Legal Considerations when Advising Marijuana / Cannabusiness Clients FEATURED FACULTY:

Transcription

1 Legal Considerations when Advising Marijuana / Cannabusiness Clients FEATURED FACULTY: Matthew R. Abel, Attorney at Law, Cannabis Counsel, P.L.C attorneyabel@me.com

2 Matthew R. Abel, Attorney at Law, Cannabis Counsel, P.L.C Matthew Abel has been a criminal defense lawyer in Michigan for 29 years, and is Executive Director of Michigan NORML. Matthew founded Cannabis Counsel, P.L.C., a five-attorney Detroit, Michigan law firm entirely devoted to cannabis clients and cases, providing both business advice and legal counseling as well as criminal defense in marijuana cases throughout Michigan. Since passage of the Michigan Medical Marihuana Act in 2008, the practice has rapidly grown to include not only business clients and issues, but also employment, drug testing, probation, family law, contract, real estate, landlord-tenant, and other issues surrounding cannabis. Mr. Abel is a lifetime member of the NORML Legal Committee and the National Association of Criminal Defense Lawyers, and a member of Criminal Defense Attorneys of Michigan, the National Lawyers Guild, and the legal committee of the ACLU of Michigan. He has lectured on Michigan Medical Marihuana Law for Oaksterdam University in Michigan, the Michigan Cannabis College, MedGrow Cannabis College, the Michigan Institute for Continuing Legal Education, the Cannabis Career Institute, and to bar associations throughout Michigan. He has lectured at numerous marijuana business conferences. Matt holds college degrees including Juris Doctorate from Wayne State University Law School, Master of Science in Public Administration from Central Michigan University, Bachelor in Philosophy from Central Michigan University, and Associate in Criminal Justice from Castleton State College. Mr. Abel is an Eagle Scout.

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4 C4CM Practice Management Legal Considerations when Advising Marijuana/Cannabusiness Clients Audio Conference Presented by Matthew Abel, Senior Partner, Cannabis Counsel, P.L.C., Detroit, Michigan Current regulatory compliance structures Federal law prohibits marijuana cultivation, possession or use: Possession is a misdemeanor up to 1 year/$1,000 Cultivation or sale is a felony up to 5 years/$250, plants/kilos = mandatory 5 year sentence 1000 plants/kilos = mandatory 10 year sentence 1

5 Federal Memoranda Ogden Memo, October, 2009 Cole Memo, June 29, 2011 Letter to Federal Firearms Licensees, Sept. 21, 2011 Cole Memo II, August 29, 2013 Indian Lands Memo Oct 28, 2014 Tax Memo ILM Released Jan 23, 2015 October 19,2009 MEMORANDUM FOR SELECTED UNITED STATES ATTORNEYS FROM: David W. Ogden, Deputy Attorney General SUBJECT: Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana Typically, when any of the following characteristics is present, the conduct will not be in clear and unambiguous compliance with applicable state law and may indicate illegal drug trafficking activity of potential federal interest: unlawful possession or unlawful use of firearms; violence; sales to minors; financial and marketing activities inconsistent with the terms, conditions, or purposes of state law, including evidence of money laundering activity and/or financial gains or excessive amounts of cash inconsistent with purported compliance with state or local law; amounts of marijuana inconsistent with purported compliance with state or local law; illegal possession or sale of other controlled substances; or ties to other criminal enterprises. 2

6 Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use (June 29, 2011) The Ogden Memorandum was never intended to shield such activities from federal enforcement action and prosecution, even where those activities purport to comply with state law. Persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law. Those who engage in transactions involving the proceeds of such activity may also be in violation of federal money laundering statutes and other federal financial laws Open Letter to All Federal Firearms Licensees (Sept. 21, 2011) Gun Memo, Sept. 21, any person who uses or is addicted to marijuana, regardless of whether his or her State has passed legislation authorizing marijuana use for medicinal purposes, is an unlawful user of or addicted to a controlled substance, and is prohibited by Federal law from possessing firearms or ammunition. Arthur Herbert, Assistant Director, Enforcement Programs and Services, Bureau of Alcohol, Tobacco, Firearms and Explosives 3

