Source: https://mcdonaldhopkins.com/Insights/Alerts/2014/09/16/Special-Report-Is-a-legal-marijuana-business-really-legal
Timestamp: 2019-03-23 12:55:53
Document Index: 525828047

Matched Legal Cases: ['§846', '§2', '§841', '§823', '§1306', '§812', '§812', '§823', '§856', '§5313', '§6050', '§5321', '§3522', '§1957', '§1956', '§981', '§856']

Special Report: Is a "legal marijuana business" really legal?
ALERT SEP 16, 2014
As more states legalize marijuana for medical or recreational use, budding entrepreneurs believe they will get rich from marijuana businesses that comply with the laws of a particular state (so-called “legal marijuana businesses”). They see opportunities to grow marijuana, to own marijuana dispensaries, and to manufacture and sell marijuana-related products. Investors and financiers envision huge returns on capital. Vendors and professionals, including lawyers and bankers, see new markets for their products and services. It is a modern day (Acapulco) gold rush. It is also a smoke screen.
Legal marijuana, even for medical use, does not exist. Marijuana businesses that comply with the laws of a particular state are still breaking federal law. Put more bluntly, theses businesses are criminal enterprises. So, third parties that help the business operate, including bankers, investors, lawyers, landlords, real estate brokers, and vendors (“ancillary service providers”) are putting themselves at risk for incarceration, loss of money, and loss of professional licensure. Until federal law is changed, interacting with a legal marijuana business creates great peril.
As discussed more fully below, those who operate marijuana businesses could be prosecuted under several federal criminal statutes. Ancillary service providers can be prosecuted under these same statutes as coconspirators or aiders and abettors. Ancillary service providers also risk civil monetary penalties and asset forfeiture.
Medical marijuana is not legal
A physician cannot lawfully prescribe marijuana, nor can a pharmacist lawfully fill a prescription for marijuana. Federal law carefully regulates controlled substances. It is punishable by up to life imprisonment to “knowingly or intentionally ... manufacture, distribute, dispense, or possess with intent to distribute or dispense, a controlled substance”. The only exception to this sweeping prohibition is that certain persons registered with the DEA (primarily drug companies, doctors, and pharmacists) can manufacture, distribute, and dispense controlled substances. A prescription for a controlled substance is valid only if issued “for a legitimate medical purpose by an individual practitioner acting in the usual course of his professional practice”.
Federal law divides controlled substances into a series of Drug Schedules. Schedule I controlled substances have been determined to have “a high potential for abuse[,] no currently accepted medical use in treatment in the United States [and] there is a lack of accepted safety for use of the drug or other substance under medical supervision”. Marijuana is a Schedule I controlled substance. It is theoretically possible to register to manufacture or distribute Schedule I controlled substances, but as a practical matter, no such registration is available for wholesale or retail marijuana. A number of bills have been introduced in Congress to remove marijuana from Schedule I; until that change occurs, any doctor prescribing marijuana risks losing his DEA registration and could go to prison.
A possible 20-year felony
It is a federal crime, punishable by up to 20 years in prison, to manage or control any place, permanently or temporarily, for the purpose of manufacturing, distributing, storing, or using marijuana. This statute is commonly used to prosecute owners and operators of illegal marijuana grow houses and methamphetamine labs. Nevertheless, a landlord, lender, investor, or ancillary service provider to a legal marijuana business also could be prosecuted under this statute.
Financial transactions with legal marijuana businesses carry additional risk. Because many banks will not accept legal marijuana businesses as clients, these businesses operate extensively in cash. Federal law requires banks, trades, and businesses to report a cash transaction, or series of transactions, that exceed $10,000. Failing to file these reports could result in monetary fines or prosecution.
Federal money laundering laws also apply to certain common financial transactions with legal marijuana businesses. For example, merely receiving a payment of more than $10,000 from a known marijuana business may be a federal crime punishable by up to 10 years in prison. Engaging in a financial transaction for the purpose of promoting or furthering a known marijuana business may be a federal crime punishable by up to 20 years in prison. So, a vendor may be committing a 20 year felony by receiving payment for goods or services that help the legal marijuana business continue operating.
