Underwriting Highs

A review of Canadian, US and UK legislation in light of recent developments in the cannabis industry and their impact from a banking, insurance and money laundering perspective.

Canada

Canadian federal legislation introduced the Cannabis Act1 which came into force on October 17, 2018. The Act legalizes the recreational use of cannabis in every province in Canada. It put into place a new, strict framework for controlling the production, distribution, sale and possession of cannabis in Canada. The federal Act:

restricts youth access to cannabis;2 prohibits promotions that are designed to encourage youth to use cannabis;3 imposes serious criminal penalties on individuals who break the law, such as importing or exporting cannabis illegally, or providing cannabis to youth;4 establishes strict product-safety and quality requirements;5 reduces the burden on the criminal-justice system;6 provides for the legal production of cannabis;7 allows adults to possess and access regulated, quality-controlled, legal cannabis;8 and enhances public awareness of the health risks associated with cannabis.9 Each province and territory has its own rules for cannabis, including determining how cannabis is distributed and sold within their jurisdiction. The provinces make law with regard to:

legal minimum age;10 where stores are located and how stores are operated;11 where adults can buy it;12 where adults can use it;13 and how much adults can possess.14 In Ontario, for example, the legal age of use is 19 and individuals can only possess up to 30 grams of cannabis. People can purchase cannabis through the provincial government-operated online store or the eventual retail stores (dispensaries) that are set to open in the coming years.15

One of Health Canada's responsibilities is to provide for the licensing and oversight framework for the legal production of cannabis. Under this framework, a person is required to obtain a license issued by Health Canada. The Cannabis Tracking and Licensing System is the primary manner in which license applications are submitted. The classes of licenses, some of which contain subclasses, are as follows:

cultivation (including subclasses for micro and standard cultivation or nursery); processing (including subclasses for micro or standard processing); sale for medical purposes; analytical testing; and research.16 At this time, it is unlawful to sell cannabis-infused products such as beverages and edibles. However, it is anticipated that the sale of cannabis-infused beverages and edibles will become legal in late-2019. Beverage companies are already in the midst of discussions with Canadian cannabis producers to develop beverages that are infused with cannabidiol, commonly referred to as "CBD".17

Compliance and Enforcement

Enforcement for criminal offences is overseen by Canadian law enforcement. Penalties are set in proportion to the seriousness of the offence as set out in the Act and the Criminal Code.18 Sanctions range from warnings and tickets for minor offences (ie. possession over the limit) to criminal prosecution and imprisonment for more serious offences (taking cannabis over Canada's borders). The importation or exportation of cannabis into or out of Canada is prohibited unless some form of authorization is obtained from the Minister of Health, who can only authorize lawful cannabis producers to export cannabis to another country for medical purposes.19

The prohibition on transporting cannabis across the Canadian border applies even if an individual is authorized to use cannabis for medical purposes, or if the individual is travelling to or from an area where cannabis has been legalized. If an individual is entering Canada and has cannabis in their possession in any form, it must be declared to the Canada Border Services Agency.

Canadians are not permitted to take cannabis across the United States border, whether by land or air, given that its recreational use is still illegal in the United States at the federal level. Furthermore, Canadian airlines have warned customers of possible diversions of domestic flights to airports in the United States. Airlines have advised passengers that diversion to an airport in the United States, where possession of cannabis is not legal, could lead to unanticipated legal issues for which they will not bear responsibility.20

Canadians travelling with cannabis within the country are responsible for learning the laws of the province or territory they are travelling to. For example, in Ontario, an individual may bring lawfully obtained or purchased cannabis from another province or territory into Ontario.21

Health Canada regulates the parties authorized to conduct activities such as cultivation, processing, analytical testing, research, sale for medical purposes, and importing and exporting. Compliance monitoring includes conducting inspections, gathering and analyzing information, carrying out compliance-verification activities and collaborating with other regulatory agencies as appropriate.

Canadian cannabis companies can face obstacles in trying to obtain financing from major financial institutions who must comply with Canada's anti-money laundering legislation. Such entities are required to comply with know-your-client requirements and report on certain types of transactions (ie. large cash transactions). This can be challenging for an industry whose product has only recently become legal.

Insurance

There are a number of issues to note when insuring cannabis risks. For example, with respect to personal lines insurance, will cannabis plants be considered "personal property" or will claims for plant theft and damage fall under the "tree, shrub, and plant" portions of a homeowner's policy? Personal cultivation is a peril that is currently excluded in a standard homeowner's policy and can no longer be covered by the "criminal activity" exclusion. In-home cannabis production comes with inherent risks, which can result in increased water consumption or damage, mould and fire damage claims.

Cannabis products present interesting product-liability insurance questions in that the effects of cannabis are not uniform nor widely-known. Cannabis is excluded under the Canada Consumer Product Safety Act.22 While producers and processers must be licensed and appoint quality-assurance persons to test cannabis products, there may be health and behaviour hazards that have yet to present themselves until widespread consumption and its effects are ascertained.

With regard to commercial insurance, there are over 100 licensed cannabis producers in Canada. Producers require specialized property and equipment. How will plants and finished products be treated in insurance coverage? In addition, the transportation of cannabis creates potential for loss exposure with cannabis currently being transported directly from licensed producers to the end user by Canada Post, or private courier companies. There is a potential for increased risk of theft and damage to product while in transit. Specialized cargo coverage will be required.

Canadian consumers must by wary of their personal information being accessed through cyber-attacks as Cannabis companies may face privacy breaches. The Ontario Cannabis Store has already suffered a privacy breach in which the company's delivery tracking tool was used to gain access to the personal...