You’re a federal prosecutor. An FBI agent comes into your office and tells you that he has conclusive evidence that a U.S. company has invested $25 million in a foreign drug cartel that manufactures and sells heroin in that foreign country and beyond. Is there any doubt that you, as the prosecutor, take that case? Probably not. But take that same scenario and change that drug cartel to a Canadian company that manufactures and sells cannabis in full compliance with Canadian law. Do you still take the case? The answer for now appears to be likely not.

There are at least two questions that should come to the mind of any U.S. executive considering an investment in a foreign cannabis company: is it illegal? and would the federal government likely be interested in bringing criminal charges?

Are Investments in Foreign Cannabis Companies Illegal?

Although the trend of marijuana legalization has been picking up steam in various states and around the world, the U.S. federal government has not followed suit. Marijuana remains a Schedule I controlled substance under the Controlled Substances Act, and it remains illegal under federal law to cultivate, process, manufacture, distribute, or sell marijuana—or to conspire to do or aid and abet any of those things.

But that does not necessarily mean that an investment in a foreign cannabis company would be illegal under federal law. Take money laundering, for example. It is illegal under federal law to knowingly engage in a financial transaction involving the proceeds of certain specified kinds of unlawful activity. Drug trafficking, specifically in marijuana, falls within that definition.

It does not follow, however, that any investment in a foreign cannabis company would automatically violate the money laundering laws. What if the investment was a purchase of stock on a foreign stock exchange in a non-U.S. cannabis company operating legally in the foreign jurisdiction? What if the investment was a purchase of assets of a non-U.S. cannabis company operating legally in the foreign jurisdiction? In both cases, the U.S. company may technically be engaging in a financial transaction that “involves” activity that is illicit under U.S. federal law, but: the U.S. company is far removed from the illicit activity, and the activity is not illicit under the law of the jurisdiction in which it is occurring. It is not clear that the money laundering laws are intended to reach so far.

What Is the Likelihood of Criminal Prosecution?

Even if a U.S. company’s investment in a foreign cannabis company that is operating legally in a foreign jurisdiction technically violates U.S. federal law, it is not clear that federal prosecutors would be likely to do anything about it. The Biden administration has yet to take an official position on federal enforcement priorities relating to the marijuana industry, but there are some signs that prosecution is unlikely, at least where the activities at issue are legal under the law of the jurisdiction in which those activities occurred.

• At his confirmation hearing, Attorney General Merrick Garland signaled that the limited resources of the Department of Justice (DOJ) will not be expended to pursue those in compliance with state-regulated cannabis programs.
• Since 2014, Congress has withheld funding to the DOJ (pursuant to the Rohrabacher-Blumenauer Amendment to federal spending bills) to prosecute state-compliant medical marijuana businesses and individuals involved in those businesses. The DOJ does not appear to have pursued state-compliant adult marijuana use businesses either.
• The United States Department of Treasury, Financial Crimes Enforcement Network (FinCen) issued its own guidance that references a previous DOJ memorandum from former Deputy Attorney General James M. Cole in effect during the Obama administration. The Cole memorandum took a narrower view of federal enforcement priorities relating to state-compliant medical marijuana business. Although the Cole Memorandum was rescinded by former Attorney General Jeff Sessions on Jan. 4, 2018, FinCen does not appear to have taken adverse action against financial institutions who comply with the FinCen guidance.

Those signs have been borne out in the real world. There are numerous examples of substantial investments that have been made in cannabis companies that have not been prosecuted, criminally or otherwise, by the federal government.

• In 2017, Constellation Brands, Inc., an American beer, wine, and spirits company, invested $4 billion (USD) into Canopy Growth Corp., a Canadian cannabis company that is traded on NASDAQ and the Toronto Stock Exchange.
• In 2021, Scotts Miracle-Gro, an American manufacturer of consumer lawn, garden, and pest control products that is listed on the New York Stock Exchange, formed a subsidiary, known as the Hawthorne Collective, for the purpose of making nonequity investments into cannabis companies. The Hawthorne Collective, in turn, provided a $150 million convertible loan to a Canadian cannabis investment and acquisition firm named RIV Capital.
• On March 30, 2022, RIV Capital announced that it was acquiring Etain, LLC and Etain IP, LLC, a cannabis business legally licensed in New York. It was reported that the cash for the deal came from the $150 million convertible loan provided to RIV Capital from Scotts Miracle-Gro in 2021.

Far from being conducted clandestinely, these transactions were heralded in press releases, just as any other major business investment would be. And yet the federal government has remained silent, at least to date.

Conclusion

There are many examples in our society of situations in which things may technically be illegal, but not everyone gets in trouble for it. A live look at virtually any U.S. interstate will confirm that not every speeder gets cited for breaking the law. But whether that concept applies to a U.S. company that passively or even actively invests in a foreign cannabis company remains to be seen. On the one hand, signs point to a kind of unofficial safe haven, provided that the cannabis operation is legal in the jurisdiction in which it operates. On the other hand, the federal government’s apparent indifference could reveal itself to be a false sense of security that turns out to be a trap. But one thing is for sure: the nascent cannabis industry opens up just as many risks as it does opportunities. Anyone considering investments touching on that industry would be wise to stop and investigate the opportunity carefully before signing on the dotted line.

Reprinted with permission from the May 13, 2022 issue of The Legal Intelligencer. (c) 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.