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Assessing Legal Risk When Financing the Cannabis Industry

The majority of states in America have legalized marijuana either for medical or recreational use—yet it remains illegal on the federal level. This poses regulatory challenges for financial institutions operating at the federal level and for some only operating in one state (because some are still subject to federal mandates, e.g., the Federal Deposit Insurance Act). Despite this disparate guidance, the multi-billion dollar U.S. cannabis market continues to expand. Dow Jones partnered with Baker McKenzie and FIBA, a nonprofit trade association of financial institutions from Europe, the United States, Latin America and the Caribbean to examine the provision of financial services to U.S.-based marijuana-related business (MRBs) and the associated legal risks. The report considers both the current regulatory environment and how it may evolve in the future and the results of a survey of compliance professionals at depository institutions. The survey included questions about their views on the regulatory environment, the policies of the institutions they work for and the screening…

DOJ No-Action Letters for the Marijuana Industry?

How to eliminate the marijuana black market? As the COVID-19 crisis continues to ravish state budgets, this question has become even more important, particularly in states like California, which have legalized marijuana but have not seen the expected tax revenues due to the persistence of the “tax exempt” black market. Increased enforcement would help, of course. But the best way to eliminate the illegal market is to support market entry by legitimate businesses. Several states have declared marijuana businesses “essential” and exempt from COVID lockdown requirements. Congressional appropriations riders prevent DOJ from prosecuting medical marijuana businesses that comply with state law. Attorney General Barr has stated that he “accepts” the Cole Memorandum (which essentially says that DOJ will not prosecute state-compliant businesses) and that DOJ will not “go after” state-compliant businesses, whether recreational or medical. As far as we are aware, there have been no federal prosecutions of state-compliant businesses during the Trump Administration. Nevertheless, the possibility of federal prosecution, no…

USDA Delays Enforcement of Hemp Testing

The U.S. Department of Agriculture (“USDA”) announced on February 27, 2020, that it would give hemp farmers a 20-month reprieve from a regulation requiring growers of hemp to have crop THC levels tested at laboratories registered with the Drug Enforcement Administration (“DEA”). The requirement had raised concerns in the industry that DEA-registered labs would be overwhelmed with crop samples at harvest time, leading to delays that could cost farmers sales. Delay in Requirement for DEA Lab Registration The 2018 Agriculture Improvement Act (known colloquially as the “2018 Farm Bill” or simply the “Farm Bill”) removed hemp, defined as cannabis containing less than 0.3 percent THC on a dry weight basis, from the scope of the Controlled Substances Act. The 2018 Farm Bill left open many questions about the requirements for establishing that a substance meets the legal definition of “hemp” and required the USDA to issue guidance on this and related issues arising under the Farm Bill. On October 31, 2019,…

5 Key Issues Raised In Most CBD Product Class Actions

As popular as cannabis has become as a recreational and medicinal agent, that popularity and the nascent nature of the cannabis industry have created a difficult scenario whereby manufacturers and sellers of these products are being sued with increasing frequency. Without a doubt, the legal and regulatory landscape for cannabis is complex. Several dozen states have legalized marijuana for medicinal and/or recreational purposes, but marijuana remains a Schedule I drug at the federal level. The Agricultural Improvement Act of 2018 (more commonly known as the 2018 Farm Bill) removed hemp (defined as cannabis products containing less than 0.3% THC on a dry weight basis) from the Controlled Substances Act. This means that CBD products derived from hemp are no longer controlled narcotics. However, the same is not true for CBD products derived from marijuana (defined as cannabis containing more than 0.3% THC on a dry weight basis). Added to this situation, the U.S. Food and Drug Administration has refused to deem…

The Sessions Memorandum: Two Years Later

January 4, 2020 marked the two year anniversary of the “Sessions Memorandum” in which (then) Attorney General Jeff Sessions rescinded the Cole Memorandum and other Obama era DOJ guidance which essentially stated that DOJ would not prosecute state-compliant marijuana-related activity.  Many saw the statement as a declaration of a new “War on Drugs.” However, a review of DOJ cases brought over the last two years reveals that the Trump Justice Department has largely adhered to the Obama Administration’s enforcement priorities. The Cole Memorandum The Cole Memorandum stated that federal cannabis enforcement resources would be concentrated on cases involving: Revenue from the sale of cannabis going to criminal enterprises, gangs, and cartels,State authorized cannabis activity being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity,Violence and the use of firearms in the cultivation and distribution of cannabis,Distribution of cannabis to minors,Diversion of cannabis from states where it is legal under state law in some…

