Investing in State-Legalized Marijuana Operations: Understanding Your Risks
The question of whether to invest in state-legalized marijuana businesses has garnered a lot of attention. There are opportunities for investment funds and individuals to participate in this new frontier of investments. It's been referred to by some as the new Gold Rush. Yet the risks are not limited to financial ones. Last month, the Department of Justice issued guidance to federal prosecutors for determining whether to prosecute individuals or entities that engage in financial transactions involving proceeds from marijuana-related businesses. FinCEN issued complementary guidance the same day, seeking to clarify reporting obligations for financial institutions that provide banking services to marijuana-related businesses.
Companies not regulated by the Bank Secrecy Act may be better positioned. They are not subject to the new FinCEN requirements that impose burdensome due diligence and seemingly continuous monitoring of the activities of any client or customer with a marijuana-related business. Nonetheless, risks remain for any company or individual that wants to invest in or provide services to a marijuana-related business. While now legal in a few states, sales of marijuana remain illegal under federal law, and transactions involving the proceeds of marijuana sales can serve as the basis for a federal money laundering prosecution. Further, persons or entities located in states that do not allow the sale of marijuana risk criminal exposure under their own state's laws if they invest in or provide services to marijuana-related businesses, even if the marijuana-related business itself operates in a state like Colorado or Washington that permits such sales. Companies should be aware, for example, that the laws of New York provide for expansive criminal jurisdiction over conduct that touches New York in any way. Because the application of those laws in the context of a marijuana-related business that is legal in another state is novel and uncertain, companies must carefully consider how and where to conduct their transactions in order to avoid or minimize the risk of liability.