Listing applications by cannabis companies – FCA statement
21 October 2020
The FCA has clarified its approach to applications to list in the UK made by cannabis-related companies.
The statement acknowledges the uncertainty surrounding cannabis-related ventures from a money laundering perspective, given the distinction between recreational cannabis companies and those operating in the medical space. Those in the former category are prevented from listing in the UK, whereas those in the latter may be permitted to list, with relevant considerations depending on whether they are UK or overseas-based. In this article we examine whether the FCA’s statement assists on the complicated proceeds of crime analysis relating to investment in cannabis products.
Different legal regimes for cannabis products
The UK’s legal framework governing the use and supply of drugs is less permissive than in other parts of the world, such as North America. The possession, production and supply of cannabis and cannabis-related products is illegal in the UK, subject to a licensing regime. This means that companies wishing to possess, supply, produce, manufacture and import or export cannabis-based products for medicinal use will require a Home Office Controlled Drug licence to lawfully undertake these activities. As of November 2018, there are limited exceptions and cannabis can be prescribed for medicinal use by registered doctors and pharmacists in the UK without the need for a Home Office licence. However, unlike Canada, for example, where recreational (and medicinal) cannabis use has been legal for several years, recreational cannabis is still unlawful in the UK.
This has given rise to some knotty UK money laundering questions for investments in cannabis ventures that are legal abroad.
Proceeds of crime issues
The distinction between medicinal and recreational cannabis, both in the UK and abroad, is particularly significant for investment opportunities in cannabis companies, given the UK’s money laundering laws.
Money laundering is an offence in the UK under the Proceeds of Crime Act 2002 (POCA). Central to POCA is the concept of “criminal property”. Property is considered to be “criminal property” under POCA if it constitutes the benefit of criminal conduct (i.e. the proceeds of crime). The criminal conduct can occur anywhere in the world. Where conduct occurs overseas, it need not be illegal under local law for POCA to apply, provided it would be a criminal offence with a maximum sentence of over 12 months if it occurred in the UK. The conduct is in effect transposed from overseas to the UK.
Under the Misuse of Drugs Act 1971, possession of cannabis carries a maximum sentence of five years’ imprisonment. For the production or supply of cannabis, it is twelve years. This means that companies that become involved with proceeds that derive from the possession, production or supply of cannabis, may be exposed to criminal liability for money laundering under POCA. Where the possession, production or supply of cannabis occurs overseas, that conduct is transposed to the UK.
In practical terms, POCA would therefore appear to present a number of challenges for the investment community, particularly in the recreational cannabis industry. Dividends from investments in a legal (in Canada) recreational cannabis company in Canada, for example, would constitute the proceeds of crime in the UK, whether they are paid directly or as part of intra-group profit sharing arrangements.
Medicinal use – a question of licensing?
Given the issue of transposing conduct under POCA, the position in relation to medicinal (or mixed medicinal and recreational) cannabis is less clear where overseas companies are concerned. The possession, production and supply of cannabis for medicinal purposes is an activity that is licensable in the UK – if a licence were to be granted, such conduct would cease to be criminal. However, just because a licence could be granted, does not mean it necessarily has been, or will be.
A key question is whether the “conduct” should be viewed as: the production and supply of cannabis in isolation, or the production and supply of cannabis for purposes which are, or could be, authorised under a local statutory regime. This has not been resolved as far as cannabis is concerned, which leaves open another question – whether or not equivalent dividends from a Canadian medicinal cannabis company would be criminal property under POCA. Companies approaching this question for their own compliance purposes have differing views on the degree of risk that is acceptable in light of this inherent legal uncertainty.
FCA statement – overseas-licensed companies
In its recent statement on listings of cannabis-related companies, the FCA acknowledges the complexity of the UK’s money laundering framework for this industry. Although the statement primarily addresses the FCA’s approach to assessing listing applications, there are also some clues about the FCA’s consideration of the practical issues described above:
- Unsurprisingly, the FCA considers the proceeds of recreational cannabis companies, wherever situated, to be criminal property under POCA.
- Investment in overseas-licensed medicinal cannabis businesses remains, says the FCA, a “legally complex area”. The FCA considers that there “remains a risk” that the proceeds from overseas medicinal cannabis business may constitute “criminal property” for the purpose of POCA. This includes where the company possesses a licence issued by an overseas medicines or pharmaceuticals licensing authority.
- For medicinal cannabis and cannabis oil companies, the FCA distinguishes between companies based in the UK (which have received the requisite Home Office licences and which therefore may be appropriate for listing in the UK) and overseas-licensed companies.
For overseas-licensed companies, the FCA will only consider a listing application if it is satisfied that POCA does not apply. The FCA has confirmed that before making a decision on whether to admit a company to the Official List, it will assess the legal basis of the company’s overseas activities, for example “the nature of the local licensing and the licences the company holds”. The company will need to satisfy the FCA that its activities would be legal if carried out in the UK. This presumably means that a licence could, in equivalent circumstances, be granted within the UK, had the medicinal cannabis cultivation, possession or supply been carried out here. The FCA has not yet provided guidance on the sorts of details and considerations that would inform such an assessment, and a consultation on guidance is due to follow.
It will be interesting to see whether, for example, in respect of companies cultivating cannabis overseas, the FCA will expect the POCA risk to be assessed and documented through the criteria the Home Office would apply in the UK, such as an analysis of the commercial end use and the strength of the plant or seed produced, in order to assess whether equivalent cultivation in the UK would be capable of being licensed by the Home Office. This underlying analysis seems likely to be sensible in any event because, as made clear by the FCA, “we can’t assume a person who has been licensed in an overseas country would receive a licence here in the UK as licensing regimes differ globally.”
Suffice to say, this guidance from the FCA does not eliminate the uncertainty around transposing overseas conduct, as was flagged by the Law Commission in its 2019 report on the AML SARs regime. In that report, the Law Commission acknowledged the difficulties created by the UK’s money laundering framework for investments in cannabis-related companies.
The legal position in the UK is not straightforward, and there is significant discrepancy in opinion within the investment community as to the boundaries of cannabis risk and compliance.