7 Cole Memo II Guidance Regarding Marijuana Enforcement (August 29, 2013) Certain enforcement priorities are particularly important to the federal government: Preventing distribution to minors Preventing revenue to criminal enterprises, gangs and cartels Preventing diversion from legal states Preventing use as cover or pretext for illegality Preventing violence and use of firearms Preventing drugged driving and other adverse health Preventing growing on public lands Preventing use on federal property Cole Guidance Regarding Marijuana Related Financial Crimes (Feb. 14, 2014)...if the financial institution or individual is willfully blind to such activity by, for example, failing to conduct appropriate due diligence of the customers activities, such prosecution might be appropriate. Conversely, if a financial institution or individual offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, prosecution for these offenses may not be appropriate. 4

8 Cole Memo III (Feb. 14, 2014) The August 29 (2013) guidance rested on the expectation that states that have enacted laws authorizing marijuana-related conduct will implement clear, strong and effective regulatory and enforcement systems in order to minimize the threat posed to federal enforcement priorities. Consequently, financial institutions and individuals choosing to service marijuana-related businesses that are not compliant with such state regulatory and enforcement systems, or that operate in states lacking a clear and robust regulatory scheme, are more likely to risk entanglement with conduct that implicates the eight federal enforcement priorities. Cole III Disclaimer As with the Department s previous statements on this subject, this memorandum is intended solely as a guide to the exercise of investigative and prosecutorial discretion. This memorandum does not alter in any way the Department s authority to enforce federal law, including federal laws relating to marijuana, regardless of state law. Neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA, the money laundering and unlicensed money transmitter statutes, or the BSA, including the obligation of financial institutions to conduct customer due diligence. Even in jurisdictions with strong and effective regulatory systems, evidence that particular conduct of a person or entity threatens federal priorities will subject that person or entity to federal enforcement action, based on the circumstances. This memorandum is not intended, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal. It applies prospectively to the exercise of prosecutorial discretion in future cases and does not provide defendants or subjects of enforcement action with a basis for reconsideration of any pending civil action or criminal prosecution. Finally, nothing herein precludes investigation or prosecution, even in the absence of any one of the factors listed above, in particular circumstances where investigation and prosecution otherwise serves an important federal interest. 5

9 Dept of Treasury Financial Crimes Enforcement Network (FIN-2014-G001) Issued: February 14, 2014 Subject: BSA Expectations Regarding Marijuana-Related Businesses As part of its customer due diligence, a financial institution should consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a marijuana-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement s priorities. A financial institution that decides to provide financial services to a marijuana-related business would be required to file suspicious activity reports ( SARs ) Filing Suspicious Activity Reports on Marijuana-Related Businesses The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. A financial institution is required to file a SAR if, consistent with FinCEN regulations, the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA, or (iii) lacks a business or apparent lawful purpose.5 Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN s suspicious activity reporting requirements and related thresholds. 6

10 Marijuana Limited SAR Filings A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a Marijuana Limited SAR. Marijuana Priority SAR Filings A financial institution filing a SAR on a marijuana-related business that it reasonably believes, based on its customer due diligence, implicates one of the Cole Memo priorities or violates state law should file a Marijuana Priority SAR. The content of this SAR should include comprehensive detail in accordance with existing regulations and guidance. Details particularly relevant to law enforcement in this context include: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) details regarding the enforcement priorities the financial institution believes have been implicated; and (iv) dates, amounts, and other relevant details of financial transactions involved in the suspicious activity. Financial institutions should use the term MARIJUANA PRIORITY in the narrative section to help law enforcement distinguish these SARs. 7

