A lot has been written and analyzed regarding foreigners investing in U.S. marijuana businesses. What are the legal ramifications of the reverse though?
If marijuana business is fully legal in a foreign jurisdiction (think Uruguay or Canada in the near future), can a U.S. resident contribute cash in exchange for stock of a company that cultivates and sells marijuana in that jurisdiction? This is timely because Constellation Brands, the New York-headquartered owner of Corona beer and other holdings in the alcohol industry, agreed to buy a significant stake in Canopy Growth Corporation, a Canadian publicly traded cannabis cultivation company. Are they breaking the law? It’s not as simple a question as one might think.
Reuters ran a story on this topic a few years ago. In that piece, the Drug Enforcement Administration (DEA) spokesperson and a financial institution money laundering risk specialist respectively implied and stated outright that such activity violated U.S. law. The DEA spokesperson said that the DEA would be “most interested in those types of activities.”
To our knowledge, the U.S. has never brought charges against a U.S. investor in these limited circumstances, so we don’t have any case law directly on point. But we can review the primary statutes that cannabis investors should be worried about — the Controlled Substances Act and the criminal money laundering statutes.
It is a general rule in the U.S., as stated in 2016 by the Supreme Court in RJR Nabisco Inc. v. European Cmty, that without “clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.” This means statutes that are silent on where they have effect will generally be interpreted as applying only to activities in the United States. And the U.S. does have laws on the books that are intended to be applied outside the United States. For example, the Controlled Substances Import and Export Act (21 U.S.C. § 959) outlaws possession of controlled substances overseas with the intent to import them into the United States. That’s one of the statutes that the U.S. used, for example, to go after Manuel Noriega in the 1990s. To be clear, this statute wouldn’t apply to Canadian operations that have no intent to export marijuana to the United States and intend to only sell it within the Canadian regulated market.
Reading the text of the domestic Controlled Substances Act (21 U.S.C. § 821), there isn’t any clear indication that it is intended to apply to overseas conduct. And in practice, we haven’t seen the United States try to claim that residents who travel to Amsterdam and use marijuana there have violated U.S. law. To the extent that the same statute exists for both possession of narcotics and manufacture of narcotics, it doesn’t look like extra-territorial application would apply.
Money laundering laws, however, are interpreted as having broad extraterritorial reach. So are U.S. investors in Canadian marijuana businesses in danger of violating those laws? 18 U.S.C. § 1957 makes it criminal for someone to knowingly engage or attempt to engage in a monetary transaction in criminally derived property of a value greater than $10,000 when such property is derived from “specified unlawful activity.” This law applies even if the offense takes place outside the United States if it involves a U.S. person or business entity formed in the U.S. “Specified unlawful activity” includes a laundry list of crimes, including violations of the Controlled Substances Act. So that doesn’t look great.
But here’s the thing — if the domestic Controlled Substances doesn’t apply because it only applies in the U.S., and if the Controlled Substances Import and Export Act doesn’t apply because there is no intention to send marijuana product to the United States, then a reasonable argument would be that the business of a Canadian-licensed marijuana company would not constitute “specified unlawful activity.” And the money laundering law wouldn’t apply.
Therefore, Constellation Brands has a solid argument that it isn’t violating U.S. law by making an investment into the Canadian marijuana industry. There are a bunch of caveats here – there’s no way for a blog post like this to have a full legal analysis, and the DEA may well disagree with this interpretation even if it were an airtight legal analysis.
Most U.S. banks will still shy away from offering any services connected with marijuana businesses even in countries that have legalized completely, including Uruguay. But at the end of the day, prosecutors would have an uphill climb if they truly wanted to go after a U.S. resident for investing in a foreign marijuana business that intends to serve that foreign market and is fully compliant with the laws of that nation.