The government can take assets, including profits
Even if there is no prosecution, there is enormous risk that assets will be seized and forfeited. Civil forfeiture laws allow the government to take all of the assets involved in operating the business and any property traceable to proceeds of the business. Assets that could be forfeited include bank accounts, investor capital, profits already paid back to investors, land used to grow marijuana, and the building where the business operates. This risk is real. In one recent case, the Justice Department sought forfeiture of a commercial building whose tenants included a marijuana business operating in compliance with state law.
No immunity from the federal government
Many people incorrectly believe that the U.S. Department of Justice has agreed not to prosecute marijuana businesses that comply with state laws. On Aug. 29, 2013, the Department of Justice issued policy guidance on criminal enforcement of federal marijuana laws (the so-called “Cole Memorandum”). In sum, the Cole Memorandum directs federal prosecutors to generally refrain from prosecuting marijuana businesses that are complying with state law. The guidance does not say that these kinds of businesses are immune from federal prosecution, however. Rather, it states, “prosecutors should continue to review marijuana cases on a case-by-case basis and weigh all available information and evidence, including, but not limited to, whether the operation is demonstrably in compliance with a strong and effective state regulatory system.” While the Cole Memorandum strongly suggests that federal prosecutors should not bring criminal cases against legal marijuana businesses, it does not create immunity. Moreover, the guidance could be rescinded at any time, particularly once a new Administration takes office after the 2016 elections.
It is also important to note that the Cole Memorandum only addresses criminal prosecutions. It does not speak to civil monetary penalties or civil forfeitures, both of which can occur without anyone being charged with a crime. For example, even without a criminal case being filed, a person who manages or controls a premises for growing, distributing, or selling marijuana can be fined up to $250,000 or twice the gross receipts of the business, whichever is greater.
The federal government also has not given definitive protection to banks or other financial institutions that accept funds from legal marijuana businesses. On Feb. 14, 2014, the Department of Justice and the Financial Crimes Enforcement Network (FinCEN) issued similar guidance to financial institutions about transactions with legal marijuana businesses. Here, again, the federal government indicated that it generally would exercise its discretion not to seek criminal penalties or Bank Secrecy Act monetary penalties against financial institutions that provided services to legal marijuana businesses, so long as the financial institutions had robust internal compliance programs. Like the Cole Memorandum, however, the guidance does not rule out present or future federal prosecution for financial institutions that provide services to legal marijuana businesses.
Ancillary service providers to legal marijuana businesses take on tremendous risk aside from possible enforcement action by the federal government. Insurance policies normally contain exclusions for criminal acts. Therefore, an ancillary service provider may have no liability coverage should it be sued for conduct related to its interactions with the legal marijuana business. Lawyers, accountants, doctors, and other professionals could see their malpractice coverage disappear. Similarly, senior executives of private equity funds, hedge funds, and corporate entities affiliated with legal marijuana businesses may breach their governing documents or their fiduciary duties by engaging in illegal activity, without the protection of Director and Officer Liability coverage.
Ancillary service providers also risk losing their livelihood. Frequently, ancillary service providers are regulated by state agencies or licensure boards. Many of these regulators have rules or codes of conduct that prohibit a regulated person or entity from knowingly engaging in illegal acts or assisting others in illegal conduct.
Lawyers cannot provide protection
Businesses frequently use lawyers to protect the business from liability. To accomplish that objective, before taking action, a business will fully disclose its plans to the lawyer in a privileged conversation. Most businesses believe that if they then follow the lawyer’s guidance, they are protected from civil or criminal liability. Those protections do not exist in the legal marijuana area.