11 Marijuana Termination SAR Filings If a financial institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program, it should file a SAR and note in the narrative the basis for the termination. Financial institutions should use the term MARIJUANA TERMINATION in the narrative section. To the extent the financial institution becomes aware that the marijuana-related business seeks to move to a second financial institution, FinCEN urges the first institution to use Section 314(b) voluntary information sharing (if it qualifies) to alert the second financial institution of potential illegal activity. Policy Statement Regarding Marijuana Issues in Indian Country (Oct. 2014) Issued by Monte Wilkinson, Director, Office for U.S. Attorneys, USDOJ Executive Indian Country includes numerous reservations and tribal lands with diverse sovereign governments, many of which traverse state borders and federal districts. Given this, the United States Attorneys recognize that effective federal law enforcement in Indian Country, including marijuana enforcement, requires consultation with our tribal partners in the districts and flexibility to confront the particular, yet sometimes divergent, public safety issues that can exist on any single reservation. 8

12 Nothing in the Cole Memorandum alters the authority or jurisdiction of the United States to enforce federal law in Indian Country. Each United States Attorney must assess all of the threats present in his or her district, including those in Indian Country, and focus enforcement efforts based on that district-specific assessment. The eight priorities in the Cole Memorandum will guide United States Attorneys' marijuana enforcement efforts in Indian Country, including in the event that sovereign Indian Nations seek to legalize the cultivation or use of marijuana in Indian Country. Consistent with the Attorney General's 2010 Indian Country Initiative, in evaluating marijuana enforcement activities in Indian Country, each United States Attorney should consult with the affected tribes on a government-to-government basis. When in the judgment of a United States Attorney, significant issues or enforcement decisions arise that may implicate this policy statement, each United States Attorney should keep the Executive Office for United States Attorneys, the Office of Tribal Justice, and the Office of the Deputy Attorney General informed of those matters, in advance of any determination on how to proceed, in order to keep the Department's leadership apprised of significant issues and to maintain consistency Tax Memo ILM (January 23, 2015) Office of Chief Counsel Internal Revenue Service Memorandum Number: Taxpayers Trafficking in a Schedule I or Schedule II Controlled Substance - Capitalization of Inventoriable Costs a producer of a Schedule I or Schedule II controlled substance should be permitted to deduct wages, rents, and repair expenses attributable to its production activities, but should not be permitted to deduct wages, rents, or repair expenses attributable to its general business activities or its marketing activities. 9

13 Taxation advice from IRS A taxpayer trafficking in a Schedule I or Schedule II controlled substance determines COGS using the applicable inventory-costing regulations under 471 as they existed when 280E was enacted. Applied literally, 280E severely penalizes taxpayers that traffic in a Schedule I or Schedule II controlled substance but don t use an inventory method for the controlled substance. When required to use an inventory method, a taxpayer also is required to use an accrual method for purchases and sales of merchandise. Legal marijuana jurisdictions Colorado Washington Alaska Oregon District of Columbia 10

14 Medical marijuana jurisdictions Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Hawaii Georgia Illinois Iowa Maine Maryland Massachusetts Michigan Minnesota Montana New Hampshire Nevada New Jersey New Mexico New York Oregon Rhode Island Texas Tennessee Vermont Washington Washington, D.C. Wisconsin 280 E In 1982, Congress enacted 280E: No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. 11

15 CHAMP v. IRS (U.S. Tax Court, 2007) In the seminal case in this area, the Tax Court held that the taxpayer trafficked in medical marijuana, which is a Schedule I controlled substance, and that 280E disallows all deductions attributable to that trade or business. The Tax Court also held, however, that 280E does not disallow the deductions attributable to the taxpayer s separate and lawful trade or business. Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner, 128 T.C. 173 (2007) ( CHAMP ). In CHAMP, the government conceded that 280E does not prohibit a taxpayer from claiming COGS. Communications Model caveat language for client communications: Any legal advice which may be provided is not intended to assist any person in violating any law, statute or ordinance. 12