Podcast Series – Episode 2 – On Federalism and Drug Law

Robert Mikos is one of the nation’s leading experts on federalism and drug law. His most recent scholarship analyzes the struggle among federal, state, and local governments for control of marijuana law and policy, which includes a first-of-its-kind casebook, Marijuana Law, Policy, and Authority. In this podcast, he discusses the intersection of federal and state cannabis law, the prospects for federal reform, the SAFE Banking Act and other hot topics in the field. Global Cannabis Compliance Podcast · Episode 2 – On Federalism and Drug Law

Community Impact Fees and Corruption Risks in State Licensing

The risk of corruption in state cannabis licensing has once again been highlighted by recent reports that a federal grand jury has subpoenaed at least seven Massachusetts cities, including Boston, for information about contracts between cannabis firms and municipalities. The subpoenas apparently relate to “host community agreements,”  a contract between individual cannabis operators and their host community that is required by state law in Massachusetts.  Host community agreements, and similar arrangements in other states that have legalized cannabis, are well intentioned.  But like any arrangement that involves payment for permission to operate, they can be abused for corrupt ends.        Host Community Agreements Massachusetts law requires that, before being awarded a state license, every marijuana business execute a host community agreement (“HCA”), “setting forth the conditions to have a marijuana establishment or medical marijuana treatment center located within the host community which shall include, but not be limited to, all stipulations of responsibilities between the host community and the marijuana establishment…

USDA Issues Interim Final Rule on Hemp

On Tuesday, October 29, the US Department of Agriculture (USDA) established the US Domestic Hemp Production Program through the issuance of an interim final rule (the “Rule”). The USDA published the Rule on Thursday, October 31, in the Federal Register. The Rule took effect upon publication, but the USDA will take comment for 60 days. Pursuant to the Agricultural Improvement Act of 2018 (the “2018 Farm Bill”), the Rule outlines provisions for states and Indian tribes to submit their plans for the domestic regulation of hemp. Such plans will need to be approved by the USDA. The Rule also establishes a federal plan for hemp producers in states or territories of Indian tribes that do not have their own USDA-approved plan. The USDA will evaluate and approve or disapprove the plans submitted to them within 60 days of submission. The goal is to give state and tribal officials enough time to put the plans into action for the 2020 hemp season…

Cannabis Due Diligence: How to Protect Against Corruption in State Licensing

Although prosecution of state-legal sales by licensed and compliant cannabis businesses may not be a current priority for federal law enforcement, prosecution of corruption in the industry clearly is. Consider the following, all of which have occurred within the last three months: The indictment of alleged Rudolph Giuliani associates Lev Parnas and Igor Fruman for, among other things, a scheme to make illegal campaign finance donations in connection with a planned recreational marijuana business in Nevada (according to various reports, they were also interested in licenses in New York, California and Florida); An announcement by the FBI that, “As an increasing number of states change their marijuana legislation, the FBI is seeing a public corruption threat emerge in the expanding cannabis industry”;  A public request by the FBI that, “If you suspect a dispensary is operating with an illegally obtained license, or suspect public corruption in the marijuana industry, contact your local FBI field office”;  The September indictment of the Mayor…

A Cannabis Due Diligence Challenge: Access to Official Records

In recent posts, we discussed lessons learned from recent compliance cases in the cannabis industry, and provided a checklist of key due diligence issues. In both articles, we highlighted the importance of independent verification of state cannabis licenses. Unfortunately, it is not always easy to get official information from state cannabis regulators. Information about cannabis licenses is not always public. This is the case in Arizona, where state law prohibits the release of the names of medical cannabis licensees. In other jurisdictions, license information is usually available, but the presentation of the information ranges from user-friendly databases (California and Colorado) to a series of not-so-user-friendly Excel sheets (Nevada and Oregon). Finally, some state cannabis industries are regulated by more than one agency, which means that verifying licenses may require checking with multiple issuers. For example, California has three different license-issuing regulators. How do states rank on transparency? Galen Diligence has compiled a research guide to accessing official data about cannabis licenses.…