Canada’s New Cannabis Act – Harsh New Offences; Money Laundering; Why Cannabis Stores Can’t Get Bank Accounts; Role of Organized Crime

By Christine Duhaime | April 17th, 2017

Canada introduced a new Cannabis law, Bill C-45, the Cannabis Act, expected to come into force in July 2018. Skip to Part 2, below, if you just want to review the new law.

Part 1 – Background on Current Law, Illegal Dispensing; Denial of Bank Accounts

Illegality of Cannabis Sales Except for Medical Purposes

Until the Cannabis Act comes into force, it is illegal to sell or have cannabis except as authorized for narrow medical purposes.  Cannabis is a prohibited drug under the Controlled Drugs and Substances Act similar to cocaine or opium (the latter are Schedule I and the former is Schedule II). Possessing cannabis illegally is an indictable offence which carries a term of incarceration of up to five years. To obtain cannabis for medical purposes involves a person receiving authorization from a doctor to buy a small amount for personal use from one of 42 federally licensed sellers, or to grow it themselves.

Stores known as “dispensaries” or “compassion clubs” in Canada are illegal, meaning they are not authorized to sell cannabis for medical or any other purposes. There is no so-called “grey” area in respect of the legality of dispensaries, cannabis stores or compassion clubs. Having a license from a City, or municipality, such as Vancouver, does not make a cannabis store or a dispensary “legal”, as municipal law does trump federal law.

Moreover, the cannabis products sold in stores, dispensaries and such are illegally supplied, and unregulated. The law in Canada does not permit stores, dispensaries and cannabis clubs to acquire cannabis supplies.

Until the Cannabis Act is brought into force, the only legal way to obtain cannabis is from one of the 42 licensed providers and only for legitimate medical purposes.

Except for the 42 licensed producers, it is illegal to advertise or promote the sale of cannabis. Promoting cannabis that is not authorized contravenes the Competition Act, among others.

Difficulty in Obtaining Bank Accounts

Cannabis storefront businesses often cannot get bank accounts and the reason is because only cannabis sold for medical purposes by one of 42 federally licensed providers is legal.

The indictable offence provisions that govern cannabis sales and distribution mean that the proceeds of sales that are illegal (occur at venues not federally licensed or regulated) are proceeds of crime, as that term is used in global money laundering law. Because they are proceeds of crime, financial transactions associated with those businesses, irrespective of the amount, are reportable to FINTRAC under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act as suspicious transactions by banks, credit unions, casinos, money services businesses, accounting firms, notaries, stock brokers and insurance companies.

It is very expensive for financial institutions to monitor, report, record and generally implement systems to comply with anti-money laundering law if they were to bank cannabis stores.

In addition, the Criminal Code of Canada makes it an offence for anyone, including banks, credit unions, directors, officers, law firms, or any entity to transfer, send, deliver, transport or deal with money that they know or believe is from the illegal sale of drugs (such as may occur if a cannabis transaction is not a licensed one). As a result, no law firm (and ergo no compliance officer at a bank) can reasonably sign off on an opinion to a bank that it can provide banking services to a cannabis store, dispensary, or compassion club that is not federally licensed.

Cannabis stores operate as all-cash businesses because they cannot get bank accounts and a typology for anti-money laundering compliance officers is large volumes of cash that cannabis dispensaries try to deposit at casinos, banks, money services businesses and such.

In this story on VICE, a person who owns a number of cannabis dispensaries alleges that a credit union called CCEC provides banking service to cannabis stores in Vancouver, despite the Criminal Code, Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Controlled Drugs and Substances Act and that the only way to accept credit cards as a merchant is to lie to an issuing financial institution (a criminal offence and an indictable offence under the Criminal Code). Lying to an issuing financial institution to obtain financial services involves lying to obtain an incorrectly coded merchant number (for example, coded as flower sales rather than drug sales) and is not recommended. In the US, officers and directors of Canadian companies who have lied to obtain merchant codes (usually in the online gambling business) have been prosecuted for money laundering and bank fraud and faced hundreds of years in jail.

It is not impossible to get a bank account in Canada for a cannabis business but it is difficult.

Filing Suspicious Transaction Reports on Cannabis Stores etc. 

People, including lawyers, cannabis entrepreneurs and others seem to be under a misapprehension that there are no suspicious transaction reports being filed to Fintrac in Canada or FinCEN in the US in respect of cannabis operations. There are numerous such filings taking place daily because, as mentioned above, the proceeds of sales from an unlicensed cannabis business is proceeds of the commission of a crime and must be reported by reporting entities. According to DSA (here), in the US, for example, between 2014 and 2015, 84% of American states filed cannabis related suspicious activity reports to FinCEN. And interestingly, there were 374 financial entities that filed including banks, credit unions, mortgage companies, stock brokers and casinos. Instances where a bank filed a suspicious transaction report include when it terminates a banking relationship with a cannabis company for anti-money laundering law purposes.

