Can the UK Solve its ‘Money Laundering’ Problem with the Proceeds of Medicinal Cannabis?

The manufacture, marketing and supply of medicinal cannabis products raise complex regulatory issues in the jurisdiction where those activities take place. These go beyond the issues applicable to medicines in general, even some whose potential harms are far greater, due to the cultural and moral judgements that have been applied to cannabis for many years. Inevitably, there is a large and growing variation in the level and nature of regulation that applies in various jurisdictions, with some countries having gone as far as to legalise cannabis in general (including for recreational use), and others being slow even to allow medicinal products in which cannabis is an ingredient.

A Restrictive Environment The UK is, broadly speaking, at the more conservative end of that spectrum for the moment, allowing some bespoke and restrictive exceptions for medicinal cannabis products, while keeping its general prohibition in place. Just as important, however, given its importance as a global financial centre, is its regulatory approach to those who invest and trade in the shares of overseas businesses that sell cannabis products. There, thanks to a quirk in its notoriously restrictive money laundering laws, the UK has cast a dark and discouraging shadow over the prospects for major investment in the medicinal cannabis industry. Now, however, an announcement from its Financial Conduct Authority (FCA) has hinted at a potential way forward, and at the time of writing, the first listing of a cannabis company on the London Stock Exchange has taken place, with several other following closely behind.

The starting point for the UK, as for many countries, is that cannabis, and certain derivatives of cannabis such as THC, are controlled drugs, so that various actions in relation to them (including possession, supply, import, export, and cultivation of the cannabis plant) are criminal offences, punishable with imprisonment, unless done in accordance with licences. The primary legislation, which creates the offences, is the Misuse of Drugs Act 1971 (MDA), while the detail of licensing arrangements is contained in secondary legislation, including the Misuse of Drugs Regulations 2001 (MDRs), and in guidance issued by a division of the Home Office, the Drugs and Firearms Licensing Unit (DFLU). It is by way of changes to the MDRs and the guidance that the approach to medicinal cannabis has changed over recent years, as attitudes towards the therapeutic value of cannabis have become more favourable. The POCA Problem The problem with the UK’s money laundering laws, and how they apply to the proceeds of overseas cannabis business, comes from the provisions of the Proceeds of Crime Act 2002 (POCA), which prohibit as ‘money laundering’ virtually any dealings with the proceeds of ‘criminal conduct’, and go on to define that term to include conduct overseas that would breach UK law, if it occurred here. There are exceptions where that conduct was lawful where it occurred, but these have been disapplied for most offences that carry a maximum penalty of over 12 months’ imprisonment, which include the principal offences under the MDA. So, taking the MDA and POCA together, it would seem that to deal with the proceeds of (even lawful) cannabis products overseas would constitute money laundering under UK law.

This has all sorts of impacts beyond the merely theoretical (the prospect of a UK investor in Canadian cannabis being arrested, let alone prosecuted or convicted, for that conduct being very remote), principally because of the way the financial sector has been co-opted into the UK’s antimoney laundering (AML) systems. For a UK bank, the regulatory risks of operating an account that might contain the proceeds of ‘criminal conduct’ are severe, which in turn means that it can be strongly in their interests to rule out such risks by turning away customers, submitting covert reports on them to the NCA, or even freezing accounts. Some banks have precautionary policies that prohibit the receipt of funds from (even purely medicinal) cannabis business. A Pragmatic Approach In the few years since this issue first arose, some interesting grey areas have emerged. First, because of the criminal liabilities that underpin the regulation of medicines in the UK, and the role of its Medicines and Healthcare products Regulatory Agency (MHRA), a pragmatic approach to the interaction of POCA and overseas medical products is needed. Applying a strict interpretation to the question of whether overseas manufacture, sale, brokering etc. of medicines breaches the Human Medicines Regulations 2012 (the HMRs) quickly runs into problems: because other jurisdictions’ regulatory schemes and authorities are different, there are myriad UK entities that handle the proceeds of selling medicinal products that do not strictly comply with the HMRs, and in which the MHRA has had

no involvement. Are they to be considered money launderers too?

A pragmatic approach to interpreting the relevant provisions of POCA, therefore, assists those dealing with the proceeds of selling products that, if not actually authorised here by the MHRA, would be so but for the difference in their location, and have been rendered lawful by means of an equivalent regulatory process somewhere else. That could include, for instance, a UK shareholder in a US business that manufactured and sold branded overthe-counter painkillers, where there was an equivalent product in the UK that was regulated in the same way.

The need for pragmatism becomes more acute the further the overseas regulatory system differs from our own: if, for example, a product that in the UK was available only on prescription was sold over the counter in the US, it might be arguable that the proceeds of that sale would breach the provisions of POCA. (Unhelpfully, most of the offences in the HMRs carry maximum sentences above the 12-month threshold, so the exceptions for less serious conduct do not apply.) The Change in Regulations Until recently, that pragmatism would have to be further stretched for virtually any medicinal cannabis product, there being virtually none that were in fact licensed and sold in the UK. That changed in 2018, with an amendment to the MDRs that introduced the concept of cannabis-based products for medicinal use (CBPMs), which are now available on prescription from an authorised consultant in certain very limited circumstances.