16 Additional legal considerations Criminal Defense Domestic Relations Contracts Employment/Labor Tax Firearms law Securities Banking Municipal law Insurance Zoning Animal law Real Estate Constitutional law Intellectual Property Forfeiture Legal Malpractice Considerations Truthfully disclose the extent of the marijuana law practice to the malpractice insurer Be careful only to counsel and not assist clients engaging in illegal activity (see ethics opinions) Use good standard law office procedures 13

17 Ethics and Cannabis ABA Model Rule of Professional Conduct 1.2(d): A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law. State Bar Ethics Opinions Maine Opinion #199 (2010) Arizona Ethics Opinion (2011) Connecticut (Jan. 2013) Colorado Formal Opinion 125 (Oct. 2013) Nevada ADKT (2014) North Dakota Ethics Committee Opinion (August 2014) Alaska Informal Preliminary Analysis (Jan 2015) Oregon ORPC Amendment (Feb. 2015) Washington Advisory Opinion

18 Maine Board of Bar Overseers Professional Ethics Commission Opinion #199 (July 7, 2010) Advising clients concerning Maine s Medical Marijuana Act Here, the proposed client conduct is known to be a violation of federal criminal law. In those circumstances, the role of the attorney is limited. While attorneys may counsel or assist a client in making good faith efforts to determine the validity, scope, meaning or application of the law, the Rule forbids attorneys from counseling a client to engage in the business or to assist a client in doing so. The limitation is highlighted by the 2009 Comment [9]: to M. R. Prof. Conduct 1.2: There is a critical distinction between presenting an analysis of legal aspects of questionable conduct and recommending the means by which a crime or fraud might be committed with impunity. Where the line is drawn between permitted and forbidden activities needs to be evaluated on a case by case basis. Bar Counsel has asked for a general opinion regarding the kind of analysis which must be undertaken. We cannot determine which specific actions would run afoul of the ethical rules. We can, however, state that participation in this endeavor by an attorney involves a significant degree of risk which needs to be carefully evaluated. State Bar of Arizona Ethics Opinion (Feb. 2011) 11-01: Scope of Representation A lawyer may ethically counsel or assist a client in legal matters expressly permissible under the Arizona Medical Marijuana Act ( Act ), despite the fact that such conduct potentially may violate applicable federal law. Lawyers may do so only if: (1) at the time the advice or assistance is provided, no court decisions have held that the provisions of the Act relating to the client s proposed course of conduct are preempted, void or otherwise invalid; (2) the lawyer reasonably concludes that the client s activities or proposed activities comply fully with state law requirements; and (3) the lawyer advises the client regarding possible federal law implications of the proposed conduct if the lawyer is qualified to do so, or recommends that the client seek other legal counsel regarding those issues and appropriately limits the scope of the representation. 15

19 Connecticut RPC 1.2 & 8.4 Comment Opinion (Jan 2013) It is our opinion that lawyers may advise clients of the requirements of the Connecticut Palliative Use of Marijuana Act. Lawyersmaynotassistclientsinconductthatisinviolatio nof federal criminal law. Lawyers should carefully assess where the line is between those functions and not cross it Connecticut At some point, perhaps, but not necessarily after the planning and licensing are complete, some clients may expect their lawyers to assist them by providing advice and services in aid of functioning marijuana enterprises that may violate federal law. It is at this point that a lawyer must consider Rule of Professional Conduct 1.2(d): A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyers knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel a client to make a good faith effort to determine the validity, scope, meaning or application of the law. The Comment to Rule 1.2(d) provides that once a lawyer discovers that client conduct the lawyer considered legally proper is criminal or fraudulent, the lawyer must end his or her assistance. 16

