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Doing business with a state-legal cannabis company: What could go wrong?
Cannabis businesses licensed under Michigan law are like other businesses in many ways; they require goods and services, locations in which to operate and other support and assistance. These businesses are becoming more and more common in our communities throughout Michigan. But in one important respect, cannabis businesses are unique — their activity violates the federal Controlled Substances Act even if lawful under state law.
What does federal illegality mean to those who do business with cannabis companies? Here are a few examples.
Banking: One significant consequence of federal cannabis illegality is that banking for cannabis businesses also is illegal. It is a violation of several different federal laws, including money laundering, for a bank to knowingly allow a deposit or transfer of money traceable to a cannabis business, even one legal under state law.
While a few banks in Michigan knowingly provide services to the cannabis industry, most will not. A noncannabis business that interacts with and is paid by a cannabis company could jeopardize its own banking relationships.
Losing a bank can be a minor inconvenience or a major problem. Imagine the disruption if a long-term bank suddenly told its customers to take their accounts elsewhere — and maybe pay off all the loans before doing so. The bank customer should never address this potential issue by not truthfully informing its bank of the source of deposits if asked — that is bank fraud, a serious federal crime.
Aiding and abetting: Federal criminal law could make assisting a cannabis business a crime called aiding and abetting. For several reasons, aggressive federal law enforcement of marijuana law against those who support the state-legal cannabis industry is rare.
However, if a cannabis business strays from the requirements of state legality, even if its departure is unknown to its vendors, the risk to its affiliates of entanglement in federal law enforcement increases. Therefore, those who conduct business with a cannabis customer should expect ongoing customer due diligence to increase, to help assure the customer remains compliant with state law.
Financial default: Most commercial relationships hold the potential for financial default, and cannabis customers are no exception. As unpleasant as it is, the availability of the federal bankruptcy law can benefit creditors whose customers are in financial trouble by providing an orderly court-supervised process to resolve these situations.
However, another consequence of federal marijuana law is that bankruptcy relief is not available to cannabis businesses. So, if a cannabis customer gets into financial distress, there will be no automatic stay or plan of reorganization. Rather, there likely will be a free-for-all to dismember the debtor, with the strong and the quick (or an insider) taking from others.
RICO: The 1970s federal Racketeer Influenced and Corrupt Organizations Act, or RICO, was designed as a tool for law enforcement to fight organized crime, including drug rackets and cartels violating the Controlled Substances Act. But government law enforcement isn’t the only potential RICO plaintiff.
The law also allows a “private right of action” where private citizens can sue other private citizens in federal court for damages arising out of actions like “aiding and abetting” violations of law. If a cannabis business is sued by an anti-marijuana activist under RICO, there’s a good chance the plaintiff could add noncannabis vendors and affiliates to the list of defendants and accuse them of aiding and abetting. Few cases have resulted in verdicts against the defendants, but the legal costs of defense can be very high.
Real estate: Providing real estate to a known cannabis business under a lease, license or even a land contract sale can violate technical provisions of many state and federal drug laws and trigger possible remedies like forfeiture. Like the risks associated with aiding and abetting, the risks to real estate owners are relatively rare. But rare isn’t never, and for the business that gets targeted, rarity is little comfort.
Despite risks and challenges like those described above, the legalized marijuana industry continues to expand and mature. Thirty-three states have legalized medical marijuana, and 11 have gone farther by legalizing recreational use. The successful supporters of this expansion are those who have come to understand the risks and to thoughtfully manage them.
Bob Hendricks is a corporate attorney for Warner Norcross + Judd with 35 years of legal experience, including the past six years focused on cannabis as Michigan’s laws in the area have evolved. He can be reached at firstname.lastname@example.org.