First, many lawyers cannot, or will not, provide services to legal marijuana businesses. The ethical rules for lawyers in most states and federal districts prohibit a lawyer from counseling a client to engage in, or assisting a client in, conduct the lawyer knows or reasonably knows is criminal. Violating these rules could potentially result in disbarment. Since a legal marijuana business is a criminal enterprise, lawyers cannot ethically advise a client to proceed with such a business.
A number of states have issued ethics opinions that address how a lawyer can advise a legal marijuana business without running afoul of the lawyer’s ethical duties. For example, the Florida Board of Bar Governors enacted a policy stating that lawyers would not be disciplined “solely for advising a client regarding the validity, scope and meaning of the Florida statutes regarding medical marijuana or for assisting a client in conduct the lawyer reasonably believes is permitted by Florida statutes, regulations, orders, and other state or local provisions implementing them, as long as the lawyer also advises the client regarding related federal law and policy”. At best, the Florida policy would permit a lawyer to merely advise a client about the legal implications of a legal marijuana business. It would not allow a lawyer to assist a client in purchasing real estate, negotiating a lease, drafting distribution contracts, raising funds, or similar transactional services. Not only would those services be unethical, the lawyer potentially could be prosecuted for aiding and abetting an illegal marijuana business.
Second, conversations with a lawyer about legal marijuana activities may not be privileged. Generally, confidential communications between a client and lawyer are privileged. Nevertheless, the so-called crime-fraud exception states that communications with a lawyer in furtherance of illegal activity are not privileged. Therefore, an adverse party (either the government or a private litigant) could assert that all attorney-client communications about the operations and transactions of the legal marijuana business are not privileged and are therefore discoverable in litigation.
Third, the advice of counsel is not a defense to the federal criminal statutes listed above. Advice of counsel negates willful criminal intent, that is, it shows that the alleged perpetrator did not think they were doing anything illegal. The federal drug statutes, as a general matter, do not require proof of willful criminal intent. Rather, a person can be guilty so long as they knew they were interacting with a marijuana business, even if they believed what they were doing was legal.
For these reasons, lawyers can only offer limited services and protections to ancillary service providers who are dealing with legal marijuana businesses.
Businesses and business owners take on tremendous risk when dealing with legal marijuana businesses. They expose themselves to criminal prosecution, loss of assets, civil penalties, loss of licensure, and fiduciary duty litigation. They assume this risk in an environment where they have limited, if any, protection from legal counsel or insurance. The decision to enter the legal marijuana market should be made cautiously and with the advice of legal counsel experienced in criminal, civil, and forfeiture law.
121 U.S.C. §846
218 U.S.C. §2
321 U.S.C. §841(a)(1)
421 U.S.C. §823
521 C.F.R. §1306.04
621 U.S.C. §812(b)(1)
721 U.S.C. §812(c)
821 U.S.C. §823(a), (b) (registration of manufacturers and distributors of Schedule I controlled substances)
9See, e.g., H.R. 499 (113th Cong., 1st Session)
1018 U.S.C. §856
1131 U.S.C. §5313 (requiring financial institutions to file cash transaction reports); 26 U.S.C. §6050I (requiring trades and businesses to file Form 8300 cash transaction reports)
12See, e.g., 31 U.S.C. §5321(civil penalties for willful failure to file CTR); 31 U.S.C. §3522 (criminal penalties for willful failure to file CTR);
1318 U.S.C. §1957 (illegal to “engage or attempt to engage in a monetary transaction in criminally derived property of a value greater than $10,000”)
1418 U.S.C. §1956(a)(1) (illegal to conduct a financial transaction with the intent to promote the carrying on of specified unlawful activity)
1518 U.S.C. §981; 21 U.S.C. 853(??)
16United States v. 2601 West Ball Road, Anaheim, Calif., No. 12-CV-01345 AG-MLG (C.D. Cal. 2012); See Landlord Fights Building Seizure
17The Cole Memorandum can be found here.
18Cole Memorandum at 3
1921 U.S.C. §856(d)
20The Justice Department guidance is located here and the FinCEN guidance is located here.
21United States v. Zolin, 491 U.S. 554 (1989)