Canada: Anti-Cash Laundering Concerns In Hashish Finance

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Because the legalization of leisure cannabis use in Canada in October 2018, funding has flowed into the cannabis sector.  Business members can leverage financing to faucet into new alternatives in what’s (actually) a development trade.  Whereas the correct financing construction generally is a important benefit to any cannabis-related enterprise, it is usually essential to do not forget that there are authorized concerns concerned, together with in respect of anti-money laundering (AML) issues. These authorized concerns embrace the choice of some cannabis retail prospects to utilizing money as a cost methodology, issues round privateness, and the dangers related to the availability of cannabis to make sure its provenance from authorized sources. Monetary establishments, cannabis companies, and traders ought to subsequently be very aware of AML concerns.

In Canada, the Proceeds of Crime (Cash Laundering) and Terrorist Financing Act (PCMLTFA) applies to a prescribed set of entities, together with amongst others, banks, credit score unions, life insurance coverage corporations, securities sellers and cash providers companies. The PCMLTFA is run by the Monetary Transactions and Stories Evaluation Centre of Canada (FINTRAC), which has issued coverage interpretations referring to authorized cannabis companies.

Entities topic to the PCMLTFA are required to conduct a danger evaluation in respect of their actions.  When assessing dangers referring to dealings with cannabis companies, FINTRAC suggested in its coverage interpretations that this contains:

  • reviewing whether or not the enterprise is correctly licensed;
  • reviewing whether or not the enterprise abides by relevant municipal necessities;
  • assessing whether or not the transactional exercise of the enterprise is according to what is anticipated from different retailers or comparable forms of companies; and
  • assessing whether or not the kinds and quantities of transactions carried out are according to what is thought in regards to the enterprise and the trade.

A reporting entity contemplating doing enterprise with a authorized cannabis-related enterprise is anticipated to evaluate and doc any dangers concerned and should implement acceptable measures to mitigate towards these dangers.  Dealings with excessive danger entities require enhanced measures, together with taking further steps to determine the people and make sure the existence of entities concerned in addition to conducting extra frequent monitoring.

As well as, the Prison Code contains a lot of provisions in respect of coping with cash laundering and coping with proceeds of crime.  Not like the PCMLTFA, which solely applies to a restricted set of entities, the Prison Code applies to all entities, together with cannabis companies.  Moreover, Invoice C-97 (the funds implementation invoice) features a new offense for “recklessness” within the Prison Code with respect to cash laundering.  This has broader implications to people and companies than these simply topic to the PCMLTFA.

Accordingly, a prudent cannabis enterprise ought to have in place an acceptable risk-based compliance program to stop such exercise, together with measures and controls to make sure that the availability of cannabis is from authorized sources. Entities financing cannabis companies ought to carry out due diligence to establish whether or not that is the case and search to barter related representations and warranties to attenuate danger and guarantee compliance.

Within the U.S., the Monetary Crimes Enforcement Community (FinCEN) launched its Expectations Concerning Marijuana-Associated Companies in 2014.  FinCEN recommends that earlier than taking over a cannabis consumer, monetary establishments conduct acceptable due diligence, together with:

  • verification that the cannabis-related enterprise is appropriately licensed and registered, together with reviewing any documentation submitted to acquire such license(s);
  • understanding the anticipated exercise of the enterprise, together with the forms of merchandise offered and the goal buyer market (e.g., medical or leisure);
  • requesting details about the enterprise and associated events corresponding to founders, officers, and administrators from legislation enforcement authorities; and
  • constant ongoing monitoring of the enterprise and its associated events for potential adversarial data or suspicious exercise.

The FinCEN Expectations additionally reiterate that monetary establishments are required to file a Suspicious Exercise Report (SAR) in the event that they know, suspect, or have cause to suspect {that a} potential transaction entails funds from criminal activity, is designed to evade AML rules or lacks a lawful enterprise function.  Related necessities would apply in Canada with respect to the submitting of Suspicious Transactions Stories (STR).

FinCEN’s marijuana steering was based mostly partially on the Cole Memo, which was rescinded in January 2018 by US Lawyer Basic Jeff Periods.  FinCEN didn’t rescind its steering.

Takeaways for Hashish Companies

Hashish-related enterprises must be well-versed within the authorized concerns for his or her enterprise, together with AML dangers.  This implies proactively anticipating AML associated diligence questions in addition to being well-organized and capable of present full and responsive solutions relating to:

  • their compliance program, together with insurance policies and procedures and measures in place to attenuate the chance of cash laundering;
  • firm possession particulars and details about the homeowners and senior administration of the corporate;
  • an in depth clarification of operations, together with standard transaction exercise; and
  • licensing and allow data referring to all ranges of presidency.

Hashish companies must be aware of the AML dangers referring to the trade, each for their very own sake and to make sure that they’ll fulfill their monetary establishment.  To take action, they need to guarantee they’ve in place a compliance program addressing AML dangers, together with appointing a accountable compliance officer, and having in place the required insurance policies and procedures, coaching and auditing.  AML procedures must be risk-based and will embrace limits on money transactions, crimson flags to determine suspicious transactions, and using level of sale programs particularly designed for cannabis. As well as, these ought to tackle the dangers related to the availability of cannabis and guaranteeing the availability originates from authorized sources.

Takeaways for Buyers

Whereas cannabis represents a chance for top returns, there are authorized dangers in financing a cannabis enterprise.  Prudent traders ought to search certified recommendation in respect of AML issues, as this can be a advanced space.  That is notably true for cross-border investments, corresponding to an US or UK fund investing in a Canadian cannabis-related enterprise.

Takeaways for Monetary Establishments

Because the cannabis market matures in Canada, monetary establishments can have entry to additional knowledge and historical past on the trade, permitting them to have interaction in additional sturdy danger evaluation of AML dangers in coping with cannabis companies.  It’s and can stay essential to be cognizant of the elevated dangers related to cannabis-related companies and guarantee compliance with related laws, together with constructing the suitable compliance processes, corresponding to rigorous know your buyer functions, potential credit score checks, police background checks, and tracing of sources of funds.

The content material of this text is meant to offer a basic information to the subject material. Specialist recommendation must be sought about your particular circumstances.

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