Money Muling to Vancouver

Because cannabis stores cannot get bank accounts, they move money across the country and from Canada to the US, and vice versa. In this story, the government arrested what is called a “money mule”, a person who moves money. In this case, the money was being muled allegedly for a cannabis chain called Canna Clinic. The alleged money mule was arrested with $590,000 cash (in $20 bills) being muled to Vancouver. The owner of the cannabis store allegedly informed CRA that $590,000 was being moved to Vancouver to pay its GST. The person with the money, however, told the police the money was his and he earned it selling videos. The $590,000 is subject to an action by the government for forfeiture as proceeds of crime allegedly tied to sales from the cannabis store – the cannabis store owners appear to corroborate that story by taking the position that it is for the payment allegedly of GST they owe. For the GST owed to be $590,000, as the cannabis store allegedly informed CRA, it means that the cannabis store’s gross sales in one store in Ottawa are $11.8 million every two weeks. That is not likely.

Online Prescriptions; Sale to Minors

Vancouver has stories of minors who attend at dispensaries and are sold cannabis, and of other stories of people “consulting” doctors online in a back room of a dispensary who write an online prescription for a person to buy cannabis for purported medical purposes. According to studies by the US, 11% of children aged 15 years old and older in Canada use cannabis, and for those between the ages of 15 – 24, in Canada the rate is 24%. Canada holds the record as the country with the highest percentage of minors who use cannabis.

According to this story, a former physician, Rob Kamermans, wrote over 15 prescriptions per day for cannabis over a one year period (4,000) to strangers he met on Skype across Canada. Physicians are licensed provincially, not nationally, and cannot practice medicine beyond provincial borders. He was charged with money laundering, fraud and forgery in connection with cannabis prescriptions and his medical license was revoked for incompetence.

Associations with Criminality 

Dispensaries that are not federally authorized exist in many parts of Canada pursuant to which there appears to be little municipal enforcement to shut them down until recently when the federal government appears to have mandated a national plan to raid numerous cannabis dispensaries. Those raids are continuing, resulting in some decrease in the number of cannabis stores operating. As well, judges are being asked to ensure that employees, managers and owners of cannabis stores that are arrested and prosecuted are given criminal records. Having a criminal record will mean that those people cannot enter the cannabis business under the Cannabis Act.

This story describes how in Canada a person with a criminal record who was incarcerated, is operating cannabis stores across the country. In 2015, Canada’s Criminal Intelligence Service reported that over 50% of the 657 organized criminal groups in Canada are known or suspected to be involved illegally in the cannabis trade. A Canadian government member of Parliament said that “the decision to sell or not to sell to a child is often made by a gangster.”

Since 2013, the government has been concerned over the involvement of organized crime in the supply, distribution and sales of cannabis, recently noting that transnational criminal organizations, including the Hells Angels, are “behind most of the [illegal unlicensed] dispensaries.” And according to this story, a well-known Toronto man with alleged links to organized crime was involved in the cannabis business and even formed an association of cannabis dispensers.

In addition, Canada is the primary source of cannabis sales to the US originating from BC, Ontario and Quebec.

Because cannabis is illegal in all but one country over the globe, organized crime tends to run drug and cannabis operations. In Italy, typically this is the Mafia but  there is also Chinese Mafia in Italy taking over cannabis cultivation and trafficking. The Italian authorities are also concerned with the increased evidence of terrorists, namely ISIS (the Islamic State), trafficking cannabis through North Africa and Italy, and funding terrorist activities using the financial system. In Mexico, drug cartels are adjusting to changes in historic cannabis sales. And here, the Nigerian Mafia traffic cannabis through the Ivory Coast, laundering the proceeds in bars and running prostitution services.

And now it would appear that foreigners, including Canadians, attempting to enter the US with any connection to cannabis, are apparently being denied entry to the US permanently, or deported.

US Enforcement

Several states in the US authorize medical and recreational cannabis use, although federal law prohibits it. The Trump administration has said that it will leave medical cannabis use alone but will go after recreational uses that contravene federal law.

Both Colorado and Alaska recently backed away from plans for cannabis social clubs over concern with federal enforcement. 16 people last month in Colorado were indicted for money laundering and drug trafficking of cannabis, and their bank accounts seized. Banks are concerned with indictments because they invite AML compliance reviews and often AML fines for failures to report money laundering activities.

Last week, the new US AG, Jeff Sessions, sent a memo to members of a task force focused on crime reduction and public safety asking for a review of existing policies of the enforcement of cannabis to reduce violent crime. The new Drug Czar, Tom Marino, is not in favour of medical or recreational cannabis. All signs seem to be pointing towards federal enforcement of recreational uses of cannabis, and consistent with the Executive Orders of January calling for the prosecution of members of organized crime and foreign nationals (Canadians and Mexicans in particular), engaged in the drug trade.

