4/8/19 - Promontory Currents: Legalization of Cannabis in Canada Creates Money-Laundering Implications for Financial Institutions
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4/8/19 - Promontory Currents: Legalization of Cannabis in Canada Creates Money-Laundering Implications for Financial Institutions

By Victoria Baker, Marlon Romero, and Osayi Lasisi

On Oct. 17, 2018, Canada joined Uruguay in becoming the only other country to fully legalize the production, distribution, sale, possession, and recreational consumption of cannabis nationwide.

In the United States, the Drug Enforcement Administration still categorizes cannabis as a Schedule I drug. Schedule I drugs have a high potential for abuse and physical or psychological dependence, and they have no accepted medical use under the Controlled Substances Act of 1970. Possession of such drugs is a federal offense (although a few states have legalized the use of cannabis). Moreover, countries such as the United Kingdom, Chile, Germany, and Greece have legalized the medical use of cannabis, but have restricted or prohibited its recreational use.

According to Bloomberg, the recreational cannabis market is projected to grow to $6.5 billion by 2020. While this burgeoning industry will create a number of income-generating and investment opportunities, financial institutions should be aware of two key issues:

International criminalization of recreational cannabis. Most countries have regulations that criminalize any activity that supports other money-laundering activities. For example, in the U.K., money laundering as defined by Section 340(11) of the Proceeds of Crime Act of 2002 includes any act or attempt to aid and abet money laundering. Such actions and attempts are considered offenses in the U.K., even if they are not committed in the U.K. and are legal in the jurisdiction where they are committed.

Similarly, in the U.S., under Section 1956 of the Money Laundering Control Act of 1986, anyone who is knowingly involved in a financial transaction that stems from unlawful activity will be penalized.

Because recreational cannabis is still illegal in most countries, it is imperative that financial institutions with a presence in Canada recognize the increased risk of dealing with organizations that are directly or indirectly involved in recreational cannabis sales, and, accordingly, that they implement the appropriate controls.

Requirements for assessing money-laundering risks in cannabis businesses. There are currently no special requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act for assessing the risks of legal cannabis businesses. However, according to the act, and to Subsection 71(1)(c) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, all reporting financial entities are required to assess the risks of money laundering and terrorist activity associated with each client.

Given the higher apparent financial-crime risk associated with cannabis producers, it is imperative that financial institutions conduct enhanced due diligence to:

  • Assess the risk levels of each business in the cannabis sector
  • Confirm the existence of these businesses as viable operating entities
  • Research ownership structure, including all beneficial owners
  • Document the findings, mitigation measures, and processes for ongoing monitoring and reporting

Financial institutions are necessary intermediaries for the cannabis industry. However, to protect their own organizational interests, as well as the interests of their clients, it is essential that they understand and are able to navigate the various — and often contradictory — domestic and international regulations related to cannabis and money laundering.

As with any opportunity, when an institution is weighing a decision regarding its level of direct or indirect involvement with organizations connected to the cannabis industry, its first step should be to evaluate the potential for profit or loss (both monetary and reputational) against its risk tolerance.


Victoria Baker and Marlon Romero are team leads, and Osayi Lasisi is an analyst, at Promontory Financial Group Canada.