As more states legalize cannabis, the likelihood of dealing with businesses in the cannabis industry grows. Doing business with companies that are in the cannabis industry comes with its own set of challenges and risks. Here are 4 things to consider when dealing with a cannabis business.

  1. Not all cannabis businesses are the same.

When picturing a cannabis based business, you probably imagine either a dispensary selling cannabis from glass cases, or a large grow operation.  Those are often the types of businesses featured in news stories, but there are numerous other business types that operate in the cannabis industry. The types of businesses can be categorized many different ways. Service vs product, medical vs recreational, whole plant vs processed, and ancillary vs direct contact businesses. The type of business will directly impact the risk of dealing with them. For instance, there may be less risk when dealing with a business that exclusively produces cannabis medication than there would be when dealing with a small scale grower that sells wholesale to dispensaries. The product produced, the security measure in place, and even social attitudes will impact the amount of risk. Be sure to do you research and know the type of business you are dealing with, the products they offer, the regulatory environment they operate within, and even the compliance mechanisms they have in place. The more you know about the company you will be dealing with; the clearer picture you will have regarding the amount of risk you are assuming by doing business with them.

  1. Know the difference between Federal and state level regulations.

The laws regulating cannabis differ on a federal and state level, and between states. The federal government still classifies cannabis as schedule 1 controlled substance, while some states permit only medical use of cannabis, while other have legalized recreational use. The regulation of medical cannabis from one state to the next will vary greatly. For example, compare the medical cannabis laws of California to the medical cannabis laws of Minnesota, and you will find California has a far more relaxed stance on the regulation of medical cannabis than Minnesota. Not only do the regulations vary by state but the enforcement mechanisms employed will vary. Before you do business with a cannabis company, know the regulations of the state.  Lastly, it is worth noting that some states limit the ability of licensed professionals to work with cannabis businesses. For example, Ohio does not permit attorneys to offer services to those entering into the medical cannabis industry, where Minnesota does. State specific regulations can impact those dealing with cannabis businesses and the degree of support they are allowed to contribute. If you hold a professional license, be sure to check the regulations of your state before dealing with any cannabis businesses.

  1. Federal financial regulations and associated risks.

Federal financial regulations make it difficult for cannabis related businesses to obtain bank accounts with large banking institutions because of the Bank Secrecy Act. The Bank Secrecy Act is the piece of legislation that prohibits money laundering. The federal government still views cannabis as a controlled substance, funds derived from cannabis are viewed as coming from illegal activity. As a result, most of the business in the cannabis industry is conducted in cash. If you are dealing with a business in the cannabis industry you should be prepared to accept payment in cash. Have guidelines in place for how employees are to handle cash from start to finish. Additionally, you should have procedures in place for how you will document cash transactions. It would be worth consulting with an accountant or financial professional to ensure you document your transactions properly to avoid the cost and hassle of defending tax evasion or money laundering criminal charges.

  1. The threat of RICO looms.

The need to know who you are dealing with, and how they conduct business is amplified when doing business in the cannabis industry. Mistakes can carry with them more significant consequences than in other industries. Cannabis businesses that fail to abide by the laws of the state in which they operate, can be considered illegal drug businesses by the federal government. If that is the case, the protections of the Rohrabacher-Farr Amendment would no longer apply. The amendment prevents federal government agencies from using funding to arrest and prosecute caregivers, individuals, and businesses operating under state medical marijuana programs. While I was unable to find an example of the use of criminal RICO charges being utilized, individuals could be subject to such charges in theory. There is one example of civil RICO charges being filed in Colorado by a business that was not happy with the legalization of recreational cannabis in the state. Even though there is no example of RICO being used to prosecute within the cannabis industry, it does not mean it could not be. Be sure to adequately vet any cannabis business you are dealing with to ensure they are compliant with state regulations.

 

Before dealing with a business in the cannabis industry you should do your research. Be sure to know the state specific regulations, and who you are dealing with. If you need help understanding the legal risks unique to the cannabis industry Loop Legal is here to help. We can help you navigate the ever changing legal landscape of the cannabis industry, and help you design the internal procedures and safety mechanisms necessary to minimize legal risk. You can contact Jordan Novak at 612-254-7223 or via email at jordan@looplegalpllc.com.