20 Colorado Formal Opinion 125 (2013)...the plain language of Colo.RPC 1.2(d) prohibits lawyers from assisting clients in structuring or implementing transactions which by themselves violate federal law. A lawyer cannot comply with Colo.RPC 1.2(d) and, for example, draft or negotiate (1) contracts to facilitate the purchase and sale of marijuana or (2) leases for properties or facilities, or contracts for resources or supplies, that clients intend to use to cultivate, manufacture, distribute, or sell marijuana, even though such transactions comply with Colorado law, and even though the law or the transaction may be so complex that a lawyer s assistance would be useful, because the lawyer would be assisting the client in conduct that the lawyer knows is criminal under federal law. Colorado Ethics Syllabus The Committee concludes that a lawyer does not violate Colo.RPC 1.2(d) by representing a client in proceedings relating to the client s past activities; by advising governmental clients regarding the creation of rules and regulations implementing Amendment 64 and the Medical Marijuana Code; by arguing or lobbying for certain regulations, rules, or standards; or by advising clients regarding the consequences of marijuana use or commerce under Colorado or federal law. The Committee further concludes that, for good or ill, under the plain language of Colo.RPC 1.2(d), it is unethical for a lawyer to counsel a client to engage, or assist a client, in conduct that violates federal law. Between these two points lies a range of conduct in which the application of Colo.RPC 1.2(d) is unclear.1 17

21 Nevada Rule of Professional Conduct 1.2 May 7, 2014 ADKT 0495: Amendments to Rule of Professional Conduct 1.2 (regarding medical marijuana) COMMENT A lawyer... may assist a client in conduct that the lawyer reasonably believes is permitted by these constitutional provisions and statutes, including regulations, orders, and other state or local provisions implementing them. In these circumstances, the lawyer shall also advise the client regarding related federal law and policy. State Bar Association of North Dakota Ethics Committee Opinion (August, 2014)...Attorney would not be able to live and use medical marijuana prescribed by a physician in Minnesota while being licensed to practice law in North Dakota. The conduct would be a violation of N.D.R. Prof. Conduct 8.4(b). (Misconduct) 18

22 Alaska 2015: An Informal Preliminary Analysis by the Ethics Committee Because the line between giving advice and actually drafting the documents is very gray, we believe that a principled line can t be drawn and, for the reasons stated in the previous paragraph, we believe that an Alaska lawyer probably could ethically provide to a marijuana business that is legal under Alaska law the same types of business law services a lawyer could provide to any other legal business. Oregon Rules of Professional Conduct 1.2d amendment (Feb. 2015) (d) Notwithstanding paragraph (c), a lawyer may counsel and assist a client regarding Oregon s marijuana-related laws. In the event Oregon law conflicts with federal or tribal law, the lawyer shall also advise the client regarding related federal and tribal law and policy. Amended 02/19/15 19

23 Washington's Marijuana Law, I-502, and the Cannabis Patient Protection Act June 5, 2015 Advisory Opinion Under Comment 18 to RPC 1.2, a lawyer who knows that the conduct in question would violate the CSA is not in violation of the RPCs if, but only if, the lawyer reasonably believes that state law authorizes the conduct on or in connection with which the lawyer is assisting the client. In other words, a lawyer who reasonably believes that state law authorizes the conduct in question is not in violation of the RPCs even if the lawyer knows that the conduct would violate the CSA Typical Barriers to Entry for Licensees Legality Funding Zoning Real Estate Experience Political connections (see Responsible Ohio) 20

24 Matthew Abel, Attorney at Law, Cannabis Counsel, P.L.C. Lawyers who roll the right waysm 2930 E. Jefferson Avenue, Detroit, Michigan THANK YOU! Matthew Abel Attorney at Law Cannabis Counsel, P.L.C. Lawyers who roll the right waysm 2930 E. Jefferson Avenue Detroit, Michigan

25 When the going gets weird, the weird turn pro. Hunter S. Thompson Help Michigan legalize marijuana 22