constitute criminal property, which could result in (a) the Isle of
Man company acquiring, using or having possession of criminal
property and (b) the CSP becoming concerned in an arrangement that
it knows or suspects facilitates the acquisition, retention, use or
control of criminal property.  The receipt of professional
fees from the Isle of Man company could also result in the CSP
using and having possession of criminal property.
Life insurers These might receive premium payments derived from lawful
overseas cannabis activities, which could result in them using and
having possession of criminal property.  The funds underlying
their policies might have direct or indirect exposure to companies
that engage in lawful overseas cannabis activities, which could
result in the insurers becoming concerned in an arrangement that
they know or suspect facilitates the acquisition, retention, use or
control of criminal property.
Gaming companies These might receive player deposits derived from lawful
overseas cannabis activities (e.g. dividends or salaries paid by
foreign cannabis companies).  This could result in them using
and having possession of criminal property.
Accountants/tax advisers These might advise clients that are engaged in, or that have
investments in, lawful overseas cannabis activities, or they might
advise clients that are engaged in entirely unrelated activities
but that have derived some or all of their wealth from lawful
overseas cannabis activities, which could result in them becoming
concerned in an arrangement that they know or suspect facilitates
the acquisition, retention, use or control of criminal
property.  Their receipt of professional fees from those
clients could also result in them using and having possession of
criminal property.
Trading/holding companies These might invest, directly or indirectly, in companies that
engage in lawful overseas cannabis activities, which could result
in them using and having possession of criminal property.

 

The scenarios in the table above are not exhaustive.  The
potential money laundering offences in relation to lawful overseas
cannabis activities are exceptionally broad, and any exposure to
the sector should be considered very carefully.

CAN WE TAKE ANY STEPS TO AVOID POTENTIAL LIABILITY?

If you or your business might have inadvertently become exposed
to the legal risks described in this article, you can take some
practical steps to help mitigate the risk.  In view of the
broad range of scenarios that can give rise to the issues discussed
in this article, there is no one-size-fits-all solution.  We
can help you to consider the best steps for you or your business to
take in view of your particular factual circumstances.

More generally, businesses that are required to comply with the
Isle of Man’s anti-money laundering legislation must perform
KYC and ongoing and effective monitoring, including appropriate
scrutiny of transactions and other activities to ensure that they
are consistent with their customer risk assessments.  This
should help to identify any potential exposure to the issues
described in this article.  Those businesses are also required
to maintain a business risk assessment.  It would be prudent
to consider whether the business risk assessment should be updated
to reflect any potential exposure to the issues described in this
article.

WHAT IS THE POSITION IN OTHER SIMILAR JURISDICTIONS?

The Jersey equivalent of POCA has been amended to specifically
exclude the production, supply, use, export or import of cannabis
or any of its derivatives from the definition of “criminal
conduct”, provided that the relevant conduct (a) occurs
outside Jersey in one of a number of approved jurisdictions and (b)
is lawful where and when it occurs.  The approved
jurisdictions are those that apply equivalent money laundering
controls to Jersey and reflect international anti-money
laundering/counter terrorist financing standards.

The Guernsey Policy & Resources Committee issued an
information notice in 2020, which stated that the proceeds of
lawful overseas cannabis activities would not be captured by
Guernsey’s equivalent of POCA.  However, the position is
not as clear-cut as in Jersey, and the Guernsey information notice
acknowledged that the issue had not been tested in court.

CAN THE ISSUES BE RESOLVED?

It is understandable for local businesses and investors to
assume that they can invest in, or work with others that invest in,
businesses that carry on cannabis activities that are legal in the
G7 country where they occur without committing serious criminal
offences in the Isle of Man as a result.

The current position casts the net of serious criminality far
too broadly and is unsustainable.  The simple fix for the
issues described above would be to amend POCA in a similar manner
to the amendments that have been made in Jersey.

Before making such an amendment, the Isle of Man Government
would need to consider its commitments under international
law.  International drug control conventions require signatory
parties, including the Isle of Man, to criminalise the acquisition,
possession or use of property that is known to be derived from a
drugs offence.  However, the amendment that we advocate in
this article would only extend to property that is derived from
activities that are lawful where and when they occur, so it would
be fully consistent with the Isle of Man’s international law
obligations.

Addressing these issues would not only permit Isle of Man
persons to gain exposure to a rapidly growing global industry; it
would also encourage businesses to relocate to the Isle of Man if
they are looking to diversify into the market for non-medicinal
cannabis products in countries and states where they are
legal.  And it would be consistent with the overwhelming
public support for lighter regulation of the sector that has been
evidenced by a number of recent consultations.

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.

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Getting Into The Weeds: Isle Of Man Regulation Of Global Cannabis Investments – – Worldwide

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