Bitcoin in the picture

The focus on Canada makes sense – in addition to Canada being a major source country to the US of cannabis, Canada is also a source country of fentanyl to the US, which is imported from China and paid for with Bitcoin (this US criminal complaint describes how fentanyl is imported to the US from Hong Kong and paid for with Bitcoin; here is another similar story of fentanyl being imported using Bitcoin). Here is a story of one of many Canadians, ironically a cannabis activist on welfare, who was arrested for importing $14,000 worth of fentanyl illegally into Canada from China and paid for with Bitcoin. Apparently, US law enforcement has been to Vancouver numerous times over the issue of Bitcoin and drug importations.

Part 2 –  New Cannabis Law

Purpose

Clearly the existing cannabis system in Canada seems to have significant issues that need remediation.

Against the backdrop of the above, the purposes of the Cannabis Act are clear and they include more harsh measures to protect minors and to remove organized crime from Canada’s legitimate cannabis system.

The Cannabis Act is also designed to act as a world model, meaning that Canada’s goal is to show that legalizing drugs for recreational consumption can be done in such a way as to promote and protect the integrity of the system and respect the rule of law. There have been statements that the government will allow existing cannabis dispensaries to be registered even though they operated in violation of the law. There are parallels here as well to the gambling industry which faced a similar issue. In the gambling industry in Canada (particularly British Columbia), there was zero tolerance for previous criminality to preserve integrity of Canada’s reputation in gambling but in the UK, it was handled differently. The issue is if, and how to on-board companies and persons with a history of non-compliance with federal law into a new legal regime that is designed for compliance with the law. In other words, can a non-law abiding person or company become law abiding? Even if they can, are those the people the federal government will or should reward with a licence to operate or should the rewards go to those who have no record of breaking the law? These decisions may be left to provincial governments at the end of the day. As noted above, we have been though this process in the past in the gambling industry.

The purposes of the Cannabis Act are to:

  • make it a serious criminal offence to sale cannabis to minors;
  • make it a serious criminal offence to possess, sell, distribute, export cannabis without legal permission;
  • make it a serious criminal offence to promote, advertise, label or package cannabis to appeal to minors;
  • establish regulations and a registration system for cannabis that will determine who can enter the sector; and
  • to increase the penalties for drug-related offenses connected to cannabis.

Registration to Sell, Distribute

Under the Cannabis Act, the government will establish classes of registration including for selling, transporting, distributing, delivering, testing, producing and advertising of cannabis.

Disclosure of beneficial owners

In order to be registered, a legal person must disclosure its shareholders and controlling persons, whether indirect or direct – so beneficial shareholders, investors, those who hold pledges of shares and such will be relevant.

Integrity 

In order to address integrity issues affecting the market, a person will not be registered or licensed if they are associated with criminality, such that there is a risk of cannabis under their control being diverted to organized crime or illicit markets; they make false statements or omitted material information; they contravened the Controlled Dugs & Substances Act; or there are reasonable grounds to believe they contravened an order under the Controlled Drugs and Substances Act.

Other grounds for refusal include not getting a security clearance and circumstances when it is not in the public interest to register a person. Whether formerly operating a cannabis store in violation of federal law will disqualify a company or a person from being registered (because breaking the law is not in the public interest or rewarding a company or a person for years of breaking the law), has yet to be determined by the government. But that is the key issue.

Provincial control

The Cannabis Act allows the provinces to regulate the selling and distribution of cannabis if provincial regulation is consistent with the Cannabis Act. However, like gaming control legislation, the authority to operate a cannabis business will only be provincial – a company will not be able to operate across provincial boundaries absent the provinces entering into inter-provincial agreements. Unless the regulations say something different, companies will need to register in each province to operate there.

Distribution of Cannabis

Under the Cannabis Act, it is prohibited to distribute illegal cannabis, to distribute cannabis to a person under 18-years-old or to distribute cannabis to any person above a certain amount without being registered and authorized to do so.

Possession of Cannabis

Under the Cannabis Act, it is prohibited to possess cannabis above a certain amount, or to possess illegal cannabis.

Advertising of Cannabis

Under the Cannabis Act, it is prohibited to promote cannabis, or an accessory of it, or any service associated with it by communicate information about its price, in a way that would appeal to minors, to have testimonials, or to depict people or animals, or that includes emotions, glamour, excitement, vitality or daring.

It is also prohibited to include false or misleading advertising or comments in respect of cannabis.

And it is prohibited to advertise or promote cannabis outside of Canada or to sponsor events, or name a facility after cannabis – like a hockey arena or a one-off event, like a concert.

Selling to Minors

Under the Cannabis Act, it is prohibited to sell cannabis to a minor and it is also prohibited to sell cannabis or an accessory with an appearance that is appealing to minors.

Importing / Exporting

Under the Cannabis Act, it is prohibited to import or export cannabis without authorization.

Offences

Selling, distributing, importing or exporting cannabis to a person without being registered to do so, or selling to a minor, is an indictable offence (relevant for money laundering legislation) and carries a term of incarceration of up to 14 years.

The term of incarceration for possession is up to 5 years.

Regulations

The majority of the legislation refers key provisions to regulations, which because it is delegated legislation, means that they will be drafted without parliamentary review and/or approval. The material parts of the regulations will include the registration requirements.

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