Conceivably, then, the argument under POCA for the proceeds of medicinal cannabis products is the same as for other medicines under the HMRs: assuming they are licensed in the jurisdiction where they are made and sold, the fact that they could in theory be prescribed as CBPMs in this jurisdiction would mean that their sale would not be ‘criminal conduct’. While this has yet to be tested in the courts, anecdotally, it would seem that many advisers and banks are relying on this argument to proceed with medicinal cannabis investments without making reports to the NCA. What About Cannabidiol (CBD)? Another grey area in the treatment of cannabis products under UK law, including but not limited to POCA, is its approach to cannabidiol (CBD). As CBD is not itself listed in the MDA as a controlled drug, and provided (as is often claimed, but less often tested) it contains no measurable THC content, then no problems arise, under either the MDA or POCA. The problem, however, is that many jurisdictions have a de minimis percentage threshold for THC content, often set at 0.2%, below which the product is not treated as controlled. In the UK, though the 0.2% threshold is relevant to hemp cultivation licences, it does not (contrary to widespread misconceptions) make the difference between legal and illegal CBD products.

The fact that the market for CBD oils and other CBD ‘wellness’ products in the UK is thriving nevertheless is largely thanks to some creative use of a provision in the MDRs about ‘exempted products’, which require various criteria to be met, including a maximum amount of the ‘controlled drug element’ of a product to be below 0.1 mg. While that arguably assists wholesalers and retailers, it is of no practical use to manufacturers handling the product in larger quantities.

The effect of these complex laws is that the boundaries between medicinal and ‘wellness’ products, and between zero- and low-THC, are particularly important in a POCA context. An overseas business that, due to less restrictive laws in this area, sold products with claims of medical effectiveness and some small measurable THC content would be committing ‘criminal conduct’ for the purposes of POCA, and an investor here who received the proceeds of such sales could be committing an offence. The FCA’s Announcement What, then, has the FCA’s announcement contributed to this debate? On one view, it has done no more than confirm the consensus that has built up over the last few years, which, broadly speaking, divides the issue up according to the categories of products involved. At the simplest end of the spectrum, the sale of purely recreational cannabis products, though lawful in many jurisdictions now, would be considered ‘criminal conduct’ for the purposes of POCA, and the FCA would have a negative approach

to the prospect of a business that sold such products being listed on the London Stock Exchange. This much at least has always been clear, at least to the banks and lawyers who have had to wrestle with the issue.

The more interesting issue is what the FCA refers to as ‘overseas-licensed medicinal cannabis companies and cannabis oil companies’, which it says may be listed if it is satisfied ‘that their activities would be legal if carried out in the UK’ – in effect, the same test as in POCA. Intriguingly, it says that it cannot ‘assume a person who has been licensed in an overseas country would receive a licence here in the UK, as licensing regimes differ globally’, and that when considering whether to list a company, it ‘will also need to understand the legal basis of [its] overseas activities, for example the nature of the local licensing, and the licences the company holds’. As a sign of what is to come, the first company to be listed, MGC Pharmaceuticals, is a European-based biopharma company with a ‘nature to medicine’ strategy. Several other companies expect to list soon, including Kanabo, an Israeli company that has developed a medicinal CBD vaporiser. Some Further Questions The FCA’s announcement implies an application of the pragmatic approach to interpreting POCA in this area, looking not only at the strict question of whether the products and their sales comply with the provisions of UK law (specifically the MDA, the MDRs, and the HMRs), but also at how their passage through the regulatory hoops applicable in their own jurisdiction might help to determine whether they would be lawful here. Given the restrictive nature of access to CBPMs here, that translation exercise must necessarily be approximate, though the exact process remains far from clear. Would it extend, for instance, to a company that sold a licensed medicinal product, prescribed by family doctors in Canada, that would in the UK be an unlicensed ‘special’, requiring a prescription from an authorised consultant?

The FCA’s reference to ‘cannabis oil companies’ also begs questions. As yet, there is no coherent system in the UK for licensing such products: the MHRA stands ready to deal with those that make medicinal claims (which most, inevitably, do not), while the Home Office has no policy to license them, and a parallel issue about whether and when CBD is a ‘novel food’ under EU law remains unresolved. So, what the FCA must mean is that the listing of companies selling such products depends on whether they either contain no measurable THC at all (in which case they would not be controlled drugs, and there would be no POCA issue), or fit the criteria for ‘exempted products’ in the MDRs (which would, because of the 0.1 mg maximum THC content, be of no practical use to manufacturers). A Way Forward In fairness, the FCA’s statement is explicitly intended not to put an end to the debate about cannabis and POCA, but to bring it into a more formal and authoritative setting. A more detailed guidance consultation is promised, which will provide those with an interest in the regulation of medicinal cannabis investments with a welcome opportunity to thrash out some of the questions of detail, and to lobby for a more workable approach than we have now. Investors will welcome the prospect of not having to take advice or make reports to the NCA on a regular basis, while banks may welcome the opportunity to profit from the business of customers they have previously turned away. Most importantly, new opportunities for investment will help further drive developments and growth in a sector that promises significant potential gains for patients in need.

John Binns

John Binns is a partner at BCL specialising in all aspects of business crime, with a particular interest in confiscation, civil recovery and money laundering under the Proceeds of Crime Act 2002 (“POCA”). His business crime experience includes representing suspects, defendants and witnesses in cases invoking allegations of bribery and corruption, fraud (including carbon credits, carousel/MTIC, land-banking, Ponzi and pyramid scheme frauds), insider trading, market abuse, pricefixing, sanctions-busting, and tax evasion. He has coordinated and undertaken corporate investigations and defended in cases brought by BEIS, the FCA, HMRC, NCA, OFT, SFO and others.

David Hardstaff

David Hardstaff is an associate solicitor at BCL specialising in criminal and regulatory law. He advises individuals and companies in relation to controlled drug licensing and AML/Proceeds of Crime considerations in the context of the domestic and international cannabis market. He has particular experience in advising and representing individuals accused of sexual offences, drugs offences and offences involving violence. He is an experienced police station representative and advocate and represents clients in a broad range of proceedings at the Magistrates’ Court, Crown Court and Court of Appeal.