Ethically Navigating Local and State Licensing of Cannabis Businesses: Part 1

As we’ve stated time and time again, the cannabis industry is rampant with risks and scams, and can be an ethical minefield for attorneys to navigate. Legalized cannabis is a multi-billion dollar industry, however, and legitimate businesses need good and ethical attorneys to provide legal advice.

This is complicated, because due to federal laws, an attorney providing legal advice to a cannabis business in compliance with state and local laws could technically be aiding and abetting violations of the federal Controlled Substances Act.

Earlier this month, I gave a presentation to California attorneys regarding ethical representation of cannabis businesses and how to navigate the complicated tension between state and federal laws. I was joined by municipal lawyer Ruben Duran, partner with Best Best & Krieger, who advises public agencies.

This post will focus on the ongoing tension between state and federal laws. My next post will discuss the application of California’s new Rules of Professional Conduct, and the third post in this series will touch on on attorney-client privilege concerns and real life ethical scenarios.

Tension Between State and Federal Laws

MAUCRSA, codified at Business and Professions Code section 26000 et. seq., provides a comprehensive system to control and regulate commercial cannabis activity in California. Civil Code section 1550.5(b), which took effect January 1, 2018, provides that commercial activity conducted in compliance with local and state laws is the lawful object of a contract, not contrary to good morals, and not against public policy. This is important for practicing and prospective attorneys because good moral character is a prerequisite for admission to the bar.

Under federal law, however, commercial cannabis activity is unlawful pursuant to the Controlled Substances Act. An attempt to violate or a conspiracy to commit a violation of the Controlled Substances Act is subject to the same penalties as the underlying offense. Accordingly, there is potential for attorneys to be roped in to a criminal action if they are considered a co-conspirator.

Any investment into a marijuana business puts an individual at risk of criminal prosecution, and those assets, investments, and profits are subject to forfeiture.
Financial transactions that involve proceeds generated by marijuana business can form the basis for federal prosecution under money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act. (18 U.S.C. §§ 1956, 1957.)

For the last several years, a rider to the appropriations bill that funds the Department of Justice (commonly referred to as the Rohrabacher-Blumenauer Amendment or Rohrabacher-Farr Amendment) has provided some degree of protection to certain categories of marijuana businesses. In the case of US v McIntosh, a Ninth Circuit panel held that the rider prohibits the Department of Justice from spending funds to prosecute people engaged in conduct permitted by state medical marijuana laws who fully complied with such laws. The panel wrote that individuals who do not strictly comply with all state law conditions regarding the use, distribution, possession, and cultivation of medical marijuana have engaged in conduct that is unauthorized, and that prosecuting such individuals would not violate the rider. Note that the rider says nothing about adult use/recreational marijuana or manufactured marijuana.

In addition to the potential criminal risks, there are many other ways the federal government is working against the cannabis industry. There are potential immigration consequences (for example, see the recent lifetime entry ban of Canadian investors), bank accounts and credit card accounts may be shut down, TSA pre-check privileges may be revoked, among other perils. On the bright side, national legalization of cannabis in the United States has been a talking point for many congressional representatives lately, and it seems like legalization may be a priority for incoming legislators. We won’t hold our breaths, but federal policy will be something to watch in 2019.

Stay tuned for the next post in this series regarding the application of California’s new Rules of Professional Conduct to attorneys working in the cannabis industry.