How to eliminate the marijuana black market?
As the COVID-19 crisis continues to ravish state budgets, this question has become even more important, particularly in states like California, which have legalized marijuana but have not seen the expected tax revenues due to the persistence of the “tax exempt” black market. Increased enforcement would help, of course. But the best way to eliminate the illegal market is to support market entry by legitimate businesses.
Several states have declared marijuana businesses “essential” and exempt from COVID lockdown requirements. Congressional appropriations riders prevent DOJ from prosecuting medical marijuana businesses that comply with state law. Attorney General Barr has stated that he “accepts” the Cole Memorandum (which essentially says that DOJ will not prosecute state-compliant businesses) and that DOJ will not “go after” state-compliant businesses, whether recreational or medical. As far as we are aware, there have been no federal prosecutions of state-compliant businesses during the Trump Administration. Nevertheless, the possibility of federal prosecution, no matter how slim, still keeps many legitimate businesses, including retailers and investors, from entering the market and prevents many financial institutions from providing banking, credit, and even credit card services to the industry. This too reduces tax revenue as any industry that operates predominately in cash is fertile ground for tax fraud.
It is not clear when, or if, marijuana will be legalized at the federal level. In the meantime, assuring state-compliant businesses, as well as their investors and the ancillary businesses that service them, that they are not targets for prosecution would reward legitimate actors, undermine bad actors, and support local tax bases. A simple way for the federal government to do this would be to create a procedure whereby state-compliant businesses could obtain “no action” letters from DOJ with regard to transactions that do not implicate DOJ enforcement priorities.
Various federal agencies with enforcement power including DOJ, the SEC, FinCEN, OFAC and the Consumer Finance Protection Bureau (CFPB) have advisory opinion or “no action” letter procedures to help businesses understand whether a proposed course of action may result in an enforcement action. In some cases, these procedures are statutorily mandated. In others, they are simply a matter of agency policy. But the rationale is always the same—to support well-intentioned businesses in heavily regulated markets by providing them with clarity about enforcement priorities. For example, the CFPB, which has the power to bring enforcement actions against businesses that violate federal consumer financial laws, explains its policy as encouraging market entry:
A primary means of facilitating innovation is removing barriers to innovation. This can be accomplished … [by]… reducing uncertainty regarding the meaning or application of statutory and regulatory provisions. Faced with such regulatory uncertainty, some companies may hesitate to develop and offer potentially beneficial products and services, not wishing to run the risk of supervisory findings, enforcement actions, or private lawsuits. Reducing this uncertainty may encourage these companies to offer these products and thereby benefit consumers.
Similarly, former Deputy Assistant Attorney General Matt Miner has explained that DOJ’s Foreign Corrupt Practices Act (FCPA) opinion procedure improves market transparency by making it less risky for legitimate companies to enter into potentially high-risk transactions:
At the Department, we know that there are many benefits when law-abiding companies with robust compliance programs are the ones to enter high-risk markets or, in appropriate cases, take over otherwise problematic companies. . . . We want to encourage this sort of activity. We certainly don’t want the specter of enforcement to be a risk factor that impedes such activity by good actors, and instead cedes the field to non-compliant companies. At bottom, it makes good economic sense and helps stamp out corruption when the Department adopts policies that foster greater corporate compliance. . . . In our view, the opinion process is a tremendous resource and we want to encourage greater use of it going forward.
A comparable procedure for the marijuana industry could have similar benefits for both “plant-touching” businesses and the ancillary businesses that service them. For example, a real estate company that plans to lease property to state-compliant growers, an investment firm that seeks to invest in state-compliant dispensaries, and a bank that services state-compliant marijuana businesses could all avail themselves of the procedure.
How would it work?
A marijuana no-action procedure could be modelled on the FCPA opinion procedure. Specifically, a company could be required to provide all the details of a proposed investment or transaction, together with an explanation as to why it complies with all relevant state laws and does not implicate any Cole Memorandum priorities. (For Cole Memorandum enforcement priorities see here.) If DOJ is satisfied, it could provide a statement that the transaction does not implicate any current DOJ enforcement priorities. Applications could be kept confidential, but opinions could be released in anonymized form to provide transparency and non-binding guidance to the industry generally.
Consistent with existing precedent, the process would not require a statement that the proposed action is legal. Rather, it would only require DOJ to state that the proposed transaction does not implicate current enforcement priorities and is therefore unlikely to result in an enforcement action. For example, the Code of Federal Regulations (CFR) provision on the FCPA opinion procedure explains that the procedure enables applicants to “obtain an opinion of the Attorney General as to whether certain specified, prospective–not hypothetical–conduct conforms with the Department’s present enforcement policy…” (emphasis added). Similarly, the CFR provision governing DOJ’s issuance of advisory opinions related to possible violations of the Foreign Agents Registration Act (FARA), another federal statute that carries criminal penalties, states that, “Any present or prospective agent of a foreign principal or the agent’s attorney, may request from the Assistant Attorney General for National Security a statement of the present enforcement intentions of the Department of Justice.” (emphasis added) .
Some may contend that such a procedure will not work because companies will be reluctant to advertise to DOJ their intention to violate federal narcotics laws However, companies seek opinion letters from DOJ about possible violations of the FCPA and FARA, which also carry serious criminal penalties. Moreover, in the marijuana context, many applicants would presumably already be operating openly in reliance on state laws. The risk of “disclosing” to DOJ would therefore be minimal and likely less than in the FCPA context, where violations are not readily apparent. And as in the FCPA context, a marijuana no-action procedure would also support DOJ’s enforcement goals by encouraging “law-abiding companies with robust compliance programs … to enter high-risk markets” and drive out bad actors.
How to get it done?
As in the FCPA context, Congress could require DOJ to issue advisory opinions with respect to proposed marijuana transactions. Alternatively, having seen the benefits of the FCPA opinion procedure, DOJ could adopt such a practice voluntarily. In the meantime, even without a formal procedure, companies can always explore the possibility of obtaining confirmation from DOJ that a proposed course of action does not implicate current enforcement priorities on a case-by-case basis.
Tom Firestone is Co-Chair of the firm’s North American Government Enforcement practice and is a member of the Firm’s Global Compliance & Investigations Steering Committee. He represents clients in matters involving anti-corruption and the US Foreign Corrupt Practices Act (FCPA), internal investigations and transactional due diligence. He is also a member of the firm’s Cannabis Review Committee and has advised clients on compliance issues related to cannabis.